A C.D. Howe report recommends that Canadian governments reassess the cascading taxes imposed on insurance premiums.

The report, authored by Alex Laurin and Farah Omran, finds that premium-based taxes increase the price of insurance products and lower the demand for them.

Most consumers don’t know that a provincial insurance premium tax (IPT) ranging from 2 per cent to 5 per cent is levied on their premiums for many life, health and property and casualty insurance products. On top of these premiums, many provinces collect retail sales taxes for a combined total of $7.3 billion in tax revenues, says the report. This number doesn’t include an additional $4.4 billion in other taxes, like corporate income tax, that insurers also pay. This tax regime makes insurance one of the most heavily taxed financial services in Canada.

“Taxes on insurance premiums have been a fixture of the Canadian tax system since the early 1900s when insurance companies were subject to very little other tax” says Laurin. “They remain a source of considerable revenue for provincial governments in particular.”

The higher the taxes, the fewer people buy

The report, called Piling On – How Provincial Taxation of Insurance Premiums Costs Consumers, states that an increase of one percentage point in the provincial insurance premium tax rate leads to a 10 per cent decrease in the number of life insurance contracts sold. Fewer people purchasing insurance coverage has the potential to increase long-term cost pressures on government budgets. 

The report recommends that provinces eliminate their insurance premium taxes or, at a minimum, make them creditable against corporate income tax liabilities.

It also asks the provinces that impose a retail sales tax on IPT-inclusive premiums to lead the way and eliminate this form of double taxation.

The report recommends reform to remodel the patchwork of transaction taxes for insurance services to create a comprehensive and broad-based, value-added system, bringing down the insurance industry's high transaction tax burden and ensuring greater comparability with other industries.