On May 19, 2010, the Department of Finance released the details
of its proposal to impose HST costs on various types of investment
vehicles and plans on the basis of the provincial location of their
ultimate investors rather than the provinces where they make their
purchases of goods and services.
The list of potentially affected entities include:
investment plans such
as mutual fund trusts and corporations, registered pension plans,
pooled funds trusts, employee benefit plans and mortgage investment
segregated funds of insurers
A fund should not be
affected by the proposals if it has a permanent establishment in
only one province. However, the proposals will substantially expand
the definition of this term for these purposes so that, for
example, a mutual fund will have a permanent establishment in each
province in which it is entitled to distribute its units or
In very general terms, such an affected fund will be required to
compute its percentage ownership by Canadian investors in the
different provinces in which it has permanent establishments. It
will then be required to pay the provincial component of the HST
(if any) for each such province by applying those allocation
percentages to its taxable expenses for which it is not entitled to
an input tax credit. (Modified versions of this rule will apply to
pension plans based on their plan members, and to various other
plans based on their beneficiaries.)
For example, suppose that a mutual fund trust with permanent
establishments in Alberta and Ontario has 80% of its unitholders
(in terms of the value of their units) located in Ontario, and the
other 20% in Alberta, and that its only expense is a $1 million
management fee of its Alberta manager that is subject to federal
GST of $50,000 and no provincial HST, and for which it is not
entitled to an input tax credit. In approximate terms, it would be
required to apply the Ontario provincial HST of 8% to the
unrecoverable expenses of $800,000 which were allocated to Ontario.
It would then compare this number to the actual Ontario HST paid by
it (in this case, nil) to determine whether it had an additional
provincial HST obligation (or a refund, if the result of the
allocation went the other way).
One of the objectives of the proposals is to avoid giving an
incentive to investors to invest in funds that incur most of their
expenses free of provincial HST.
There is a morass of specific proposed rules that attempt to
address the considerable practical difficulties that affected funds
will face in determining the provinces of ultimate ownership (i.e.,
looking through institutional investors) of their equity - and in
the case of exchange-traded mutual funds, the proposals are vague
as to how the allocation methodology will work. These rules will
impose onerous obligations on many fund owners as well as the funds
themselves, with associated significant compliance costs and
potential penalties. For most funds, these requirements will begin
to apply for their 2010 taxation years.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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