Canada: FI, LFI, SLFI And SAM: What Do They Mean And What Can They Cause

Revenue is a good thing; we are always looking for ways to increase it. But in the GST/HST world, dividend and interest revenue can reduce income in addition to causing huge compliance costs and issues. This can come as an unwelcome surprise to many taxpayers.

Subsection 149(1) of the Excise Tax Act (all references are to the ETA) is a deeming provision to determine if a person is a Financial Institution (FI). When an organization is an FI, the services it provides are exempt from GST/HST and consequently any GST/HST paid by the organization becomes an expense as no input tax credits (ITCs) may be claimed with exempt services. One note of interest: an individual can also be an FI.

Paragraph 149(1)(a) lists business types, which include organizations we would think of as financial institutions: banks, credit unions and insurance companies. Also included are pension plans, brokerage firms, investment plans, mutual funds and even tax discounters. When an organization's business type is listed in this section, it is an FI and is also designated as a Listed Financial Institution (LFI).

If an organization manages to escape from the business types listed under 149(1)(a), the Canada Revenue Agency (CRA) is still not finished; it has a few other tools available to ensnare an organization as an FI.  Paragraphs 149(1)(b) and (c) contain two additional tests that can result in an organization being deemed a de minimis FI. These tests review the types of revenue an organization earns and the sources of revenue. The first test determines whether interest and dividend revenue (financial revenue) exceeds 10% of the organization's total revenue or is greater than $10 million in a year. The second test looks at whether the organization has interest revenue from credit cards, loans or advances greater than $1 million in a year with no allocation of revenue component.

The CRA does provide some relief for de minimis FIs. Subsection 149(4) excludes any dividend or interest revenue from a person that is related to the person whose revenue is being reviewed in the tests under paragraphs 149(1)(b) and (c). Furthermore, if the person is part of the non-profit sector (e.g. charity, NPO, municipality, public college or university, school authority or hospital), the de minimis test does not apply.

If an organization is an LFI or a de minimis FI and has total annual income in excess of $1 million, it will be required annually to complete GST Form 111, Financial Institution GST/HST Annual Information Return. Within this document, the CRA requires a detailed breakdown of revenue, purchases and other expenditures, imports, exports, ITC allocation methods, and changes in use of capital property. The form is eight pages in length and will require an in-depth analysis of an organization's operations involving management information that would not be readily available in some companies.

Beyond GST Form 111, the CRA has one last request to exhaust the accounting world. If during a taxation year an LFI organization has a permanent establishment or partner in a participating province that is an HST zone and a permanent establishment or partner in a non-participating province, it is deemed to be a Selected Listed Financial Institution (SLFI). The federal government seeks to ensure that SLFI expenditures are not all made in a province that charges only GST, thus reducing expenses by the provincial component in the HST and causing unfair economic loss to an HST province.

The Special Attribution Method – or SAM – calculation is designed to review an organization's spending and determine specifically if there is a disproportionate amount in a non-participating province. In order to complete a SAM, an organization must record all GST/HST paid even though it cannot be claimed as an ITC. The CRA has specific rules in the Selected Listed Financial Institutions Attribution Method (GST/HST) Regulations within the Excise Tax Act on provincial attribution percentages specific to various legal structures and business types, which can require detailed management information.

The good news is, at the end of the SAM calculation there is a potential refund if too much GST/HST is paid compared to the provincial allocation. Conversely, if the allocation is not favourable, more GST/HST will be due. Unfortunately, more interest and dividend revenue are not always good things in the GST/HST world.

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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