Re: Alberta budget proposal to increase the premium tax rate on life and health insurance premiumsRelease Date: 11/05/2015 Staff Reference: Noeline Simon
November 5, 2015
The Honourable Joe Ceci
President of Treasury Board and Minister of Finance
Government of Alberta
Ministry of Finance and Enterprise
323 Legislature Building
10800 - 97th Avenue
Edmonton, AB T5K 2B6
I am writing on behalf of Canada’s life and health insurers to convey our members' significant concerns with the Budget proposal to increase the premium tax rate on life and health insurance premiums from 2% to 3% (effective April 1, 2016).
We are disappointed and concerned that your government is pursuing the previous government's plan to increase the premium tax rate, despite our industry's extensive discussions with your officials about the negative and unintended consequences of a premium tax rate increase on life and health insurance. An overview of our industry's significant contributions to the social fabric and economy in Alberta is attached.
This higher premium tax rate will increase the cost of insurance for Albertans, reducing their ability to acquire adequate life and health insurance protection for themselves their employees and their families. With the growing pressures on the public income security and health care systems due to the aging population and rising health care costs, in our view, it is not good public policy to discourage the fullest possible use of insurance products by taxing them more.
Because property and casualty (P&C) insurance contracts are short-term, the proposed premium tax increase will only apply prospectively on P&C insurance, that is, only on contracts issued or renewed after March 30, 2016. In contrast, the rate increase on life insurance policies will apply on new business and, more importantly, to existing long-term, guaranteed premium policies that may span 30 or 40 years or more. This additional tax cost will disproportionately increase prices on new policyholders (given the large number of existing policyholders with long-term fixed contracts) or, the additional costs will have to be borne by life insurers.
In addition to the material increase in annual cash tax payments on the large block of existing long-term guaranteed contracts, life insurers must also immediately record a liability in their financial statements for the full cost of this increased future tax obligation over the remaining years of these long-term contracts. This will immediately deplete solvency capital levels of life insurers, significantly limiting their ability to grow and invest in Alberta.
The premium tax and the proposed increase must be viewed in the context of this industry's tax burden compared to other industries, including other financial institutions. The premium tax regime is in lieu of capital taxes that historically applied to other corporations, including banks, and predates the introduction of corporate income taxes. Alberta no longer imposes a capital tax on corporations generally, or specifically on banks. But insurers have been subject to both premium and corporate income tax.
While all corporations, including insurers, will be impacted by the recent increase in the corporate tax rate from 10% to 12%, the premium tax increase will yield about five times the corporate tax increase on our industry. This targeted tax rate increase is especially unwelcome in the economic climate of prolonged ultra-low interest rates, further hindering the strength and ability of the life insurance industry to provide affordable protection products to Albertans.
We urge your government to reconsider the proposed premium tax increase on life and health insurance protection. Alberta should uphold the principle of not increasing taxes retroactively, by ensuring that the new rate only applies prospectively (that is, to grandfather policies in-force prior to April 1, 2016), as Saskatchewan did when they increased premium taxes. Grandfathering would still allow Alberta to collect over 50% of the targeted revenue from the life insurance sector. At the very least, Alberta should announce that the premium tax rate increase would be a temporary measure that would be repealed as soon as the deficit is eliminated.
We are available to work with your officials at the earliest opportunity to address this important issue's impact on our industry and customers.
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