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
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
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
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
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
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
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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