Premium tax is a mandatory tax that insurance companies must pay to provincial and territorial governments in Canada based on the insurance premiums they collect. Although it is technically paid by the insurer, the cost is passed on to the policyholder and is included in the amount you pay for your insurance coverage.
This tax applies to most types of insurance, including life insurance, universal life insurance, extended health and dental plans, critical illness insurance, disability insurance, and travel insurance.
How premium tax works
When you pay your insurance premium, a portion of that amount is allocated toward:
- The cost of insurance
- Administrative expenses
- Premium tax
- Any additional benefits or riders
In the case of universal life insurance, the premium tax is deducted from your payment before any money is allocated to the investment accounts inside your policy.
For example:
- You pay $1,000
- Premium tax is calculated (for example, 2%)
- $20 is withheld for tax
- $980 is credited to the policy’s investment accounts
Who sets the premium tax rate?
Premium tax rates are set by each province or territory and vary across Canada. Rates vary with the type of insurance and the jurisdiction where the policyholder resides or where the contract is issued.
Premium taxes are typically higher for health and accident insurance compared to life insurance in certain provinces.
Where does the money go?
The premium tax is a source of revenue for provincial governments. It is not related to the federal Goods and Services Tax (GST) or Harmonized Sales Tax (HST), and it does not benefit the insurance company. The tax helps fund provincial programs and infrastructure, much like other consumption-based taxes.
In Ontario and Quebec, group insurance premiums also carry a provincial sales tax on insurance, on top of the premium tax. Individual life and health insurance is generally exempt.
Summary
| Feature | Description |
|---|---|
| What it is | A provincial/territorial tax on insurance premiums |
| Who pays it | Paid by the insurer, but passed on to the policyholder |
| Applies to | Life, health, disability, critical illness, and travel insurance |
| Rate | Set by each province or territory, and varies |
| Impact on universal life | Deducted before funds are deposited to the policy’s investment accounts |