Important Changes for Financial Institutions
and Pension Plans Proposed
February 2007

On January 26, 2007, the Department of Finance released draft legislation, explanatory notes and a backgrounder detailing important changes proposed to the application of GST/HST to financial institutions and pension plans, including:

  • new input tax credit (“ITC”) allocation methods for financial institutions (“FIs”);
  • new rules for imported supplies by FIs;
  • enhanced reporting requirements for FIs; and
  • a new GST/HST rebate for pension plan trusts.

New ITC Allocation Methods

Where an FI uses a particular input to make both taxable and exempt supplies, it is required to allocate the use of that expense between commercial and non-commercial activities in order to determine how much GST/HST paid with respect to that input may be recovered as an ITC. In the past, all that was required was that the allocation method selected by a person be “fair and reasonable” and used consistently throughout a fiscal year. Indeed, numerous court cases have resulted from disputes over whether or not a particular method satisfied these requirements.

In an effort to resolve any uncertainty regarding the appropriateness of allocation methods selected by FIs, the Department of Finance has proposed amendments to the Excise Tax Act (“ETA”) which will require FIs to follow detailed allocation rules. In particular, qualifying large banks, insurers and securities dealers will be required to use prescribed percentages – currently 12% for banks, 10% for insurers, and 15% for securities dealers - unless their own allocation methods are pre-approved by the CRA.

The new allocation rules are complex and restrictive. Consequently, all FIs are advised to assess the impact of the proposed legislation on their operations and evaluate the adequacy of their current ITC allocation methods in light of the new requirements. The timeframe for examining current methods is quite short, as the proposed amendments are set to apply to fiscal years of an FI beginning after March 2007. The proposed changes that will require large banks, insurers and securities dealers to obtain pre-approval of their own allocation method, rather than using a prescribed percentage, will not apply until fiscal years ending after March 2008. The proposed rules also include a transitional provision that will allow an FI to elect to use an allocation method approved by the CRA in a prior fiscal year for the first year that begins after March 2007.

Rules for Imported Supplies

The draft legislation released by the Department of Finance includes provisions, previously announced on November 17, 2005, to implement a clarifying amendment and new rule for FIs with respect to certain imported taxable supplies. The clarifying amendment regarding taxable imports of services and intangibles between branches of the same person applies from the day the related provision first came into effect (i.e., December 17, 1990). However, the new rule requiring an FI with a presence outside of Canada to self-assess GST/HST on certain expenses incurred outside of Canada in relation to Canadian activities takes effect on the announcement date of November 17, 2005.

Enhanced Reporting Requirements

An annual GST/HST information schedule for FIs has also been proposed. The new schedule will be implemented for fiscal years commencing after 2006, and is to be filed within six months after the end of a fiscal year by registered FIs with total annual revenue in excess of $1 million.

The annual information schedule appears to be intended to capture the results of the intricate analysis performed by many FIs, which are subject to unique rules under the ETA, in completing their GST/HST returns. The proposal requires each FI to report significantly more information than the summarized calculations currently provided on a typical return, including:

  • supplemental identification information, including type of FI (within the meaning of certain provisions of the ETA) and North American Industry Classification System (NAICS) code;
  • breakdowns of revenue by type of supply, total GST/HST collected (including details on adjustments to net tax) and total ITCs and adjustments (including information on amounts claimed with respect to prior fiscal years);
  • the amount of tax paid or payable on imported supplies during the fiscal year, with the GST and provincial component of HST shown separately;
  • detailed information on imported and exported supplies;
  • ITC allocation information, organized by method (based on the proposed legislation discussed above);
  • total expenditures by type of purchase;
  • details on changes in use of capital property and transactions with related persons under an election for exempt supplies; and
  • provincial and territorial income tax allocation information.

According to the Department of Finance, the objective in obtaining the additional information is to improve compliance and the efficiency and effectiveness of the tax administration system. Unfortunately, the nature and extent of the information requested will undoubtedly place a larger compliance burden on many FIs, since a great deal of this information will not readily be available.

The Department of Finance has committed to consulting with the FI sector prior to releasing a final proposed annual information schedule, and interested parties have until April 30, 2007 to comment on the proposed information requirements.

New Pension Plan Trust Rebate

In an effort to address inequities between various types of pension plans (i.e., single versus multi-employer and related versus unrelated multi-employer plans) and clarify the eligibility of pension plan trusts for ITCs, the Department of Finance is proposing to replace the existing ITC provisions for pension plans and 33 per cent GST/HST rebate currently available to multi-employer pension plans with a single rebate system applicable to all employer-sponsored pension plan trusts.

Under the proposed new system:

  • the rebate will be available to all employer-sponsored plans, regardless of GST/HST registration status;
  • pension trusts which receive 10 per cent or more of their contributions from listed financial institutions will not be eligible for the rebate;
  • the rebate will apply to all types of pension plan related expenses, whether administrative in nature or related to investment; and
  • the rebate amount will be 33 per cent of the GST/HST charged on pension plan related expenses.

Employers engaged in commercial activities will be entitled to recover ITCs on all taxable inputs in relation to pension plans. However, such employers will also be deemed to have made a taxable supply of any eligible items to the pension trust, and the pension trust will be deemed to have paid, and the employer to have collected, the GST/HST on these amounts, effectively negating the employer’s claim in favour of allowing the pension trust to claim the rebate.

In addition to providing for the equal treatment of different types of eligible pension plans, the proposed rules will allow the rebate to be claimed regardless of whether the expense is incurred by the plan trust or the employer. However, where the expense is incurred by the employer, the pension plan trust will still be responsible for obtaining adequate supporting documentation from the employer to substantiate the amount of tax paid.

Note that the new rules also appear to establish a maximum GST/HST recovery of 33 per cent of the tax paid on pension plan expenses - the Department of Finance’s estimate of the proportion of these expenses that may be attributable to commercial activities. This new limit might be in direct response to the pending decision on an appeal of the General Motors case, which involves the extent to which an employer should be entitled to claim ITCs with respect to GST paid on pension plan expenses.

Comments on the proposed changes to the pension plan rebate system may be submitted to the Sales Tax Division of the Department of Finance before April 30, 2007.

For more information on any of the proposed amendments, please call the Ryan TaxDirect™ line at 1-800-667-1600, or visit the Department of Finance Canada web site at: http://www.fin.gc.ca/news07/07-006e.html.



HOME