Insurance claims

Generally, when you receive benefits from an insurance company under the terms of an insurance policy, the insurance company is making an exempt supply of a financial service. There are two kinds of insurance claims:

• life and health; and
• property and casualty.

Under life and health insurance contracts, the settlement of a claim is usually limited to payment of financial benefits. These payments are financial services and are supplied exempt from GST/HST.

Under property and casualty insurance contracts, the insurer agrees to settle a claim for loss or damage to property either by:

• a cash settlement with the insured;
• paying the cost of repairs to the damaged property; or
• paying the cost of replacing the damaged property.

A cash settlement is a financial service and is supplied GST/HST exempt.

There are two ways an insurer can settle a loss related to damaged property:

• the insurer repairs or replaces the damaged property; or
• the insurer compensates the insured for the cost of repairing or replacing the damaged property.

The insurer repairs or replaces the damaged property

The insurer purchases repair services or replacement property directly. The insurer would pay GST/HST only if the repair services or replacement property is taxable. The insurer is not entitled to claim an input tax credit (ITC) as the insurer is not acquiring the property or service for consumption, use, or supply in his/her commercial activity.

The insurer compensates the insured for the cost of repairing or replacing the damaged property.

You, as the insured, acquire the repair services or replacement property directly, and are the recipient of the services or property. If you are a registrant, you may be eligible to claim an ITC. If you are a public service body, you may be eligible to claim a rebate. In this situation, it may be appropriate for the insurer to use the net-of-GST/HST method for settling the property and casualty insurance claim.

The net-of-GST/HST method ensures that an insurer is required to make payment for an insurance claim only to the extent of the actual loss suffered by the insured in accordance with the terms of the insurance policy. The amount paid by an insurer to you will be reduced by the amount that you are eligible to claim as an ITC or rebate related to the tax part of the repair or replacement expense.

Example
You are a GST/HST registrant who uses a car exclusively in the course of your commercial activities. You have an accident. You arrange to have the repairs done at the dealership for $5,000 plus $300 GST. Under the car insurance policy, there is a $500 deductible. You make a cheque payable to the dealership and claim $300 as an ITC. You forward a copy of the invoice to your insurer and ask for compensation less the $300 tax part. The insurer pays you the following:

Where an insured person is not eligible to claim an ITC or rebate, the amount paid by the insurer to the insured may include the GST/HST charged that is related to the repair or replacement expense.

For more information on insurance-related subjects or on insurance claims, see Insurance Agents and Brokers and GST/HST Treatment of Insurance Claims.