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 corporations

  • 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 shares.

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.