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.
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