How Northbridge beat the taxman

Northbridge is allowed to claim GST input tax credits for insurance policies it issued to trucking companies operating in both Canada and the United States, the Federal Court of Appeal has ruled.

The decision overturned a Tax Court of Canada ruling in December 2020 that disallowed Northbridge’s claim for the tax credits.

At issue is how the word “risks” in the Excise Tax Act is defined when determining eligibility for the credits.

Northbridge made the claim for GST input tax credits based on the “zero-rated” services the insurer provides to trucking companies for “risks that are ordinarily situated outside Canada.”

A zero-rated supply of services is not the same as tax-exempt services. Essentially, GST does apply to zero-rated services, according to the Excise Tax Act, but a company in Canada is eligible to claim input tax credits for “risks that are ordinarily situated outside Canada.”

The rationale is that Canadian companies should not be paying GST for services provided mainly in the United States.

The Federal Court of Appeal upheld that the “risks” outside Canada to which the tax credits applied meant “the perils or the events which would give rise to a claim,” and not, as the Tax Court of Canada ruled, the objects of the insurance, namely the trucks themselves.

“Any claims arising as a result of an accident in the United States would result in payments to a person outside Canada to repair the vehicles or to compensate individuals who were injured,” Federal Court of Appeal Justice Wyman W. Webb ruled in a decision released Tuesday. “This is an exported service of indemnifying loss arising as a result of an insurable event occurring outside Canada.

“As a result, in my view, ‘risks’ means the risk of a claim arising from an accident or other insurable event. To the extent that any insurance policy issued by Northbridge covered such risks that were ordinarily situated in the United States, the supply of such a policy would be a zero-rated supply.”

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Northbridge issued insurance policies to trucking companies operating in Canada and the United States. The policies provided coverage for accidents and other insurable events.

The premiums Northbridge charged for its policies were calculated annually, based on the company’s best estimate of the loss potential related to “the states or provinces within North America in which an insured’s vehicles may travel,” as explained in court documents.

For example, the insurer divided U.S. states into seven different groups based on a historical loss analysis. Wyoming had the lowest claims costs. Massachusetts, New York, and Texas were grouped together as the states with the highest claims costs. The base rate varied for each group of states.

Northbridge claimed input tax credits related to a portion of the GST/HST it paid for general head office and overhead costs. It applied on the basis it was making zero-rated supplies.

Canada’s Minister of National Revenue denied the claim and the Tax Court of Canada dismissed Northbridge’s appeal. The tax court found the zero-rated “risks” eligible for tax credits were the objects of the insurance policy [i.e., the trucks], not the perils.

Based on this finding, the tax court ruled there was no way to determine where in the continent the insured trucks would be at any given moment [i.e. whether in Canada or the U.S.]. Therefore, there was insufficient evidence to determine if the trucks were ordinarily situated outside Canada.

The Federal Appeal Court overturned the ruling. It found the “risks” eligible for tax credits referred to the perils, not the trucks.

“For Northbridge, the risk was that a claim (or claims) would be made by its customers arising as a result of accidents involving its customers’ vehicles,” the Federal Court of Appeal stated in its ruling. “The risk to Northbridge was not the vehicle, per se, but rather that the vehicle would be involved in an accident (or other insurable event), which would result in a claim….

“Since the policies issued by Northbridge in part related to accidents (and other insurable events) that are usually situated outside Canada, the supply of a portion of the policies qualified as a zero-rated supply [i.e. eligible for input tax credits].”

Feature image courtesy of iStock.com/MayaCom