New tax’s big im­pact

Investment Executive - - FRONT PAGE - BY MEGAN HAR­MAN

saskatchewan’s new sales tax on in­surance pre­mi­ums is set to have dam­ag­ing im­pacts for clients, fi­nan­cial ad­vi­sors and life in­sur­ers in that prov­ince. The tax in­creases the cost of life in­surance and cre­ates a ma­jor ad­min­is­tra­tive headache for in­sur­ers, ac­cord­ing to in­dus­try play­ers.

Saskatchewan’s de­ci­sion to ap­ply its 6% pro­vin­cial sales tax (PST) to in­surance pre­mi­ums — in­clud­ing in­di­vid­ual and group life, and health in­surance — was re­vealed in the prov­ince’s 201718 bud­get in March and takes ef­fect Aug. 1. The tax makes

Saskatchewan the only prov­ince in Canada in which in­di­vid­ual life in­surance prod­ucts are sub­ject to sales taxes.

The move has pro­voked an up­roar from the life in­surance in­dus­try, which ar­gues that the tax will make in­surance less af­ford­able and rep­re­sents an un­fair tax on sav­ings.

“Sales taxes are meant to tax con­sump­tion; they’re not meant to tax sav­ings,” says Ron San­der­son, di­rec­tor of pol­i­cy­holder tax­a­tion and pen­sions with the Cana­dian Life and Health In­surance As­so­ci­a­tion Inc. in Toronto.

Many life in­surance poli­cies, he adds, “have sig­nif­i­cant sav­ings el­e­ments to them, and that’s fac­tored into the pric­ing. So, when you start tax­ing pre­mi­ums, you start, es­sen­tially, tax­ing sav­ings.”

The new tax will drive down sales of per­ma­nent life in­surance poli­cies, says Dean Owen, vice pres­i­dent and fi­nan­cial plan­ner with Cherry Fi­nan­cial Ser­vices Inc. in Saska­toon. As al­ter­na­tive sav­ings ve­hi­cles such as bank ac­counts and mu­tual funds are ex­empt from sales taxes, Owen says, clients will have an in­cen­tive to use those ve­hi­cles rather than life in­surance poli­cies that have a sav­ings com­po­nent.

“We’ll be forced to look away from these kinds of poli­cies as a sav­ings ve­hi­cle,” says Owen. “There’s no doubt we are go­ing to see fewer whole life and univer­sal life poli­cies be­ing sold.”

The back­lash against the new sales tax prompted the Saskatchewan gov­ern­ment to tweak the rules slightly fol­low­ing the re­lease of the bud­get.

Specif­i­cally, the gov­ern­ment an­nounced in May that it would de­lay the ef­fec­tive date of the tax change to Aug. 1 from July 1 to pro­vide the in­dus­try with more time to im­ple­ment the change.

The gov­ern­ment also an­nounced that per­ma­nent life in­surance poli­cies in force prior to Aug. 1 would be ex­empt from the PST. In the orig­i­nal an­nounce­ment, the tax ap­plied to pre­mi­ums on all ex­ist­ing and fu­ture poli­cies.

Ex­ist­ing term poli­cies and health in­surance poli­cies such as dis­abil­ity and crit­i­cal ill­ness in­surance, how­ever, are not cov­ered by the ex­emp­tion. That’s forc­ing ad­vi­sors to have dif­fi­cult con­ver­sa­tions with clients whose pre­mi­ums will in­crease sud­denly.

“To add on another 6% to the pre­mium is re­ally dif­fi­cult for some clients to swal­low,” Owen says. “A lot of ad­vi­sors do not want to go to their clients to dis­cuss this, but it’s some­thing that they’re go­ing to have to dis­cuss.”

As other types of in­surance — such as home and au­to­mo­bile in­surance — are also sub­ject to PST as of Aug. 1, and since the sales tax it­self in­creased to 6% from 5% in March, Saskatchewan res­i­dents will be feel­ing the im­pact in mul­ti­ple ar­eas.

The new tax could prompt some clients to re­duce their life in­surance cov­er­age. One of Owen’s clients has al­ready in­di­cated that he will take this step to keep his pre­mi­ums the same when the PST kicks in be­cause the client had bud­geted for that spe­cific monthly pay­ment.

“The down­side is, a 6% de­crease in your cov­er­age is a pretty sig­nif­i­cant num­ber,” Owen says.

Look­ing abroad, the con­cept of im­pos­ing sales taxes on life in­surance is in­con­sis­tent with the ap­proach of most ma­jor coun­tries, Owen says. In fact, he notes, some coun­tries, in­clud­ing Japan, pro­vide tax de­duc­tions to res­i­dents who pay life in­surance pre­mi­ums.

“[Tax­a­tion] dis­cour­ages the use of i nsurance,” says San­der­son. “Most con­sumers have a fixed ex­pen­di­ture limit on things like in­surance. If they are not able to af­ford the pro­tec­tion they need, then that’s not good pub­lic pol­icy.”

