Saskatchewan's new sales tax on insurance premiums is set to have damaging impacts for clients, financial advisors and life insurers in that province. The tax increases the cost of life insurance and creates a major administrative headache for insurers, according to industry players.

Saskatchewan's decision to apply its 6% provincial sales tax (PST) to insurance premiums - including individual and group life, and health insurance - was revealed in the province's 2017-18 budget in March and takes effect Aug. 1. The tax makes Saskatchewan the only province in Canada in which individual life insurance products are subject to sales taxes.

The move has provoked an uproar from the life insurance industry, which argues that the tax will make insurance less affordable and represents an unfair tax on savings.

"Sales taxes are meant to tax consumption; they're not meant to tax savings," says Ron Sanderson, director of policyholder taxation and pensions with the Canadian Life and Health Insurance Association Inc. in Toronto.

Many life insurance policies, he adds, "have significant savings elements to them, and that's factored into the pricing. So, when you start taxing premiums, you start, essentially, taxing savings."

The new tax will drive down sales of permanent life insurance policies, says Dean Owen, vice president and financial planner with Cherry Financial Services Inc. in Saskatoon. As alternative savings vehicles such as bank accounts and mutual funds are exempt from sales taxes, Owen says, clients will have an incentive to use those vehicles rather than life insurance policies that have a savings component.

"We'll be forced to look away from these kinds of policies as a savings vehicle," says Owen. "There's no doubt we are going to see fewer whole life and universal life policies being sold."

The backlash against the new sales tax prompted the Saskatchewan government to tweak the rules slightly following the release of the budget.

Specifically, the government announced in May that it would delay the effective date of the tax change to Aug. 1 from July 1 to provide the industry with more time to implement the change.

The government also announced that permanent life insurance policies in force prior to Aug. 1 would be exempt from the PST. In the original announcement, the tax applied to premiums on all existing and future policies.

Existing term policies and health insurance policies such as disability and critical illness insurance, however, are not covered by the exemption. That's forcing advisors to have difficult conversations with clients whose premiums will increase suddenly.

"To add on another 6% to the premium is really difficult for some clients to swallow," Owen says. "A lot of advisors do not want to go to their clients to discuss this, but it's something that they're going to have to discuss."

As other types of insurance - such as home and automobile insurance - are also subject to PST as of Aug. 1, and since the sales tax itself increased to 6% from 5% in March, Saskatchewan residents will be feeling the impact in multiple areas.

The new tax could prompt some clients to reduce their life insurance coverage. One of Owen's clients has already indicated that he will take this step to keep his premiums the same when the PST kicks in because the client had budgeted for that specific monthly payment.

"The downside is, a 6% decrease in your coverage is a pretty significant number," Owen says.

Looking abroad, the concept of imposing sales taxes on life insurance is inconsistent with the approach of most major countries, Owen says. In fact, he notes, some countries, including Japan, provide tax deductions to residents who pay life insurance premiums.

"[Taxation] discourages the use of insurance," says Sanderson. "Most consumers have a fixed expenditure limit on things like insurance. If they are not able to afford the protection they need, then that's not good public policy."

For insurance companies, implementing the new tax requires costly system changes. Insurers have long been subject to an insurance premiums tax in all provinces and territories, ranging from 2% to 5%, depending on the jurisdiction, and some provinces also charge sales taxes on group insurance. However, no provinces or territories charge sales taxes on individual policies.

Although other provinces have introduced a sales tax on individual life and health insurance premiums in the past, they reversed the policy either before it took effect (such as in Manitoba in 2012) or shortly following implementation (such as in Quebec, where the government introduced PST on individual insurance premiums in 1985, then reversed that policy in 1986).

Even though the implementation date in Saskatchewan is days away as Investment Executive went to press, few insurers are prepared.

"These are massive systems changes," says Sanderson. "Getting those built, because there is no precedent for something like this in recent years, means that [implementation] is going to take time. So, companies are saying they can't do it in the time that's been allocated."

Many companies didn't immediately begin preparing for the new tax when the Saskatchewan budget was released because they expected the government to repeal the decision, according to Ami Maishlish, president of Markham, Ont.-based CompuOffice Software Inc., the company that developed LifeGuide, the life insurance comparison and quotation software.

"It appears the insurance companies were caught totally off guard," Maishlish says. "They started [preparing] late because they figured that Saskatchewan would eventually reverse this - which, I hope, eventually it will. But it doesn't look like [the province] will, at this point in time."

Owen suspects that some insurance companies may consider leaving the province to avoid having to make the changes necessary to accommodate the new sales tax for just one province.

"I still don't think it's out of the question for companies to pull out of selling life insurance in Saskatchewan," he says.

Some insurers are likely to absorb the new sales tax rather than charging it explicitly to policyholders, Maishlish says. However, that cost ultimately would be distributed among policyholders across the entire country, he adds: "It will impact the Saskatchewan residents to whom it applies, but it will also affect everyone across the country."

A key concern regarding the new tax revolves around the fact that it applies to the entire premium rather than only the cost of insurance, given that insurance premiums typically contain a variety of components.

"Not the total premium is being used for insurance," says Maishlish.

For clients who pay their premiums monthly rather than annually, for example, insurers typically charge a financing fee that's included in the monthly premium.

Guidance from the Saskatchewan government suggests that, unless that financing charge is broken out separately, the entire premium will be taxable, which means clients will be paying PST on the financing fee.

"[The new tax] is an additional tax on borrowing, which doesn't exist anywhere," Maishlish notes.

In addition, the existing insurance premium tax, which is 3% in Saskatchewan, typically is hidden within policyholder's premium, which means the PST will be compounded on that tax.

Adding to the challenge for insurers is the fact the Saskatchewan government has not yet published regulations to accompany the new legislation, Sanderson says: "There are some missing pieces in what Saskatchewan has produced. We need clear rules if the province expects us to comply."

In some cases, Sanderson says, insurance companies that aren't prepared to begin collecting the new tax may have to collect it retroactively.

If the PST gets implemented as planned, Sanderson worries other provinces will follow.

"We would hope that other provinces would not consider this," he says. "But there is certainly a risk that others will."

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