From 1 April 2017 the compensation tax on insurance premiums charged to insurers in Quebec, Canada, will be reduced to 0.3%.

From 1 April 2017, the compensation tax on insurance premiums charged to insurers in Quebec, Canada, will be reduced from 0.48% to 0.3%. This is the fourth change to the rate since the tax was introduced on 31 March 2010. This new rate of 0.3% will be effective until 31 March 2019, when the tax is due to be abolished.

Background

The compensation tax on financial institutions in the province can be attributed to Quebec’s sales tax (QST) system. Under the old QST rules prior to 31 March 2010, financial institutions were zero-rated and application for an input tax refund (ITR) from the financial institutions was made possible. To cover the cost of the governing body which grants ITRs to suppliers of financial services, the compensation tax came into being. Its original rate was 0.3% on insurance premiums for the insurance industry.

On the 31 March 2010 the authority raised the tax rate to 0.55% - announced in the 2010-2011 budget - to help maintain the budget balance. This rate ended on 31 December 2012. It is worth noting that from 1 January 2013 (when Quebec strove to harmonize QST with the federal goods & services tax (GST) system) where financial services are exempt from tax rather than zero-rated, the compensation tax on financial institutions was no longer justified and should have been eliminated. However, the authority decided to keep this revenue for budget purposes, though they lowered the rate to 0.3%.

This tax is now set to be abolished as part of the completion of the harmonisation of the QST and GST. The tax rate saw another rise to 0.48% (effective 3 December 2014 to 31 March 2017). And as announced in Quebec’s Economic and Financial Situation in early December 2014, the tax will decrease to 0.3% on 1 April 2017, and will be terminated on 1 April 2019.

IPT Quote

Compensation tax is calculated on the insurance premium and it is a tax charged to the insurer. Thus, in IPT Quote (IPTQ), TMF Group’s online tax calculation tool, compensation tax is added to the insurance premium tax (IPT) and shown as one tax. This way, the types of tax shown in the system for Quebec is reduced, and it has proven to be more convenient for IPTQ users.

IPTQ is also helpful in indicating tax treatment in a non-admitted scenario. The compensation tax and IPT is payable by the insurer and administered by the insurer, on the basis of admitted business. However, when non-admitted insurance is taken out, the insured is obliged to bear the tax cost and submit the tax to the authority. Such treatment is well presented in IPTQ and when a non-Canadian insurance company is entered into the system, the non-admitted tax treatment will be driven so that tax outcome is shown payable and handled by the insured.