Insurer, not payroll, is tax collector
The Manitoba government began applying the province’s seven per cent retail sales tax (RST) to premiums for group life and some forms of group health insurance coverage, effective July 15, 2012.
The change was the result of amendments to Manitoba’s Retail Sales Tax Act made in June.
“It's a whole range of insurance, but for payroll professionals, the key will really be on group insurance,” says Janine Carmichael, director of provincial affairs for Manitoba at the Canadian Federation of Independent Business. “It's very important to note that it does not apply to health, accident or sickness insurance. And it also doesn't apply to individual life insurance.”
Ontario, Quebec already tax premiums
The change brings Manitoba in line with Ontario and Quebec, which both already collect provincial sales tax on group health insurance policies. In Ontario, premiums are subject to eight per cent tax, while in Quebec premiums are subject to nine per cent RST.
“Ontario and Quebec have taxes on group insurance,” says Ron Sanderson, director of policyholder taxation and pensions at Canadian Life and Health Insurance Association in Toronto. “This one is a little bit different in that Manitoba has picked and chosen a little bit more than Ontario and Quebec have done, which actually makes it a little bit harder to administer.”
Insurer responsible for paying tax
A payroll professional will not necessarily need to alter anything for the majority of a company’s employees because the responsibility lies with the insurance company to bill for the tax increase, Sanderson says.
“The insurer is essentially the tax collector for this. They are going to have to add the amount of the tax to the bills they are producing,” he says. “So, if you as an employee had a $100 employer-paid insurance benefit over the course of the year, that’s now going to show up as $107. So you’ll see a bump in the numbers, but there’s not a whole lot for payroll to do.”
Where payroll professionals do need to be careful is whether or not the tax was collected appropriately during the month of July, Carmichael points out. Because the increase was made mid-July, the premium is subject to the tax for only half the month.
“The actual day that you pay the premiums, as well as the actual day the premiums are for, have to be after July 15,” Carmichael says. “If your next payment for your group life insurance is for Aug. 1 to Aug. 30, and that payment came out July 10, it wouldn't be taxable. But if that payment came out July 20, it would be taxable because the period that it's in reference to is after July 15, as well as the actual payment date.”
Complications may also arise when Manitoba employers have employees working outside of the province, according to Sanderson.
“It simply means that the premium the insurer is going to have to bill is going to have to take into account the footprint of where your employees are and adjust the premium up on the Manitoba piece,” he says.
“You then have to preserve that allocation of the tax when you’re doing your T4 slips for the employees in Manitoba. You don’t want to give your employees in Ontario and Saskatchewan a higher benefit on their tax slip than they actually incurred, so you can’t really spread it across all employees.”
Companies that neglect to collect the tax could be subject to government penalties, but Sanderson says the Canada Revenue Agency (CRA) is normally lenient when changes to tax rates occur.
“It’s going to be more employee backlash than from the government,” he says. “I don’t think it serves their purpose to go out and impose a lot of penalties on people. Now, if an insurance company and a company completely ignored this and did so for the next five years, I would find Manitoba Finance to be more inclined to assess penalties.”
Neglecting to collect the tax could lead to interest penalties from the CRA, Sanderson adds. Carmichael worries this may be the case because of the way the Manitoba government communicated the changes to employers.
“The government did a terrible job of communicating with effected businesses about what their requirements would be,” she says, pointing out that the bulletin that outlines the changes was still being revised during the same month the changes took place.
“In order to comply, you had to get registered with the provincial government. There are all kinds of things that needed to happen with a very small window to do it and the information that was provided to explain how to do it was quite poor.”
