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Should the amount of compensation include taxes or not?

Publication date: December 7, 2021
Targeted audience

The Story

An insured’s garage burns down. Damages to the building are repaired and reimbursed. However, a dispute arises over compensation for the personal property in the garage: the value of the contents the claims adjuster estimated differs from the amount set by the insurer’s reviewer.

The difference between the two amounts stems from the fact that before applying an overall depreciation percentage of 40% to the home insurance contract, the claims adjuster included the taxes while the reviewer did not. Which calculation is correct?

Normally, the applicable taxes must be added to the cost of the property to be replaced, whether the insured is entitled to the replacement cost or the actual cash value (value on the day of the loss). You must therefore calculate the amount of the replacement cost, add the applicable, non-recoverable taxes to it, and then subtract the percentage of overall depreciation, when applicable.

However, there are a few exceptions, including for tax-exempt persons and companies eligible for a tax credit.


In personal-lines insurance, when calculating a settlement for replacement cost or actual cash value, the taxes on personal property must be included.

After you have investigated and estimated the damage amount, you must determine the amount of compensation admissible under the insured’s insurance contract and add to it the applicable taxes. The manual of the Autorité des marchés financiers (the Authority) explains that “when there is coverage for reconstruction, repair or replacement cost, the insured is entitled to have included within the amount of compensation paid, an amount representing the sales taxes applicable to the damaged or destroyed property.” [1]

Moreover, whether the insured replaces their property or not, the amount of applicable, non-recoverable taxes must be included.


In commercial-lines insurance, the taxes must be excluded when calculating compensation if the business is registered to charge the GST/HST and the QST, and is entitled to a tax credit. The Authority reminds claims adjusters that they must therefore “verify whether the company is registered with Revenu Québec in order to be entitled to an input tax credit (ITC) or an input tax rebate (ITR).” [2]

The Authority also notes other exceptions that apply to both personal-lines and commercial-lines insurance: “Certain personal property or services are exempt from sales tax or tax-free, such as: agricultural and fishery products, prescription medications and medical devices, transportation services, educational services, financial services, tolls on bridges, roads and ferries, sales to Indians, exports.”[3]

Simply put, in cases where the insured is entitled to a tax rebate or if the goods and services are exempt, the taxes are excluded when calculating compensation. However, “to the extent that an insured person is not eligible to claim an ITC or a rebate, the amount paid by the insurer to the insured person to settle the claim according to the terms of the insurance policy generally includes the amount of GST/HST that the insured person was not entitled to claim as an ITC or rebate.”[4]

Your Role

Your role, as a claims adjuster, includes estimating the extent of damages and the damage amount, as well as determining whether the loss is admissible. It is also your responsibility to establish the depreciation of the property and its actual cash value to present the insurer with the amount of compensation the insured is entitled to receive under his contract.

Finally, you must provide the insured with an explanation of how you estimated the damages, including information on your calculations and the percentage of depreciation, as well as explanations regarding the terms of the settlement and the steps the insurer plans to take.


[1] AUTORITÉ DES MARCHÉS FINANCIERS, “Assurance de biens et responsabilité civile des particuliers – expert en sinistre,” Volume 2, 4th edition, 2020, p. 166. [unofficial translation, document available in French only]

[2] AUTORITÉ DES MARCHÉS FINANCIERS, “Assurance de biens et responsabilité civile des entreprises – expert en sinistre,” Volume 3, 2nd edition, 2014, p. 455. [unofficial translation, document available in French only].

[3] Idem.

[4] Canada Revenue Agency, “GST/HST Treatment of Insurance Claims”, August 2014.