Budget extends review and provides tax relief

THIS YEAR’s federal budget contains more than the usual fare for the p&c industry, with long-sought cross-border reinsurance tax relief, climate change mitigation pledges and a postponement of the review of financial services legislation.
The Liberal government is extending the current statutory sunset date for the review by two years to March 29, 2019.
Finance Minister Bill Morneau said his department will undertake a financial sector legislative review and begin consulting stakeholders in the coming months.
The government has pledged $4.2m over the next five years to support the review.
Craig Stewart, vp of federal affairs at the Insurance Bureau of Canada, suggested that nothing much should be read into the postponement.
“What can be read into the delay is that the government doesn’t see an urgency given a range of other priorities.”
The Insurance Brokers Association of Canada welcomed news of the postponement.
Steve Masnyk, IBAC’s manager of public affairs, said that given the importance of the review, a couple of extra years to execute it is welcomed.
“It means that the government is going to do a full and thorough review.
“It also means that they want to put the consumer interest at the forefront.”
He said that point in particular is important because banks have been pushing a lot of quasi- p&c products through their subsidiaries.
“For example, they are offering mortgage insurance which is a total disaster because it doesn’t protect the consumer.”
Brokers will continue to push for continuing the ban on banks selling p&c insurance where they grant credit.
“Credit is very powerful,” Mr. Masnyk said.
“(Banks) wish they could sell insurance and that everybody would buy into it like mortgage insurance but that’s unfair to the actual consumer.”
He said Canada’s MPs appear to understand the issue. And postponement of the review means brokers will have more time to speak with them about it.
Jim Murphy, ceo of the Insurance Brokers Association of Ontario, said that whether the postponement is a positive or negative for brokers remains to be seen.
“It’s not as if the government hasn’t done a review before,” Insurance Brokers Association of Ontario ceo Jim Murphy said.
“There are many public servants that have done this before so by postponing the review they are saying one of two things.
“Either there is a lot on their agenda currently and they don’t have time to do it or they are saying a more thorough review is needed and they want to take their time doing it.”
He noted that the review is of great interest to brokers all across the country.
“It will be interesting to see how (the postponement) will affect the review.
“It indicates that a more thorough review will be done but at the same time it would mean that any legislative changes would be done in 2019 — which is an election year.”
While it is difficult to say if 2019 being an election year will affect the review, he said it will be interesting to see if the dynamics of the politics could lead government to do anything that would dramatically change the existing rules.
“Insurance brokers and the IBAO are going to continue a dialogue with the government and it’s going to be a much longer process.
“Our message has been pretty clear already. Keeping the current rules that (banks) cannot sell (p&c insurance) in branches or online — we feel very strongly about that.”
Patrick Bouchard, chair of Regroupement des cabinets de courtage d’Assurance du Québec, said the delay unfortunately means further uncertainty for brokers there amid an ongoing provincial review of financial services distribution laws.
“Our uncertainty will remain for another two years but we hope the new timeframe results in a cautious preparation of the law review,” he said.
“Whenever the government does decide to review the Bank Act we will gladly take part in the modernization of such an important bill.”
In an analysis of the new budget, law firm Blake Cassels and Graydon notes that the government is proposing to modernize the existing consumer protection framework by amending the Bank Act to include a new chapter.
“Currently, the provisions of the financial consumer protection framework are dispersed throughout the Bank Act and its regulations; thus, the new chapter is meant to consolidate these provisions to create a comprehensive framework. The new framework will include a set of principles to guide bank conduct.”
Buried in the tax details of the budget were changes to the treatment of cross-border reinsurance arrangements, which the Insurance Bureau of Canada has been seeking for a roughly a decade.
“For insurance companies that are purchasing global reinsurance it means that part of that purchase won’t be taxed,” Mr. Stewart said.
“Through these measures insurance companies will save taxes.”
The latest budget clarified that two components of imported reinsurance services, the ceding of commissions and the margin-for-risk transfer, do not form part of the tax base that is subject to self-assessment provisions.
The budget also specified conditions under which special rules for financial institutions impose neither GST nor HST on reinsurance premiums charged by the reinsurer to a related primary insurer.
That measure will apply retroactively from Nov. 16, 2005, the time of the introduction of the special GST and HST imported supply rules for financial institutions.
Insurers will also be able to request a reassessment of the amount of tax owed under the special GST/HST supply rule, which includes related penalties or interest. Insurers have one year after the amendments receive royal assent, which is expected by June.
“This is the most important part of the budget for the insurance industry,” Mr. Stewart said. “It wouldn’t be something that you would pick up easily and it wasn’t even in the main document; it was in the annex. We are quite pleased with the tax changes for the industry.”
Another measure from the 2016 federal budget welcomed by insurers is the allotment of $510m over five years for climate change mitigation and adaptation.
And Mr. Stewart said that the federal government has indicated there will be more investment to come to address climate change issues.
“We also know that the federal government has heard from municipalities and the insurance industry that there is a need for a national flood program,” he said. “We know they are studying our proposal (for a national flood program) very closely and signalled that they will engage actively around flood over the coming months.”