Canada: New GST Rules For Financial Institutions And Pension Plans

Copyright 2009, Blake, Cassels & Graydon LLP

Originally published in Blakes Bulletin on Tax, October 2009

On September 23, 2009, the Department of Finance released draft legislation and explanatory notes (the 2009 Amendments) aimed at improving and streamlining the application of the Goods and Services Tax (GST) to the financial services sector.

The changes to the GST follow upon and refine previous measures that were released on January 26, 2007, some of which (in the case of imported taxable supplies) were first announced in November 2005.

The new GST rules for financial institutions (FIs) involve the self-assessment of GST on certain imported taxable supplies, input tax credit (ITC) allocation methods, annual information returns and changes to the filing date for annual GST returns. A new GST rebate for registered pension plan trusts has also been proposed.

1. Imported Taxable Supplies

The new GST rules governing self-assessment of GST by FIs on imported taxable supplies are substantially the same as the previous proposals that were released in January 2007; however, there are several modifications to address concerns raised by FIs.

Most importantly, the revised draft legislation will allow FIs resident in Canada that conduct business through foreign branches to elect to use a simpler alternative approach to self-assess tax on the charges from their foreign branches to Canada. An FI that makes this election would self-assess tax on an internal charge that is generally an amount that is treated, for income tax purposes, both (i) as income or profit in a particular country other than Canada; and (ii) as a deduction from income in Canada. FIs resident in Canada would be permitted to elect to use this method retroactively for periods back to the proposed 2005 effective date.

The more detailed cost-based self-assessment approach that was outlined in the January 2007 proposed draft legislation will remain an option.

As a result of industry consultations, certain financial derivative transactions are proposed to be excluded from self-assessment under the new rules, provided that all or substantially all of the value of the financial derivative transaction attributable to Canada represents financial elements, profit margins and employee compensation.

2. ITC Allocation Methods

The 2009 Amendments provide several modifications to the original ITC allocation rules for FIs released in January 2007. The new rules will allow large banks, insurance companies and securities dealers to use their own proposed ITC allocation methods under certain circumstances (e.g., if the FI meets all documentary requirements set out in the new rules for pre-approval and where the Canada Revenue Agency (CRA) has not acted fairly or diligently in considering the FI's method). If the CRA directs an FI (other than a large bank, insurer or securities dealer) to use an allocation method, the FI (if assessed) can challenge the direction in the Tax Court of Canada where the CRA would be required to establish that its method is fair and reasonable. The new rules also provide the CRA and FIs with more flexibility in the use of the pre-approval process and permit the CRA to extend the deadline for pre-approval at the request of an FI.

3. Annual Information Returns

The requirement to file an annual information return was first announced on January 26, 2007 (but absent any legislative framework). Many FIs have viewed this requirement as both unnecessary and onerous. The 2009 Amendments provide the legislative framework to govern the preparation and filing of the information return. The return will be required to be filed within six months after the end of the fiscal year of the FI, for fiscal years commencing after 2006.

The draft legislation contains penalties for failure to report or misstatement of amounts required to be reported on the annual return (subject to a defence of due diligence). The penalty provisions will apply for fiscal years commencing after 2008.

One new refinement is that the fields on the information return will be segregated between tax and non-tax amounts. Non-tax amounts would include information such as taxable sales, taxable purchases, and intra-group transactions that are not directly used in computing the tax liability. FIs will be permitted to provide estimates for non-tax amounts where the actual amounts are not ascertainable at the time of filing the return.

4. Extension of GST/HST Filing Date

The due date for filing GST returns for FIs that are annual filers will be extended from three to six months after the end of the fiscal year. The proposed changes come into effect for reporting periods of an FI commencing after 2009.

5. New GST Rebate for Pension Plans

The 2009 Amendments follow upon the Department of Finance's earlier proposal in January 2007 to provide common treatment for all employer-sponsored registered pension plans (i.e., notably a 33% GST rebate for all pension plans, other than pensions plans where 10% or more of the contributions are made by listed FIs such as banks and insurance companies). The new legislation is intended to allow GST paid by employers on pension plan expenses to be recoverable as an ITC where the expense relates to the commercial activities of the sponsoring employer, but to not allow ITCs where the expense is in respect of investment activities of the pension entity. The draft legislation accomplishes the latter purpose by effectively deeming all GST on pension-related expenses incurred by employers to have been paid by the relevant pension entity. There may be supplies in respect of which the employer would not be required to pay GST, but in respect of which a pension entity would be required to pay GST. For example, certain services may be exempt financial services when supplied to an employer, but, when these services are supplied to an investment plan such as a pension entity, they would be taxable. The pension entity (whether a single or multi-employer plan) will be entitled to claim a 33% rebate of the GST it has paid or is deemed to have paid. The pension entity will not need to be GST-registered to claim the rebate.

The new rules also provide for an election to allow participating employers that are GST registrants and the pension entity to transfer some or all of the rebate to the participating employers (i.e., as a deduction in determining their net tax). Where participating employers are not engaged exclusively in commercial activities, there will be restrictions on the amount of the rebate that can be transferred. The new deeming rules apply for fiscal years of employers beginning on or after September 23, 2009. For pension entities, the new rules apply to claim periods beginning on or after September 23, 2009.

Detailed tracking rules apply on the deemed supply to the pension entity to ensure that the proper amount of GST will be remitted by the pension entity.

The new rules are effectively the Department of Finance's legislative response to the recent decision of the Federal Court of Appeal in The Queen v. General Motors of Canada Ltd. In that decision, the Federal Court affirmed that General Motors was the recipient of investment management services and entitled to claim ITCs on such services. There had been some concern that the new rules would be retroactive. Given that this is not the case, employer sponsors who are the recipient of investment management services and are in a similar situation as General Motors may wish to consider claiming ITCs for periods prior to September 23, 2009.

The new rules do not address the recent decision of the Federal Court of Appeal in The Queen v. The Canadian Medical Protective Association. In that decision, the Federal Court affirmed that the investment management services were financial services of "arranging for" the purchase and sale of financial instruments and, therefore, exempt from GST. We understand that the decision is still under review by the Department of Finance. Consequently, taxpayers who are in a similar situation as the Canadian Medical Protective Association may wish to consider claiming rebates for tax paid in error on investment management services.

We wish to acknowledge the contribution of Robert Kreklewich to this publication.

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.