Most consumers pay a provincial insurance premium tax ranging from 2% to 5% on insurance products—they just don’t know it.
And many provinces collect retail sales taxes on top of those premiums for a combined total of $7.3 billion in tax revenues, a report from the C.D. Howe Institute says.
That total doesn’t include an additional $4.4 billion in other taxes insurers pay, such as corporate income tax, the study says.
Retail sales taxes (RST) ranging from 6% to 15% are used in five provinces, write director of research Alexandre Laurin and junior policy analyst Farah Omran. In Ontario, for example, the RST that’s generally applied to group life and health insurance, as well as property and casualty insurance (but not auto insurance) is 8%.
Some provinces and municipalities have collected “small levies” on insurance products since the late 1800s, the report says. Insurance premium taxes (IPTs) used to be an alternative to taxing insurers’ profits, but now all governments tax insurance companies’ corporate income, making IPTs obsolete.
All the taxation increases the cost of insurance, the report says.
“We find that an increase of one percentage point in the provincial IPT rate leads to a 10% decrease in the number of life insurance contracts sold,” the report says. And reduced coverage for life, illness and natural disasters will only put more pressure on government budgets.
To avoid lowering demand for policies, the report suggests reassessing the taxes.
“At a minimum, IPT liabilities should be made creditable against corporate income tax liabilities, partly restoring their original role as a substitute for taxing profits,” the report says. “And provinces that impose an RST on IPT-inclusive premiums should lead the way and eliminate this form of double taxation.”
A better solution, the report says, would be to make insurance services subject to value-added taxation, since the elimination of current taxes would mean “large” provincial fiscal losses.
That approach wouldn’t be without its challenges, either. “It would be difficult in practice to identify and tax the value added of an insurance service since value added is conceptually the margin between premiums received and risk-adjusted claims paid out—both transactions may be spread out over a number of years, and most claims are not subject to sales tax.”
Yet, there are methods worth exploring, including “the traditional invoice-based tax on sales” and “the addition-based method.”
A main goal of exploring such alternatives, the authors say, would be to address “the problem of adverse selection in insurance markets, increasing the pressure on premiums as lower-risk consumers are driven out of the market.”
Read the full report for more on the pros and cons of reviewing insurance taxation.