Tax Articles
What You Need to Know About the New GST/HST Rules
for Pension Entities
Date: March 2011
At a time when many businesses are still reeling from the transition to Harmonized Sales Tax (HST) in Ontario and British Columbia (BC) as well as the introduction of new place of supply rules for GST/HST, the government has released new legislation that results in sweeping changes to the rules that apply to pension plans and pension entities.
On October 8, 2010, Canada Revenue Agency (CRA) issued GST/HST Notice 257 – “The GST/HST Rebate for Pension Entities”. Released as a draft bulletin, this document outlines a number of important legislative changes that impact just about every pension plan in Canada. The information contained in the bulletin is based upon the relevant provisions contained in two separate pieces of legislation: Bill C-9, the Jobs and Economic Growth Act (which received Royal Assent on July 12, 2010) and The Selected Listed Financial Institutions Attribution Method (GST/HST) Regulations (released on June 30, 2010). Taken together, these documents describe how pension plans must account for the GST/HST with new rules applying for fiscal years of employers, and to a pension entity’s rebate claim periods beginning on or after September 23, 2009.
In addition, on January 28, 2011, the Department of Finance also released a number of technical amendments and clarifications to these rules by way of a backgrounder – “Modifications to the Proposed Financial Institution (FI) Rules for the Harmonized Sales Tax (HST)”.
This article outlines the key changes that have been introduced with respect to the application of the new GST/HST rules that apply to pension plans and pension entities. Please note that these new rules only affect pension plans which are Registered Pension Plans (RPP) – the rules do not apply to other arrangements including Retirement Compensation Arrangements (RCA) or Employees Profit Sharing Plans (EPSP). As well, for purposes of the new rules a pension entity means an entity of the plan including a trust, a corporation or a person in specific circumstances.
Deemed Taxable Supplies to the Pension Plan.
The new rules will result in many employers being regarded as making taxable supplies to a pension plan. Under these rules an employer that is a GST/HST registrant may be deemed to have made a taxable supply to a plan where the employer acquires a particular property or service for the purposes of resupply to the pension entity or if the employer uses or consumes an employer resource in the course of pension activities.
Regardless of whether or not the plan is actually charged by the employer for a property or services deemed to have been supplied by the employer, the employer will be considered to have collected tax in respect of the deemed supplies and will create a tax liability to the CRA on the last day of the employer’s fiscal year.
Plans may be entitled to offset a portion of the tax deemed paid in the form of a rebate. Alternatively, a pension entity may make an election with qualifying employers to transfer the rebate entitlement to an employer such that the amount transferred may be deducted from the electing employer’s net tax calculation on its regular GST/HST return.
Can you Claim a Pension Entity Rebate?
Under the GST/HST rules, pension plans are generally ineligible to claim Input Tax Credits (ITCs) to recover the GST/HST that they have paid. Plans are therefore required to utilize rebates in order to offset a portion of the sales tax costs incurred.
Under the old rules, pension rebates were only available to multi-employer pension plans (MEPPs). The pension entity rebate introduced under the new legislation replaces the old MEPP rebate and has made the ability to claim a rebate available to all pension entities regardless of the nature of the plan arrangements or whether the plan is registered for GST/HST.
The new rules also have the effect of deeming all of the GST/HST on pension related expenses incurred by employers participating in a pension plan to have been paid by the relevant pension entity. The new pension rebate generally allows for a rebate claim equal to 33% of the GST/HST actually paid as well as any new GST/HST deemed to have been paid under the new legislation.
QST Harmonization of Pension Plan Rules
Québec has decided to harmonize the QST regime with the GST/HST rules. Accordingly, similar deeming rules for the supply of employer resources between the employer and the pension entity will also be applicable for QST purposes. However since financial services are zero-rated under QST legislation, pension entities will generally be eligible to claim a 100% rebate of QST (as compared to GST/HST rebate of 33%). Where the participating employers are public service bodies, the pension rebate will be limited to either 88% or 77% depending on the percentage of contributions made by them and their current entitlement to a QST rebate.
Special Rules for Selected Listed Financial Institutions (SLFI)
Under the new regulations, pension plans with members resident in at least one HST-participating province (Nova Scotia, New Brunswick and Newfoundland and Labrador and as of July 1, Ontario and BC) and in another province will be considered a SLFI.
However, the Department of Finance has proposed that the SLFI rules may not apply to pension plans for reporting periods ending on or after July 1, 2010 if:
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Throughout a particular taxation year, 10% or less of the total number of members of the plan reside in participating provinces; and
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The value of assets of the plan (or in the case of a pension entity of a defined benefit pension plan, the value of actuarial liabilities of the pension plan) that are reasonably attributable to its members resident in participating provinces was less than $100 million in its preceding fiscal year.
The new rules for SLFIs were mainly introduced as a measure to curb the incentive for SLFIs to purchase inputs from non-HST participating provinces due to lower tax rates. These rules will require SLFIs to be subject to a Special Attribution Method (SAM) formula which will essentially apportion a plan’s GST/HST assets or liabilities based on its membership in each province.
For defined benefit pension plans, a plan’s HST liability will be determined based on the portion of the plan’s total liabilities (as determined by an actuary) attributable to members resident in each HST-participating province. For defined contribution pension plans, a plan’s HST liability will be based on the proportion of the pension assets attributable to members resident in HST-participating provinces.
Elections
Pension entities may choose to elect jointly with all the participating employers of the plan to transfer some or all of the pension entity’s rebate entitlement to qualifying employers. Three variations of this election are available in this regard:
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Type 1 – Is available where all qualifying employers of the pension entity are engaged exclusively in commercial activities throughout the claim period. The effect of the election is to allow a pension entity to transfer the rebate entitlement to the electing employers in the proportions that they choose. The amount transferred to each qualifying employer may be deducted from that employer’s net tax calculation on its regular GST/HST return;
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Type 2 – Is available where the qualifying employers of the pension entity are not all engaged exclusively in commercial activities throughout the claim period. The election allows the pension entity to transfer a share of the pension rebate to each qualifying employer up to a maximum of the employer’s relative share of total pension contributions or ratio of active members in the pension plan; and
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Type 3 – The election provides that even where there is a non-qualifying pension entity for which no rebate is available, the plan may still make an election with qualifying employers to make a deduction in respect of a rebate that would have otherwise been available if the plan had it been a qualifying pension entity. While a non-qualifying pension entity could not claim a rebate, this election would allow some or all of the qualifying employers of the pension plan to make a net tax deduction on their GST/HST return in respect of the pension rebate amount.
Election forms must be filed at the same time that the plan files its rebate application for the particular claim period.
Summary
Significant new rules exist that will impact many pension entities in Canada. The guidance herein is not meant to be exhaustive as the rules and required calculations can be complex for many pension plans and pension entities. Please contact your local BDO advisor to determine how these new rules will impact your business.
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