Canada: Minister Of Finance Proposal For Pension Plans: New Rebate Regime To Cap GST Recovery

Last Updated: February 26 2007

Edited by Daniel Hayhurst

The Minister of Finance recently proposed a new regime to rebate to single employer pension plan trusts a fixed percentage of the goods and services tax ("GST") incurred by both employers and pension plan trusts on pension plan expenses. The proposal will cap the recovery by employers and pension plan trusts of GST incurred on pension plan expenses.

In a previous edition of Pensions@Gowlings we previously reported on the intention of the Canada Revenue Agency ("CRA") to revisit its published administrative policy on the recoverability of GST by employers in respect of pension plan expenses. The CRA's review appears to have lead to the Minister of Finance's proposal for amendments to the Excise Tax Act (Canada) (the "Tax Act") that will strictly limit the recovery of pension plan expenses by pension plan trusts and deny recovery to employers.

The Department of Finance will be seeking input from pension plan trusts, employers and others on the proposed regime until April 30, 2007. Accordingly, the extent of the recovery and the precise legislative mechanisms of the regime have not been definitively determined.

The Current Legislative Regime and Administrative Policy

The current legislative regime as interpreted by the administrative policy of the CRA denies employers the right to recover GST on a range of expenses that the CRA views as expenses of the pension fund trust.

The Tax Act deems a trust, including a pension fund trust, to be a separate legal entity for GST purposes. A pension fund trust is unable to recover GST incurred on most taxable services or property acquired as inputs into the trust's operations. However, an employer carrying on a business of making GST taxable supplies is entitled to fully recover GST incurred on property or services acquired for consumption, use or supply in the course of a business of making taxable supplies. Employers often take the filing position that this extends to property or services acquired in respect of a pension plan for its employees to the extent the GST is payable by the employer, rather than the trust.

The CRA's current policy provides that certain services or property acquired by an employer in respect of a pension plan are required for the operation of the employer's business, while other services and property acquired in respect of a pension plan are required for the operation of the pension fund trust. The current policy treats investment advice and portfolio management services, the most significant expenses of most pension plans, as unrecoverable expenses of the pension plan rather than recoverable expenses of the employer.

The stated objective of the CRA in revisiting its administrative policy had been to more clearly link its administrative position to the provisions of the Tax Act. We noted previously that the CRA would face a challenge in respecting the language of the Tax Act, while avoiding the loss of significant GST revenues. It may well be that a failure to meet this challenge has resulted in the proposed legislative amendments.

The Proposed Legislative Rebate Regime

In announcing the proposed rebate regime, the Minister of Finance noted that "complications created by the range of terms in different pension trust agreements" are such that "the practical application of the current set of rules is not clear and may not provide equitable results in all circumstances". The proposed rebate regime will cause the pendulum to swing towards certainty and equality amongst pension plans, but at a cost to any employer that was, under the terms of agreements with its pension plan trust, responsible for a significant portion of the pension plan expenses.

As announced, the rebate mechanism will limit most single employer sponsored pension plan trusts to recover only 33% of the GST charged on all pension plan expenses, whether the expenses are incurred by the pension plan trust or the employer.

The Rebate Mechanism

The proposed mechanism is to permit employers to claim input tax credits to recover GST on all inputs of property and services for which they are responsible in respect of the pension plan. However, this GST recovery will be fully negated by a deemed supply of the property and services to the pension plan. The employer will be required to report and remit GST deemed to have been collected from the pension plan trust without actually receiving any such GST from the trust.

This fiction will set up the pension plan for the 33% rebate in respect of the GST deemed to have been incurred on this deemed supply from the employer, in addition to any other services or property acquired directly by the pension plan trust.

In effect, the rebate regime will push all the GST costs to the pension plan trust, the employer will not be entitled to recover any GST, and the pension plan trust recover will be capped at 33%.

The 33% threshold for recovery will cause single employer sponsored pension plan trusts to be treated similarly to multi-employer pension plan trusts that have been operating under an existing rebate regime since amendments to the Tax Act in 2000.

The Winners and the Losers

Whether the proposed rebate regime will benefit a pension plan will depend on whether the current GST recovery by the employer is sufficiently low that a 33% recovery of all expenses of the pension plan will improve the combined recovery by the employer and the pension plan trust. Clearly, some pension plans will be entitled to less recovery under the new regime than was previously permitted. Furthermore, there will be a cash flow benefit to the pension plan trust at the cost of the employer.

The only pension plans not eligible for the rebate would be those for which 10% or more of the contributions to the plan are made by certain "listed financial institutions" that by virtue of their activities generally are not entitled to claim input tax credits for GST incurred in the course of their businesses, which include banks, credit unions, trustees and insurers. This exclusion may result in denying such employers the limited GST recovery to which they may otherwise have been entitled under the current legislative regime and administrative policy.

We will report on developments in the legislation in a future issue of Pensions @ Gowlings.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

 
In association with
Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions