Car dealerships and other companies that are selling or promoting insurance products to their customers should conduct a close review of their business arrangements inclusive of the Authorized Retailer Agreement, sales practices, procedures, and policies to ensure that the sale of insurance products are GST/HST exempt.
As the Applewood Holdings Inc. decision outlined below illustrates, the CRA has become increasingly aggressive and has shifted its focus to GST/HST compliance of car dealers and others.
Applewood Holdings Inc. (Applewood) operated a car dealership where it sold vehicles to customers who often leased or financed their purchase.
Applewood was also a group policyholder of an insurance policy (the Policy) underwritten by Arch Insurance Company (Arch). While the sale of cars was its main business, Applewood earned a significant portion of its overall revenue from up-selling insurance coverage to its customers.
Applewood sold its customers enrollment in the Policy through an Authorized Retailer Agreement (ARA) with Walkaway Canada Incorporated, a company that administers and distributes insurance products for Arch Insurance Company. The Policy covered customers’ lease or financial payment obligations from risks such as loss of employment, critical illness, disability and accidental death and other perils.
Percentage of Extended Premiums Retained
Applewood provided customers with a complementary policy to cover basic perils but, under the ARA, Applewood was entitled to keep 55 per cent of insurance premiums that were paid by customers for the extended coverage policies. Applewood employees were trained and encouraged to upsell customers to the extended insurance coverage. Applewood’s share of those premiums represented a significant source of revenue for the company at approximately 12.5 per cent of all its revenues.
CRA’s GST/HST Audit
The CRA’s administrative position in the insurance context is to limit the “arranging for” financial services exemption to licensed intermediaries like insurance agents and brokers. And in most circumstances, it would be an insurance agent, broker or other intermediary that would claim an exemption from GST/HST on the providing or arranging for the sale of financial products to policyholders.
The CRA audited and ultimately reassessed Applewood on the basis that it should have charged GST/HST on its revenues from the sale of the insurance products. Applewood did not charge GST/HST on its sale of the insurance products, and instead treated those sales as exempt supplies of “agreeing to provide, or arranging for” a financial service.
Applewood objected to the reassessments which could not be resolved at the CRA’s appeal stage and eventually landed at the Tax Court of Canada and before the Honourable Justice Pizzitelli.
After a thorough and comprehensive review of Applewood’s various contracts, agreements, practices, procedures and policies at the dealership and testimony from its CEO and the Business Manager as well as the CEO of Walkaway, Justice Pizzitelli concluded that Applewood was not required to charge GST/HST on its sale of insurance products. He determined that based on the totality of the evidence, it was clear that Applewood either provided or arranged for an exempt financial service by selling insurance products to its customers and was not merely providing promotional or administrative services with respect to those products. This was a crucial finding because if the activities amounted only to promotional or administrative activities, Applewood would have been required to charge GST/HST on its portion of the fees.
Differentiating the nature of a service between a promotional service versus arranging services, for instance, requires the court to determine its predominant element. This is accomplished by reference to the end result of the service viewed from the perspective of the consumer. Justice Pizzitelli stated the following with respect to the sale of insurance products to Applewood customers:
 It is therefore quite clear that the “purchaser” whose perspective one must objectively look through is the consumer of the end supply that is the subject matter of the transaction. In our case, that is the car buyer who buys the insurance product and he would clearly and objectively know he was buying insurance, not the expertise or training, or commercial efficacy or profitability of the Dealer or its staff as the predominant elements of the transaction, notwithstanding that such services, if provided, may have an ancillary role to play in his decision making process; if he was even aware of their existence. There is simply no merit to the Respondent’s argument that the services or duties under the Dealer Agreement that may be said to be owed to Walkaway from the Appellant constitute the predominant element of the services to be provided under the Dealer Agreement, neither when analysing the terms of such agreement nor when conducting a functional analyses of the Appellant’s acts in performing its Insurance Product retailer duties.
In other words, the analysis is whether the customer is acquiring a promotional or administrative service from Applewood or services that are predominately to provide or arrange for an insurance product.
Important Guidance from the TCC
The Tax Court’s analysis provides important guidance to non-licensed financial services intermediaries (like car dealerships) that sell insurance products in order to determine whether they are providing an exempt or taxable supply. Based on the Applewood decision, the following additional factors may indicate whether an unlicensed intermediary may be “arranging for” financial services instead of providing a taxable supply of promotional and administrative services:
- The customer (the car buyer in this case) clearly and objectively understands they are buying an insurance product;
- The intermediary’s fees are calculated based on sales, and such fees do not compensate the intermediary for any particular activities or expenses;
- The insurer has no point of contact with the intermediary’s customer unless the customer must make an insurance claim; and
- The insurer has no right to instruct, control, or supervise the intermediary’s staff.
The Department of Justice may appeal the Applewood decision to the Federal Court of Appeal and has until December 15, 2018 to do so.