Insurance Policy Protection Risk Security Concepts

Canadian governments should reassess the cascading taxes imposed on insurance premiums, according to a report published Tuesday from Toronto-based C.D. Howe Institute.

The report Piling On – How Provincial Taxation of Insurance Premiums Costs Consumers, finds that premium-based taxes increase the price of insurance products and lower the demand for them.

Provincial insurance premium taxes, which range from 2% to 5% on premiums for many life, health and property and casualty insurance products, are collected alongside retail sales taxes, generating a combined $7.3 billion in tax revenues, the report finds.

Additionally, governments collect another $4.4 billion in other taxes, such as corporate income tax, from insurers.

“This tax regime makes insurance one of the most heavily taxed financial service in Canada,” C.D. Howe says in a news release.

The report estimates that one percentage point increase in the provincial insurance premium tax rate leads to a 10% decrease in the number of life insurance contracts sold.

In addition, reduced insurance coverage could impose added costs on government budgets over the long term, the report argues.

“Fewer people purchasing insurance coverage has the potential to increase long-term cost pressures on government budgets. Reduced insurance coverage for natural disasters such as floods and earthquakes, other catastrophes, relief to a deceased’s family, or relief of the financial burden of illness and disability may lead to increased cost pressures on government budgets down the road,” the report explains.

As a result, the report recommends that the provinces consider eliminating their taxes on insurance premiums, or at least make them creditable against corporate income tax.

In particular, provinces that levy both premium taxes and retail sales taxes — Ontario, Québec, Manitoba, Saskatchewan and Newfoundland — should lead the way in reforming the industry’s tax structure, says the report.

Alternatively, “a more ambitious reform would remodel the patchwork of transaction taxes for insurance services to a comprehensive and broad-based, value-added system, bringing down the insurance industry’s high transaction tax burden and ensuring greater comparability with other industries.” the report says.