Winds of Tax Change - Saskatchewan Reinstates PST Exemptions on Most Insurance

In a surprise move, the government of Saskatchewan has reversed its course on a recent expansion of the provincial sales tax (PST) base as announced in the 2017 provincial budget. Now, Saskatchewan will retroactively remove the PST on many of the insurance premiums that had become subject to the indirect tax, according to an announcement in February 2018.

The PST will no longer apply to the following types of contracts:

• Individual and group life insurance
• Individual and group health, disability, accident and sickness insurance
• Agriculture insurance including crop and livestock insurance, hail insurance and margin / income insurance

The exemption is reinstated back to August 1, 2017. Other types of insurance will remain taxable.

While the reversal of policy is a welcome relief to most businesses and taxpayers, this change in direction will not provide a simple mechanism to return the PST collected back into the policyholder's hands. 

Challenges to Compliance

PST is a tax on the use and consumption of services within the province. What increases the difficulty of taxing insurance is that assets and people associated with businesses might be situated in Saskatchewan but reside elsewhere – or vice versa.

The PST has to be applied to only what is connected to Saskatchewan for this 'use and consumption' concept to work. Any apportionment of what is to be taxed has to be reasonable. Reasonable is not further defined, therefore it is open to interpretation.

The insurance industry is complex, with many different businesses involved in the entire supply chain of the insurance product. Not only do we have the insurer, there are agents and brokers and third-party administrators. Plus, we also have the employers, employees and other vendors of insurance contracts. Many of these players may also reside outside of Saskatchewan but are required to comply with the provincial tax.

These layers of complexities made it difficult for businesses to be compliant with the PST application to insurance. Take, for example, PST on group insurance where both employer and employee premiums are taxed. Employers tax their premium according to the employee's place of employment, not residency (e.g.; work in Saskatchewan, may or may not live in in the province). Meanwhile, the employee's premium is taxed to both the place of employment and their residency (e.g. live and work in Saskatchewan). 

This is further complicated when there is additional relief such as First Nation individuals living and / or working on or off-reserve. Keeping track of employees who were mobile or move locations, as well as who and what was taxed was a large audit assessment waiting to happen. The reversal in policy announced in February removes a significant level of audit risk.

Next Steps

The retroactive change to these types of insurance contracts appears to be the right choice. However, announcing the change and implementing the reversal of the tax are two entirely different issues.

Saskatchewan Finance has indicated it will soon communicate how the refund of the PST will be made. The province has indicated the policy change will result in about a $65-million impact to the fiscal 2017-18 budget¹. Assuming this is a reflection of how much PST was considered collectible between August 1, 2017 and the recent announcement date to re-exempt the premiums, that means $65 million has to reverse directions and be returned to all those who paid the PST on the premiums. 

That won't be simple. A PST regime is unlike the goods and services (GST) system: a refund cannot be created in a PST return and there is not any specific form for claiming a refund of tax. 

Both the purchaser and the tax collector could, theoretically, seek refunds of the same tax. The customer, having paid tax in error, is entitled to a refund of tax paid in error and the tax collector is entitled to the PST they paid from the PST collected from the customer. How will the government control the refund so both parties cannot seek a refund of the same tax?

POSSIBLE REFUND SCENARIOS

Tax Collector

Currently, a refund cannot be created on a PST return. Any unclaimed credits are carried forward to a future return. Possibly they could be trapped as unrecoverable if this were the only mechanism.

In a PST return, at best, the government could reduce a current period PST collectible amount by an equal and offsetting credit. This would result in, more or less, you as a business owner reporting a nil amount as a collectible and showing in your books and records how this nil amount has been determined. 

A claim should be requested directly from Saskatchewan Finance. While the government does not prefer this option, it reduces the audit risk for the tax collector. The claim would then be reviewed prior to being refunded, as opposed to taking the credits on a return and risking misplacing the documentary support needed in a future PST audit.

Taxpayer

The purchaser / customer has paid tax in error, according to the retroactive change and is entitled to a refund of the PST. They can go directly to Saskatchewan Finance to seek a recovery of the tax, or request the vendor return the PST collected in error. Saskatchewan Finance in the recent past has expected vendors and customers to work things out rather than go to the provincial agency. 

As noted above, there could be more tax being refunded than collected at some point where the vendor has no other mechanism to obtain the PST back from Saskatchewan Finance. We have to expect some tolerance from Saskatchewan Finance on its recent announcement.

Other Forms of Insurance Remain Taxable

The changes announced in February do not cover the entire insurance sector: the Saskatchewan PST remains on forms of insurance tied to property, peril, risk or events that relate in full or in part to an activity or location inside Saskatchewan. This includes all forms of property insurance, equipment and vehicle insurance, liability insurance, mortgage insurance and other types of insurance.

The insurance industry must still segregate taxable and exempt forms of insurance. The same insurance brokers, agents, third party administrators and other players must still deal with the remaining taxable insurance products being subject to PST. 

More Changes Instore

Harmonization with the GST is looking better all the time. We expect to see more PST changes coming through as other industries argue the PST changes are hurting their business. For example, oil and gas companies are upset with the removal of the remission order on much of their equipment. This has resulted in increased costs, compared to resident businesses that have comparable equipment on which they have yet to pay PST on. This also was done at a time with already low oil prices and the source of companies' service needs remain mainly from out-of-province suppliers. 

As with the introduction of the changes on insurance, the changes to reverse tax law will also create confusion and concern for some time yet to come. As always, it is a good idea to seek written rulings to avoid uncertainty and seek professional advice to help you effectively navigate the changes.

Contact Jeff Harrison, CPA, CMA, at 306.751.7998 or [email protected] or your local MNP Tax Advisor.

1: http://www.cbc.ca/news/canada/saskatchewan/pst-exemption-reinstated-1.4551931