Tax Insights: Federal Court of Appeal confirms insurers eligible to recover GST/HST when insuring risks outside of Canada

Issue 2025-21

In brief

What happened?

On April 28, 2025, the Federal Court of Appeal (FCA) rendered its judgement in Northbridge Commercial Insurance Corporation v. The King, 2025 FCA 83. The FCA allowed the taxpayer’s appeal, finding that the Tax Court of Canada (TCC) had erred in its decision on:

• how the taxpayer should determine the extent to which it was insuring “risks that are ordinarily situated outside of Canada,” for purposes of claiming goods and services tax/harmonized sales tax (GST/HST) input tax credits (ITCs) on general head office and overhead costs, and
• the method to be used to determine the amount of the ITCs

This is the second time that the FCA has overturned a TCC decision for this taxpayer. In the first case, the FCA concluded that “risks that are ordinarily situated in Canada” refers to the location where there is a “risk of a claim arising from an accident or other insurance event” and not the ordinary location of the objects that are being insured. This second case deals with how the ITCs should be determined, with the FCA finding that the ITC calculation can be based on:

• global evidence, and
• the ITC allocation rules in section 141.02 of the Excise Tax Act (ETA)

For the second time, the matter was referred back to the TCC to determine the amount of the ITCs that the taxpayer is entitled to claim. 

Why is it relevant?

These cases affirm that Canadian resident insurers insuring tangible personal property (e.g. vehicles, aircraft, railcars, etc.), from which an insurance claim may arise due to an accident or event outside of Canada, should be considered to be providing zero-rated insurance. Therefore, they would be eligible to claim ITCs on expenses, to the extent (expressed as a percentage) the expenses are incurred to make this type of zero-rated supply.

Actions to consider

Canadian resident insurers should determine the extent to which they make zero-rated supplies of insurance and adopt a fair and reasonable ITC allocation. To support the amount of ITCs that may be claimed on general expenses (e.g. direct inputs, non-attributable inputs and capital property), insurers should maintain evidence on how insurance policies are priced and the portion of insurance premiums that are attributable to a risk of a claim arising from an event that occurs outside of Canada.

In detail

Facts

The taxpayer, a Canadian resident insurance company, issues fleet insurance policies to trucking companies that operate their vehicles in both Canada and the United States (US). The policies provide insurance coverage for a company’s fleet of trucks and trailers in the event of accidents and other insurable events, including when the vehicles are travelling in the US. The premiums paid to the taxpayer are calculated annually, based on its best estimate of the potential losses applicable to each policy (loss calculation). The main factors used to determine the premiums include the loss calculation, the average cost of claims and the mileage driven in the various jurisdictions.

In carrying on its insurance business, the taxpayer incurs various expenses on which it pays GST/HST. It had claimed ITCs to recover 33.3% of the GST/HST paid on general head office and overhead costs, on the basis that its insurance products were partially related to risks ordinarily situated outside Canada and were, therefore, partially zero-rated under paragraph 2(d) of Part IX of Schedule VI of the ETA. The ITC recovery percentage was based on historical cost of insurance claims that the taxpayer was required to pay in respect of events occurring in the US, compared to the total costs of insurance claims in respect of insurance events occurring in the US and in Canada.

The Minister of National Revenue (the Minister) denied the taxpayer’s ITC claims on the basis that all the taxpayer’s supplies were exempt supplies (the supply of an insurance policy is generally an exempt supply and thus not eligible for ITCs) and the taxpayer appealed this assessment.

TCC decision 1

In Northbridge Commercial Insurance Corporation v. The Queen, 2020 TCC 132, the TCC dismissed the taxpayer’s appeal:

• interpreting “risks that are ordinarily situated outside of Canada” (for the purposes of paragraph 2(d)) as being a reference to the “object” (property) being insured, and not the perils in which the object is being insured against, and
• finding that, if the object is ordinarily situated in Canada, the insurance does not qualify for zero-rating

The taxpayer appealed the TCC’s decision.

