Please note that the following document, although correct at the time of issue, may not represent the current position of the Canada Revenue Agency. / Veuillez prendre note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'Agence du revenu du Canada.
Date
From
Constantin Constant
Senior Rulings Officer
Listed Financial Institutions Unit
320 Queen Street
Ottawa ON K1A0L5
To [Addressee]
Case Number: 150882
Subject: GST/HST INTERPRETATION
Determining whether a pension entity is a qualifying small investment plan
This memorandum is in response to your request of [mm/dd/yyyy] for an interpretation of the term “unrecoverable tax” of a trust that is an investment plan and the impact of the related coming into force provisions. We apologize for the delay in our response.
All legislative references are to the Excise Tax Act (ETA) and its regulations unless otherwise specified.
BACKGROUND AND FACTS
From your request and the documents provided, […], we understand the following:
1. According to […](the Agreement):
• […]([…][the Company]) is the administrator of [the Company] Pension Plan (the Plan) set up for the benefit of certain eligible employees, and in conjunction with the Plan has established the Fund.
• The Plan is comprised of a defined contribution portion and a defined benefit portion and is funded by two separate and distinct trust funds. The trust fund relating to the defined benefit option (the Trust) is held by […](the Trustee) pursuant to this Agreement.
• […] the Trustee shall make payments from the Fund pursuant to authorized instructions which may direct such payments to be made to the Company.
2. According to the […] (Pension Plan Rules):
• […] there shall be paid from the Fund:
(i) the costs of administering the Plan and the Fund, and
(ii) all pensions, lump sums, refunds and interest to be paid under the Plan.
• […] outlines certain fees and expenses that shall be paid by the Company to the extent they relate to the […] provisions […].
• […], the Company shall pay into the Fund such amounts […], to enable the Fund to provide for payment of all pensions, lump sums, refunds, interest and administrative costs required to be paid under the Plan.
3. To manage the assets of the Trust, the Company contracted the services of various investment advisers and consultants and the Company also relied on its staff to provide plan management, pension services and payroll services required for the administration of the Plan. Plan administration expenses incurred by the Company for fiscal years 2009 and 2010 exceeded $[…] each year.
4. On December 31, 2010, the Company self-assessed the GST/HST on the services incurred in respect of plan administration that it was deemed to have supplied to the Trust. The Trust then filed a pension rebate application as follows: an amount of $[…], which is the amount self-assessed by the Company, was reported on line B of Form RC4607. This amount was comprised of $[…] of GST and $[…] of PVAT. The pension rebate claimed amounted to $[…].
5. […].
6. The Trust […] contends that it had no unrecoverable tax amount pursuant to subsection 9(1) of the proposed Draft Regulations Amending Various GST/HST Regulations which includes the draft Selected Listed Financial Institutions Attribution Method (GST/HST) Regulations (draft Regulations), issued on January 28, 2011. The submission from […] indicates that Element A of the formula to calculate the unrecoverable tax amount is nil. Specifically, no tax was paid by the Trust under any of subsection 165(1) or sections 212, 218 and 218.01 during the period from January 1 to December 31, 2010. Consequently, the Trust maintains that it is a qualifying small investment plan and is not a selected listed financial institution (SLFI) for the fiscal years 2010 and 2011.
[Note that section 9 of the draft Regulations is consistent with section 7 of the current provisions of the Selected Listed Financial Institutions Attribution Method (GST/HST) Regulations (SLFI Regulations) which were adopted on April 18, 2013 and published in the Canada Gazette on May 8, 2013.]
7. The Trust is an investment plan as defined in paragraph 149(5)(a) and a “pension entity” of a pension plan as that term is defined in subsection 123(1). The Trust has never elected to be an SLFI pursuant to subsection 14(1) nor has it made an application under section 15 of the SLFI Regulations.
8. The Trust’s operations are carried out in [City 1, Province 1] and it has a December 31 calendar fiscal year. The December 2010 fiscal year is not the first fiscal year of the Trust.
9. […]. More than 10% of the plan members are located in participating provinces. […].
[…][INTERPRETATION REQUESTED]
You wish to clarify the impact of the coming into force provision with respect to the “unrecoverable tax” amount for purposes of determining whether the Trust is a qualifying small investment plan (QSIP) and not a selected listed financial institution (SLFI) for fiscal years 2010 and 2011.
