Tax insurance is one of the coverages clients are least aware of, but one of the most beneficial to their portfolio. The first tax investigation insurance product in Canada was created in 2015 by Richard Little, CEO of Professional Fee Protection Inc (PFP) who was a captive agent for DAS at the time.
PFP is currently working on building out an MGA platform to mirror the original tax investigation product and is expected to launch it by November 2021. PFP will be going to associations, accounting firms and insurance brokers to assess which avenue works best for the product’s lifecycle.
“The IT build will allow any client or broker to quote and bind a tax product in five minutes,” Little told Insurance Business. “In the past, the issue was that the product was newer to clients, and it took too long to process a small policy. There was a lot of confusion, but we’re going to have a new solution to solve all of that.”
Little, who also works on P&C business with AA Munro, explained that educating brokers and brokerages on the value of tax coverage for clients is essential, but the process has been stretched out because brokers don’t typically make as much commission compared to selling larger commercial policies.
If the CRA comes knocking, tax coverage mitigates the stress of an audit and keeps money in clients’ pockets.
“We figured out that between every two to five years everyone is going to have a tax or legal dispute,” said Little. “An accountant charges $400 an hour to file against a CRA audit, it’s much cheaper to spend a couple of hundred dollars on a tax policy.”
“Even if you had to carry that policy for five years and not have an audit, it’s a tax deductible so the cost of the business is negligible,” Little noted. “On the other side, if they were to have a tax audit and no policy, they’d have to take after-tax dollars to defend it.”
Little has dealt with situations where a client was insured for three to five years and successfully sold the business. “They actually paid to keep the tax coverage for an additional three years just in case CRA came back on that sale,” he said.
He also has clients with personal tax products. Even after a client passes away, the tax product is in place for three years until their family estate is settled because the personal tax product helps with the estate and pays for the tax review.
“We had another instance where a personal estate was settled, and then 18 months later CRA came for an audit. At that point all the estate funds had been dispersed and someone had to decide who pays for the tax audit work, when they could have spent $100 yearly and had that risk covered,” he said.
“Clients have bought coverage even though they sold their business two years ago because they know CRA can still come back, and typically it’s within a three-year window.”
Accountants or business advisors should also be telling clients about the risk surrounding audits in M&A transactions. Selling, merging, or acquiring a business opens the possibility for companies to spend thousands of dollars on a tax audit - when a couple of hundred could have been spent putting a tax insurance policy premium within the M&A sale.
“If an accountant or business consultant doing the deal isn’t educated about the product, they’re not going to mention tax coverage because after the sale is done it’s not their responsibility,” Little added. “As insurance professionals, it’s our job to tell clients about the tax risks going forward.”
“If you have these conversations with business owners and clients, there’s no reason why they would take that risk,” he said. “Tax coverages are very inexpensive but it’s an educational process.”
Selling tax policies provides brokers with an opportunity to add value to their existing clientele and retain their business with an additional policy. “There is a lack of broker knowledge in this space because they never truly had a product that’s presented to them that’s easy to sell and promote,” Little added.
“When our new product is launched, a brokerage can come to us directly through our MGA portal. It will be very simple going forward.”
