Last spring, one of the RCCAQ's member firms was visited by a Revenu Québec (RQ) audit team. A verification was carried out in the normal course of a standard GST/QST management audit. After reviewing the matter, the auditor proposed an "additional contribution amount" totalling nearly $375,000 in uncollected taxes on fees charged to the firm's clients. As a result of lobbying by the RCCAQ, the proposed contribution amount was withdrawn. Here is a summary of the arguments developed by the RCCAQ and submitted to RQ.
For GST/HST purposes, the supplying of financial services is tax-exempt. The definition of a financial service is specifically set out in the Excise Tax Act and the Act respecting the Québec sales tax and includes services that involve taking steps with a view to providing a financial service or agreeing to provide a financial service. Many of the services offered by brokerage firms meet this definition. However, this definition contains a number of specific exclusions, in particular with regard to what may appear to be administrative or preparatory services.
In this firm's case, it had received commissions from insurers and could also bill fees directly to policy holders. The latter were described as additional fees relating to new business, payments returned due to insufficient funds or insufficient compensation, modifications or cancellations during a policy's term of coverage or late fees. These fees were billed directly by the firm to the policy holders.
According to RQ's initial position, since there were two payers, there were also two "acquirers" of different services, i.e. the insurer and the policy holder. The former acquired a tax-exempt financial service while the latter acquired a taxable administrative or preparatory service.
During the lobbying process, the RCCAQ and the firm's representatives outlined the range of billing methods used in Quebec for insurance brokerage services. They also described the services covered by payments made by the insurers, as well as by the policy holders, together with supporting documents and descriptions of services provided when communicating with policy holders. The goal was to show that these were not altogether different services: they were actually part of a single insurance brokerage service. After reviewing these arguments, RQ accepted the RCCAQ's position and withdrew the proposed contribution amount (it had originally requested a $375,000 payment).
Against that backdrop, the RCCAQ encourages its members to clearly document the activities they engage in when providing brokerage services, not only in terms of processes but also in terms of the documentation they use (invoices, leaflets, etc.) for policy holders, particularly by identifying the nature of fees charged as part professional brokerage fees for policy holders' coverage and clearly identifying these fees in communications with policy holders.
In addition, it is a good idea to clearly identify on invoices which amounts stem directly from providing a financial service (non-taxable) and which amounts are not directly linked to the provision of financial services (taxable).
If you have any questions concerning this important issue regarding the management and operation of your firm, please feel free to contact us.