[…][INTERPRETATION GIVEN]
According to subsection 225.2(1) a financial institution is an SLFI throughout a reporting period in a fiscal year that ends in a taxation year of the financial institution if it is a listed financial institution described in any of subparagraphs 149(1)(a)(i) to (x) at any time during the particular taxation year and a prescribed financial institution throughout the reporting period.
A prescribed financial institution for purposes of subsection 225.2(1) is described in section 9 of the Selected Listed Financial Institutions Attribution Method (GST/HST) Regulations (the SLFI Regulations), which were adopted on April 18, 2013 and published in the Canada Gazette on May 8, 2013.
Pursuant to section 9 of the SLFI Regulations, subject to sections 10 to 15, an investment plan is a prescribed financial institution for the purpose of paragraph 225.2(1)(b) throughout a reporting period in a particular fiscal year that ends in a taxation year of the financial institution if the investment plan has a permanent establishment in a participating province and a permanent establishment in any other province at any time in the taxation year.
Given the information provided, the Trust is an investment plan that is a pension entity of a pension plan. In addition, as indicated above, more than 10% of its total plan members of the Trust are resident in participating provinces and the Trust has not made an application under section 15 of the SLFI Regulations. Therefore, the exclusions from being a prescribed financial institution in sections 11, 12, 13 and 15 do not apply to the Trust. It is also noted that the Trust has not made an election under section 14 of the SLFI Regulation to be a prescribed financial institution. For purposes of the SLFI Regulations the term “plan member” of an investment plan that is a pension entity of a pension plan means an individual who has a right, either immediate or in the future and either absolute or contingent, to receive benefits under the pension plan.
Section 10 of the SLFI Regulations provides that an investment plan that is a qualifying small investment plan in a particular fiscal year would not be a prescribed financial institution in respect of a reporting period if:
* the investment plan was also a qualifying small investment plan in the fiscal year that precedes the particular fiscal year, and not an SLFI throughout that preceding fiscal year;
* the investment plan was an SLFI throughout the three preceding fiscal years; or
* the particular fiscal year is the first fiscal year of the investment plan.
Pursuant to paragraph 7(2)(b) of the SLFI Regulations, if the particular fiscal year is not the first fiscal year of the plan, an investment plan that is a pension entity of a pension plan would be a qualifying small investment plan for a particular fiscal year where the total of its “unrecoverable tax amounts” for all of its reporting periods in its immediately preceding fiscal year is equal to or less than $10,000 on an annualized basis.
Pursuant to subsection 7(1) of the SLFI Regulations, for the purposes of determining whether an investment plan is a qualifying small investment plan, the unrecoverable tax amount for a reporting period of an investment plan means the amount determined by the formula A – B where
A is the total of all amounts, each of which is
(a) an amount that would be included in the total for Element A of the special attribution method (SAM) formula in subsection 225.2(2), read without reference to any adaptation made under Part 5 of the SLFI Regulations, for the reporting period, if the investment plan were an SLFI throughout the reporting period and no tax adjustment transfer election under subsection 55(1) were in effect throughout the reporting period,
(b) if the investment plan were a pension entity, an amount of tax that the pension entity would be deemed to have paid under subparagraph 172.1(5)(d) (ii) or (6)(d)(ii) or paragraph 172.1(7)(d) during the reporting period, if the pension entity were an SLFI throughout the reporting period, or
(c) if the investment plan were a pension entity, an amount with respect to a tax adjustment note issued to the pension entity that it would be required by paragraph 232.01(5)(b) or 232.02(4)(b) to include in its determination of net tax for the reporting period if the pension entity were an SLFI throughout the reporting period; and
B is the total of amounts each of which is
(a) an amount that would be included in the total for Element B of the SAM formula in subsection 225.2(2), read without reference to any adaptation made under Part 5 of the SLFI Regulations, for the reporting period, if the investment plan were an SLFI throughout the reporting period and no tax adjustment transfer election under subsection 55(1) were in effect throughout the reporting period,
(b) if the investment plan were a pension entity, the federal component amount, within the meaning of section 232.01, of a tax adjustment note issued under subsection 232.01(3) to the pension entity during the reporting period, or
(c) if the investment plan were a pension entity, the federal component amount, within the meaning of section 232.02, of a tax adjustment note issued under subsection 232.02(2) to the pension entity during the reporting period.
Paragraph (a) of the description of A and paragraph (a) of the description of B are applicable in respect of a reporting period that ends on or after July 1, 2010. These paragraphs would apply to determine whether the Trust is a QSIP for its 2010, 2011 and subsequent fiscal years.
