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Canada – Provincial Premium Tax

This communication is to remind Lloyd’s managing agents and brokers of the requirements regarding the processing of provincial premium tax in Canada relating to Lloyd’s business.

Lloyd’s brokers and underwriters must ensure that the Canadian provincial premium tax position is clearly stated for all Canadian business on the Market Reform Contract (MRC/slip) or tax schedule submitted with the MRC/slip. This includes recording any applicable exemptions, such as the specific marine exemption detailed below.

These requirements also extend to Lloyd’s coverholders in Canada.

Lloyd’s Crystal has been updated to include all relevant details of Canadian provincial premium tax rates and exemptions.

Velonetic has received updated instructions and guidance to process these risks going forward and any Lloyd’s policies where the Canadian provincial premium tax position is not clear will be queried by Velonetic, potentially leading to delays in premium processing and payment.

When a policy includes both taxable and exempt elements, it must be divided into two sections. The first section should detail the exempt premium, while the second section should outline the taxable premium. Unless a policy is explicitly fully exempt, any mixed policy that is not divided into taxable and exempt sections will be treated as entirely taxable. For further details on mixed policies, please refer to the information below.

This communication supersedes previous communications via Lloyd’s Market Bulletin Y5137 and the Taxation News page.

If you have any questions or require any further information, please contact the Lloyd’s Tax Department.

taxdept@lloyds.com

Details of marine exemption

The marine tax exemption is very narrow and only limited to risks associated with navigation of the sea, e.g., ship’s hull & liability and marine cargo. Other risks written in the marine market are treated as accident, property, or liability risks for Canadian regulatory and tax purposes.

  • “Marine” insurance has a very narrow definition under Canadian legislation and is limited to:
        - “…insurance against liability arising out of; (a) bodily injury to, or the death of, a person, or the loss of, or damage to, property, or (b) the loss of, or damage to, property, occurring during a voyage or marine adventure at sea or on an inland waterway, or during a delay or a transit other than by water that is incidental to a voyage or marine adventure at sea or on an inland waterway…"
  • “Marine adventure” means any situation where “….insurable property is exposed to maritime perils,…”
    - This includes situations where the potential earnings from freight, commissions, profits, or securing loans are jeopardised due to maritime perils. Additionally, it covers instances where the owner or responsible party might incur liability to third parties because of maritime perils. For example, a shipping company transporting goods across the ocean might face financial loss if the cargo is damaged in a storm, or a fishing vessel owner could be liable if their boat causes an accident at sea.
  • “Maritime perils” means “…perils consequent on or incidental to navigation….”
    - This includes perils of the seas, fire, war perils, acts of pirates or thieves, captures, seizures, restraints, detainments of princes and peoples, jettisons, barratry, and other similar perils, including any peril specified by a marine policy. Numerous Canadian cases have explored what qualifies as a peril of the sea, emphasising that it must be something unique to the sea.

Taxable / Exempt mixed policies

Example 1:

A policy insures cargo traveling from the manufacturing site to a seaport for global shipping. This policy will be divided into two sections: one covering the land transportation leg and the other covering the ocean-going leg.

  • Section 1 – Exempt: The ocean-going leg is eligible for the provincial premium tax exemption. The premium is split accordingly.
  • Section 2 – Taxable: The cargos journey over land does not qualify for the exemption. Therefore, the premium is split, and the applicable provincial premium tax is applied.

If more than one section, with premium allocation, is not provided then the whole policy will be treated as taxable for Canada premium tax purposes.

Example 2:

A policy insures six vessels, three of which qualify for the Canadian provincial premium tax exemption as they are transporting cargo from Canada to the Netherlands (Ocean-going). The remaining vessels include one operating in a Canadian port (i.e. tugboats), one in dry dock for repairs during the policy period and one Yacht.

  • Section 1 – Exempt: The three ocean-going vessels carrying cargo are eligible for the provincial premium tax exemption. The premium is split accordingly.
  • Section 2 – Taxable: The other two vessels, excluding Yachts, do not qualify for the exemption. Therefore, the premium is split, and the applicable provincial premium tax is applied.
  • Section 3 – Taxable Yacht: The premium is split, and the applicable provincial premium tax is applied.

If more than one section, with premium allocation, is not provided then the whole policy will be treated as taxable for Canada premium tax purposes.

FAQs

In Canada, all provinces provide a provincial premium tax exemption for policies that meet the definition of marine insurance, with the exception of Quebec. Manitoba provides a provincial premium tax exemption for marine insurance including pleasure craft.

Marine insurance that is not pleasure craft insurance is exempt from BC IPT. This includes insurance against risks during a voyage or marine adventure at sea or on an inland waterway, and incidental non-water transit.

Insurance types generally subject to BC IPT include:

  • Terminal operator’s liability insurance

    - Insurance entered into by the owner of a wharf, dock, terminal, berth or loading arm that is used for the purpose of moorage or storage of vessels where the contract insures the owner against the loss of, or damage to, the structures or against liability for a vessel moored or stored at the insured's facilities.
  • Ship builder’s / repairer’s insurance

    - Insurance covering a ship in the course of building, repairing or refitting the ship other than insurance in respect of a sea trial or a delivery voyage
  • Insurance for moored or anchored floating homes/buildings (except during towing voyages)
  • Insurance for logs in water storage

For contracts with both taxable and exempt components, a reasonable methodology must be used to allocate premiums between taxable and exempt insurance components. This should be justifiable and documented should it ever be reviewed by the tax authority.

The BC Tax Authority considers cargo / stock throughput insurance exempt if the insured goods are primarily transported through a marine voyage or adventure, with other means of transport being incidental. For example, logs and lumber products transported worldwide, however, logs in water storage would be subject to BC IPT.

Providing detailed information about the intended usage of insured vessels can significantly reduce processing queries from Velonetic. Often, insufficient details make it challenging to determine if the insurance qualifies as marine insurance. For example, certain insured vessels cannot be distinguished from pleasure craft, and certain insured barges cannot be distinguished from floating stationary structures. By ensuring comprehensive and clear descriptions, the qualification process becomes more efficient.