For in­surance com­pa­nies, im­ple­ment­ing the new tax re­quires costly sys­tem changes. In­sur­ers have long been sub­ject to an in­surance pre­mi­ums tax in all prov­inces and ter­ri­to­ries, rang­ing from 2% to 5%, de­pend­ing on the ju­ris­dic­tion, and some prov­inces also charge sales taxes on group in­surance. How­ever, no prov­inces or ter­ri­to­ries charge sales taxes on in­di­vid­ual poli­cies.

Al­though other prov­inces have in­tro­duced a sales tax on in­di­vid­ual life and health in­surance pre­mi­ums in the past, they re­versed the pol­icy ei­ther be­fore it took ef­fect (such as in Man­i­toba in 2012) or shortly fol­low­ing im­ple­men­ta­tion (such as in Que­bec, where the gov­ern­ment in­tro­duced PST on in­di­vid­ual in­surance pre­mi­ums i n 1985, then re­versed that pol­icy in 1986).

Even though the im­ple­men­ta­tion date in Saskatchewan is days away as In­vest­ment Ex­ec­u­tive went to press, few in­sur­ers are pre­pared.

“These are mas­sive sys­tems changes,” says San­der­son. “Get­ting those built, be­cause there is no prece­dent for some­thing like this in re­cent years, means that [im­ple­men­ta­tion] is go­ing to take time. So, com­pa­nies are say­ing they can’t do it in the time that’s been al­lo­cated.”

Many com­pa­nies didn’t im­me­di­ately be­gin pre­par­ing for the new tax when the Saskatchewan bud­get was re­leased be­cause they ex­pected the gov­ern­ment to re­peal the de­ci­sion, ac­cord­ing to Ami Maish­lish, pres­i­dent of Markham, Ont.based Com­puOf­fice Soft­ware Inc., the com­pany that de­vel­oped LifeGuide, the life in­surance com­par­i­son and quo­ta­tion soft­ware.

“It ap­pears the in­surance com­pa­nies were caught to­tally off guard,” Maish­lish says. “They started [pre­par­ing] late be­cause they fig­ured that Saskatchewan would even­tu­ally re­v­erse this — which, I hope, even­tu­ally it will. But it doesn’t look like [the prov­ince] will, at this point in time.”

Owen sus­pects that some in­surance com­pa­nies may con­sider leav­ing the prov­ince to avoid hav­ing to make the changes ne- ces­sary to ac­com­mo­date the new sales tax for just one prov­ince.

“I still don’t think it’s out of the ques­tion for com­pa­nies to pull out of sell­ing life in­surance in Saskatchewan,” he says.

Some in­sur­ers are likely to ab­sorb the new sales tax rather than charg­ing it ex­plic­itly to pol­i­cy­hold­ers, Maish­lish says. How­ever, that cost ul­ti­mately would be dis­trib­uted among pol­i­cy­hold­ers across the en­tire coun­try, he adds: “It will im­pact the Saskatchewan res­i­dents to whom it ap­plies, but it will also af­fect ev­ery­one across the coun­try.”

A key con­cern re­gard­ing the new tax re­volves around the fact that it ap­plies to the en­tire pre­mium rather than only the cost of in­surance, given that in­surance pre­mi­ums typ­i­cally con­tain a va­ri­ety of com­po­nents.

“Not the to­tal pre­mium is be­ing used for in­surance,” says Maish­lish.

For clients who pay their pre­mi­ums monthly rather than an­nu­ally, for ex­am­ple, in­sur­ers typ­i­cally charge a fi­nanc­ing fee that’s in­cluded in the monthly pre­mium.

Guid­ance from the Saskatchewan gov­ern­ment sug­gests that, un­less that fi­nanc­ing charge is bro­ken out sep­a­rately, the en­tire pre­mium will be tax­able, which means clients will be pay­ing PST on the fi­nanc­ing fee.

“[The new tax] is an ad­di­tional tax on bor­row­ing, which doesn’t ex­ist any­where,” Maish­lish notes.

In ad­di­tion, the ex­ist­ing in­surance pre­mium tax, which is 3% in Saskatchewan, typ­i­cally is hid­den within pol­i­cy­holder’s pre­mium, which means the PST will be com­pounded on that tax.

Ad­ding to the chal­lenge for in­sur­ers is the fact the Saskatchewan gov­ern­ment has not yet pub­lished reg­u­la­tions to ac­com­pany the new leg­is­la­tion, San­der­son says: “There are some miss­ing pieces in what Saskatchewan has pro­duced. We need clear rules if the prov­ince ex­pects us to com­ply.”

In some cases, San­der­son says, in­surance com­pa­nies that aren’t pre­pared to be­gin col­lect­ing the new tax may have to col­lect it retroac­tively.

If the PST gets im­ple­mented as planned, San­der­son wor­ries other prov­inces will fol­low.

“We would hope that other prov­inces would not con­sider this,” he says. “But there is cer­tainly a risk that oth­ers will.”

“To add 6% on to the pre­mium re­ally is dif­fi­cult for some clients to swal­low”

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