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Letter to Newfoundland Ministry of Finance Re: Budget proposal to increase premium tax rate on life and health insurance premiums

Release Date: 05/02/2016
Staff Reference: Ronald Sanderson

May 2, 2016

The Honourable Cathy Bennett
Minister of Finance and President of Treasury Board
Government of Newfoundland and Labrador
Confederation Building, Main Floor, East Block
P.O. Box 8700
St. John's, NL A1B 4J6

Dear Minister,

I am writing on behalf of Canada’s life and health insurers to convey our members' significant concerns regarding your budget proposal to increase the premium tax rate on life and health insurance premiums from 4% to 5% (effective July 1, 2016).

Established in 1894, CLHIA represents life and health insurance providers accounting for 99% of the business in Canada. The life and health insurance industry is a major contributor to Newfoundland and Labrador’s economy, key details of which are included in the Newfoundland and Labrador Overview enclosed.

Prior to this Budget, Newfoundland and Labrador already had the highest premium tax rate in Canada. While we recognize the fiscal challenges your government inherited, we are very concerned that a premium tax increase will increase the cost of insurance for Newfoundlanders and Labradorians, reducing their ability to acquire adequate life and health insurance protection for themselves, their employees and their families. Furthermore, declining insurance protection will place additional pressures on the public health care system.

A regrettable and unintended consequence of the budget proposal is that it will apply retroactively to all insurance policies, including those that were issued prior to the effective date of the increase. For in-force policies with adjustable premiums or yearly renewable contracts, the additional premium tax cost can be passed on to policyholders, subject to market conditions. However, for existing contracts with guaranteed premiums, that span 30 or 40 years or more, the additional tax cost must be borne by new policyholders or insurers. In addition to the annual increase in tax payments (cash outlay), life insurers must also immediately accrue (following the budget announcement) the full cost of this increased future tax obligation for the remaining years of these long-term guaranteed contracts and set aside funds now to meet those future payments. This charge will immediately deplete solvency capital levels of life insurers, limiting their ability to grow and invest in Newfoundland and Labrador.

The proposed increase in premium tax rates must also be considered in the context of this industry's tax burden compared to other industries, including banks. The budget projects the premium tax increase on the life and P&C insurance industry will generate almost the same revenue as the corporate tax increase ($16.9 million vs $17.2 million), despite the fact that the corporate tax increase applies to all corporations, including insurers. Similarly, the premium tax rate increase is nearly 3 times the increase in the Financial Corporations Capital Tax on banks and other deposit taking institutions, announced in this budget.

While we believe the government should reconsider the proposed premium tax increase, at a minimum we urge you to remove the retroactivity aspect of the increase by ensuring that the new rate only applies prospectively (that is, exempting policies in-force prior to July 1, 2016), as Saskatchewan did when it increased premium taxes. Such "grandfathering" would still allow Newfoundland and Labrador to collect over 50% of the targeted revenue from the life insurance sector, primarily through application to employer-paid group life and health insurance protection in the workplace. In addition, Newfoundland and Labrador should announce that the premium tax rate increase would be a temporary measure that would be repealed as soon as economically prudent.

We are available to work with your officials at the earliest opportunity to address this significant impact on our industry and customers. Senior industry tax officers will be in St. John's May 16-19 at the CLHIA's annual tax conference, and we will be seeking a meeting with you and your officials at that time.

Yours sincerely,

Original signed by

Frank Swedlove

Enclosed: Newfoundland and Labrador Overview
C: Donna Brewer, Deputy Minister
Craig Martin, Assistant Deputy Minister, Taxation and Fiscal Policy
Chris Butt, Director, Fiscal Policy Division
Jay Griffin, Director, Tax Policy Division