Tax authorities harden their stance

Three years ago, the Canada Revenue Agency and Revenu Québec announced their intention to charge MGAs sales tax. The threat is back: Revenu Québec has begun to issue notices of assessment looking back three years.

Now the Canada Revenue Agency is jumping into the fray. The tax authorities have been galvanized by a decision rendered against a dealer in Western Canada that sold automobile guarantees without charging customers goods and services taxes.

AFL Financial Group is an MGA that received a notice from Revenu Québec. CEO Yan Charbonneau is expecting to get one from CRA because the federal government also considers services that MGAs provide to advisors taxable.

Charbonneau thinks it is time to have a frank discussion with insurers. “Revenue Canada and Revenu Québec are telling us that we should have collected the GST from insurers. Insurers are not thrilled about being billed retroactively: we would have to charge each insurer several millions of dollars,” he told Insurance Journal.

MGAs will likely go to court to appeal the CRA decision, Charbonneau adds. “Law firms have already stepped up to the plate and signalled that they are ready to defend us,” he says.

All the same, he managed to negotiate some aspects of the tax assessment. “We may have a right to contributions on inputs. They contribute directly based on our earnings and salaries. Deloitte is our advisor in this case,” he says.

Mathieu Goulet, Executive Vice-President Finance at MICA Financial Services, says that the CRA’s position was stated in an interpretation bulletin. Published on June 11, 2019 by Marcel Boivin, Director, Financial Institutions and Real Property Division at the CRA, this bulletin states that MGA services are not financial services, so they are taxable.

In the CRA’s view, MGAs’ main activities are advisor recruitment, training and supervision, along with promotion of insurers’ products. These services are not covered in the definition of financial services.

MICA, one of the first MGAs to contribute in line with this vision, back in 2016, had obtained a deferral, after successfully contesting a claim by Revenu Québec. The case had been on ice ever since. “They regained interest in the case, which also happened to several of our colleagues,” Goulet says.

Heavier compliance burden

Insurance companies have increased the burden of MGAs’ compliance vis-a-vis advisors, Goulet points out. “We have to take more and more measures to make sure that their recommendations to clients are appropriate. There are also complex files that advisors cannot handle alone, on which the MGA dedicates many hours. We offer taxation services on-site with the advisor. As a result we are much closer to clients than Revenu Québec claims,” Goulet explains.

In its latest negotiations with the tax authorities, MICA Financial Services had to remit its general ledger starting from the deferral in autumn 2016 until October 31, 2019. To carry out this retrospective audit, the government asked the MGA to sign an agreement to waive the time limit.

Several Québec MGAs have undergone this process since audits resumed in late 2019, Insurance Journal learned. The Québec tax authorities are acting “aggressively,” the MGAs say, They anticipate that the new taxation could cause their profitability to decline by 15% each year, equal to the amount of the GST collected on 100% of their revenues, particularly those derived from segregated funds and life insurance products.

“It’s a troubling change of discourse,” says Mathieu Goulet, of MICA. “We are opposed to this notice of assessment. We will pay only the interest after that, which already represents thousands of dollars. All MGAs will oppose it. The government suggests that we pass the bill along to insurers. Will the insurance companies compensate us? I don’t see the Canadian Life and Health Insurance Association (CLHIA) moving in this direction,” he adds.

A seven-figure tab

Gino Savard, President of MICA Financial Services, says that his company cannot absorb an invoice “in the seven digits,” that the tax authorities are charging. “I can’t imagine where we would find that amount. On top of that, no MGA has the means to sacrifice a 15% profit margin. This is why all the MGAs are forming a common front,” he explains.

If the two levels of government haul out their big guns, many MGAs will have to shut down over the short term, Savard continues. Others with large volumes can overcome the hurdle with support from long-standing suppliers. “Insurers cannot just wash their hands of this. It is not in their interest that we close,” says Savard.

Canada-wide challenge

This case is resonating through the rest of Canada, which had been fairly unscathed to date. “The GST is a big deal for us. We are keeping a very close eye on what’s happening in Québec and how discussions with the CRA are advancing,” says HUB Financial CEO Terri Botosan. Although aware of the potential financial impact on MGAs, she remains optimistic about the outcome.

CLHIA-Québec says it is standing by MGAs. “We think that MGAs’ revenue should not be taxable,” says president Lyne Duhaime. Given the COVID-19 crisis, it would be surprising if this file progresses in the short term.