Tax Court Distinguishes Between Exempt and Taxable Supply For Car Dealership Selling Insurance
The Tax Court of Canada recently had to decide whether a car dealership that sold insurance products to its customers was providing an exempt or taxable supply.
The underlying facts in the case were not in dispute. Applewood Holdings Inc. (“Applewood”) operated a car dealership and sold vehicles; most customers leased or financed the purchase of their vehicles. Applewood also undertook selling various types of credit insurance to its customers to cover their lease or finance payment obligations from risks such as loss of employment, critical illness, disability and accidental death and other perils, which were underwritten by an insurance company.
Under its agreement with the insurance company, Applewood was required to provide a complimentary policy covering basic perils for which it was required to pay a premium, but it also made efforts to sell one of the higher grades of policies for which it received compensation by keeping 55% of the premium and remitting the balance to the insurance company. Applewood’s insurance branch provided a significant source of its income, accounting for 12.5% of the entire dealership’s profits.
At issue was whether Applewood’s compensation for the services it provided was a taxable supply or exempt from GST/HST under the Excise Tax Act (the “Act”). Applewood claimedthey were exempt as an “exempt supply” of a “financial service”. But the Canada Revenue Agency (“CRA”) issued a reassessment in 2015 for the GST/HST in respect of the services provided in the sale of insurance products to Applewood’s car dealership customers for the years 2010 and 2011. The amount at issue at trial equalled $33,802.
Position of the Parties
The facts in dispute between the parties concerned the level and characterization of services provided by Applewood and whether such services resulted in it providing an exempt supply.
Applewood took the position that the services it provided in connection with the insurance products fell within the meaning of a “financial service” as defined in subsection 123(1) of the Act because they amounted to “agreeing to provide, or arranging for a financial service.” Therefore, it submitted that the services to be analysed were those provided to its customers, who bought the vehicles and insurance, since Applewood’s remuneration which was the subject to the GST/HST assessment was payable only as a result of such sale transactions.
The CRA argued that the services provided did not constitute financial services or, in the alternative, fell within an exception to the definition of “financial services” found in paragraph 12(1)(r.4) that concern the provision of only preparatory promotional or administrative activities. It submitted that this consisted of essentially document preparation, processing, customer assistance or promoting the insurance products. Therefore, the CRA claimed that the services provided to the insurance company were the relevant services to analyse in the context of determining the issue.
Applewood appealed the CRA reassessment to the Tax Court of Canada.
After reviewing all the evidence, which included all relevant contracts, policies, agreements and testimony, the court agreed with Applewood that the predominant elements of the services for which it earned its fee was the sale of the insurance products to its customers. The court found that any objective analyses would lead to the conclusion the main purpose of the insurance contract between Applewood and the insurance company was to sell insurance, not provide expert advice, personnel or commercial efficacy.
Additionally, the court found that the compensation arrangement supported the finding that the predominant element of Applewood’s services was the sale of insurance products because compensation was calculated solely on the sales of insurance products and not on any other service.
As a result, the court found that Applewood did not owe GST/HST by concluding:
“Accordingly, I find that the predominant element of [Applewood]’s service was the arranging for the sale of insurance which falls within the definition of a “financial service”, notwithstanding that some of the ancillary services provided by [Applewood] could be considered promotional or administrative; particularly after the sale of Insurance Products was completed, thus the compensation received by the [Applewood] is exempt from GST/HST.”
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