FCA decision 1

In Northbridge Commercial Insurance Corporation v. The King, 2023 FCA 211, the FCA found in favour of the taxpayer and held that, for the purposes of paragraph 2(1)(d) of Part IX of Schedule VI of the ETA, the reference to where “risk” is ordinarily situated relates to where the events which would give rise to the claim are located (as opposed to where the objects that are the subject of the insurance are ordinarily located). As such, to the extent that the events (e.g. trucking accidents) that give rise to the insurance claim can occur outside of Canada, a portion of the insurance will qualify for zero-rating.

The FCA also noted that the taxpayer’s pricing of its insurance policies would be relevant in determining the extent to which they relate to risks ordinarily situated outside of Canada (i.e. higher prices for policies with coverage outside of Canada). Based on this interpretation, the FCA referred the matter back to the TCC to determine the amount of the ITC that the taxpayer was eligible to claim.

TCC decision 2

In Northbridge Commercial Insurance Corporation v. The King, 2024 TCC 10, the TCC dismissed the taxpayer’s appeal, noting that all evidence presented at trial was “global evidence,” and not specific evidence regarding individual policies. The TCC found no evidence to support how each and every insurance policy was priced that would allow the court to determine the portion of the premiums that were zero-rated. The taxpayer appealed the TCC’s decision.  

FCA decision 2

In Northbridge Commercial Insurance Corporation v. The King, 2025 FCA 83, the FCA, again, found in favour of the taxpayer, concluding that global evidence on the manner in which the policies were priced was sufficient for determining the taxpayer’s ITCs. In reaching this conclusion, the FCA noted that an ITC is based on:

• the business that is being carried on by a supplier, and
• the extent (expressed as a percentage) that a particular expense is incurred in the course of a commercial activity

For expenses that are not incurred for a particular supply (e.g. property and services that are consumed or used in relation to all insurance policies that were issued by the taxpayer), the FCA reasoned that:

• an examination of each insurance policy individually is not necessary, and
• global evidence on the taxpayer’s overall business should be sufficient for purposes of determining ITCs on property and services that were acquired for use in operating the overall business

The FCA held that the taxpayer was making zero-rated supplies of insurance and, for the second time, the matter was referred back to the TCC to determine the amount of ITCs that the taxpayer would be entitled to claim, in accordance with the ITC allocation rules in section 141.02 of the ETA.

The allocation rules

The allocation rules depend, in part, on whether the property and services that the taxpayer acquired were a “direct input” or a “non-attributable input.” The rules require a financial institution (FI) to first classify its expenses into the following four categories:

• Excluded inputs – property purchased for use as capital property, and property and services that result in an “improvement” to capital property
• Exclusive inputs – business inputs (other than “excluded inputs”) acquired for consumption or use directly and exclusively (i.e. 100%) in:
  • making taxable supplies for consideration, for which a full ITC is available, or
  • other purposes for which no amount may be claimed as an ITC
• Non-attributable inputs – business inputs not attributable to the making of any particular supply, but instead consumed or used in the course of making both taxable supplies for consideration and exempt activities
• Direct inputs – the default category for inputs acquired for consumption, use or supply in the course of both commercial and non-commercial activities

After the expenses are classified, the FI must apply a specific ITC allocation method. To determine the operative extent and procurative extent of a particular input, the FI must use:

• a “specified method” for non-attributable inputs and excluded inputs
• a “direct attribution method” for direct inputs

Both of these methods are defined to ensure they conform to the criteria, rules, terms and conditions specified by the Minister. Therefore, FIs are required to determine their ITCs in a manner which the Canada Revenue Agency considers appropriate, based on its administrative policies. The ITC allocation methods must also be determined by the FI in advance and before the due date for filing its GST/HST returns.

The takeaway

These are important cases for taxpayers who insure objects located both inside and outside Canada. The FCA provides some useful guidance for insurers in determining whether their supplies are exempt or zero-rated, and also the method to calculate ITCs for related expenses. In light of the FCA’s decisions, insurers should assess their eligibility to claim ITCs, based on the location of the risk and the extent that it qualifies for zero-rating, and document these assessments. Our PwC specialists can guide and assist you with this process.