Paragraph (b) of the description of A was added to the SLFI Regulations on January 28, 2011 but only applies in respect of fiscal years of investment plans that began after January 28, 2011. Since the Trust fiscal year begins on January 1, this paragraph would not apply to determine if the Trust is a QSIP for the 2010 and 2011 fiscal years, but would apply to subsequent fiscal years (e.g., 2012 fiscal year).
Paragraph (c) of the description of A and paragraphs (b) and (c) of the description of B were also added to the SLFI Regulations on January 28, 2011 and apply in respect of fiscal years of investment plans that began after January 28, 2011. Since the Trust’s fiscal year begins on January 1, these paragraphs would not apply to determine if the Trust is a QSIP for the 2010 and 2011 fiscal year, but would apply to the subsequent fiscal years. However, it is important to note that in determining whether an investment plan is a QSIP for fiscal years that begin after January 28, 2011 and before May 8, 2013 (the date of publication of the SLFI Regulations in the Canada Gazette), the investment plan may choose to read the description of A without reference to paragraph (c) and the description of B without reference to paragraphs (b) and (c). In other words, the Trust may choose not to include the amounts described in these particular paragraphs in determining whether it is a QSIP for its 2012 and 2013 fiscal years.
Therefore, as the fiscal year of the Trust begins on January 1, the Trust would not be required to include in its fiscal years of 2010 and 2011 the deemed tax paid under subparagraph 172.1(5)(d)(ii) or (6)(d)(ii) or paragraph 172.1(7)(d) in the calculation of its unrecoverable tax amount for purposes of determining if the investment plan is a QSIP. As indicated above such requirement would apply to its subsequent fiscal years.
Although the Trust did not have to take into account the deemed tax paid in the calculation of its unrecoverable tax amount for the 2010 and 2011 fiscal years, the Trust may have, nevertheless, exceeded the unrecoverable tax amount threshold of $10,000 and as a result could possibly be an SLFI for these particular years. The following additional comments are provided for your consideration.
Additional comments
Although […] indicates that no tax was paid or payable by the Trust under any of subsection 165(1) or sections 212, 218 and 218.01 during the period from January 1 to December 31, 2010, it is our view that tax under section 165(1) may have been payable by the Trust in 2009 and 2010 on actual supplies of plan administration services made by the Company.
To determine whether actual supplies have occurred between the parties to a pension plan, we refer to our interpretive position outlined in Technical Information Bulletin B-032, Registered Pension Plans.
TIB B-032 indicates that where pension related expenses incurred by the employer (the person liable to pay the consideration under the agreement for the supply) have been paid out of trust assets, the CRA generally considers the payment made by the plan trust1 to be consideration for an actual supply of property or service made by the employer to the trust if:
* the trust paid the third party supplier directly,
* the employer invoiced the trust for the costs of the inputs, and/or
* the trust reimbursed the employer.
In such circumstances, the employer would generally be considered to be making a supply of property or services to the trust for which the trust, as recipient of a taxable supply, based on subsection 165(1) would be required to pay tax calculated on the consideration for the supply. Tax paid or payable under subsection 165(1) would be included in the calculation of the trust’s unrecoverable tax amount under paragraph (a) in Element A of the formula A – B in subsection 7(1) of the SLFI Regulations.
Based on the information submitted, plan administration expenses incurred by the Company in relation to the defined benefit segment are expected to be paid out of the Trust assets. Specifically, the Company incurred annually plan administration expenses in excess of $[…] for the years ending December 31, 2009 and 2010 for which it may have been reimbursed by the Trust. It appears that tax paid or payable under subsection 165(1) on these expenses should have been included in the calculation of the Trust unrecoverable tax amount under paragraph 7(1)(a) of the description of A.
If this is in fact correct, the Trust would have exceeded the $10,000 unrecoverable tax amount threshold required under subsection 7(2) of the SLFI Regulations in order for an investment plan to be a qualifying small investment plan and would therefore be an SLFI for the 2010 and 2011 fiscal years.
If you require clarification with respect to any of the issues discussed in this letter, please call me directly at 613-952-9220. Should you have additional questions on the interpretation and application of GST/HST, please contact a GST/HST Rulings officer at 1-800-959-8287.
Yours truly,
Constantin Constant
Listed Financial Institutions Unit
Financial Institution and Real Property Division
Excise and GST/HST Rulings Directorate
1 As “person” is defined in subsection 123(1) of the ETA to include a “trust”, a trust is subject to the obligations and entitlements of the ETA as a separate person.
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