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.
Excise and GST/HST Rulings Directorate
Place de Ville, Tower A, 14th floor
320 Queen Street
Ottawa ON K1A 0L5
[Addressee]
Case Number: 152148
November 27, 2013
Dear [Client]:
Subject: GST/HST INTERPRETATION
New GST/HST rules on deemed supplies of property and services to pension entities
Thank you for your [correspondence] of March 22, 2013, concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to deemed supplies of property and services to pension entities.
As you are aware, on March 21, 2013 (Budget Day) the Department of Finance proposed new measures which, in certain circumstances, may simplify employer compliance with the requirement to account for GST/HST on an actual taxable supply and a deemed taxable supply. These amendments became law on June 26th, 2013.
The HST applies in the participating provinces at the following rates: 13% in Ontario, New Brunswick and Newfoundland and Labrador, 14% in Prince Edward Island (effective April 1, 2013) and 15% in Nova Scotia.
The GST applies in the rest of Canada at the rate of 5%. Effective April 1, 2013, the 12% HST in British Columbia has been replaced by the 5% GST and a provincial sales tax.
All legislative references are to the Excise Tax Act (ETA) unless otherwise specified.
Interpretation Requested
You wish to confirm the circumstances under which an employer would not be required to account for tax under the amendments to section 172.1 of the ETA. Specifically, you wish to confirm whether an employer that makes an actual supply to a pension entity in the following situations would be relieved from accounting for deemed tax collected under section 172.1 as a result of the simplification measures.
1. The employer pays a third party to manage and administer the employer's registered pension plan and charges the pension entity for the services;
2. The employer charges the pension entity for the services of one full-time employee who is responsible for the collection and the remittance of pension contributions to the pension plan;
3. The employer charges the pension entity for the services of one full-time employee who is responsible for:
* union negotiations;
* selecting, monitoring and evaluating a fund manager; and
* producing information material to members.
Interpretation Given
With respect to your above questions, an employer would be relieved for a fiscal year of the employer from accounting for deemed tax in respect of employer resources or specified resources acquired, used or consumed for the purpose of making an actual supply to a pension entity, but only if the employer is a selected qualifying employer for that fiscal year.
Where the employer is not a selected qualifying employer for that fiscal year, the employer would be required to account for this deemed tax. However, the employer would generally be permitted to make the joint election under section 157 with the pension entity so as not to account for tax on the actual supply. In this situation, the employer would be relieved from accounting for one form of tax but this relief would be in respect of the actual tax rather than the deemed tax.
LEGISLATION AND ANALYSIS
We first wish to confirm that the employer would be considered to have made an actual supply to the pension entity in all three of the above circumstances. Pursuant to GST/HST Technical Information Bulletin B-032, Registered Pension Plans, where pension related expenses incurred by the employer (i.e., the person liable to pay the consideration under the agreement for the supply) have been paid for out of trust assets because of the following situations, the CRA generally considers the payment made by the plan trust to be consideration for a supply of property or services made by the employer to the plan trust:
* the plan trust paid the third party supplier directly,
* the employer invoiced the plan trust for the costs of the inputs, and/or
* the plan trust reimbursed the employer.
In such circumstances, the employer would generally be considered to be making a supply of property or services to the plan trust. If the employer is a GST/HST registrant, it would be required to charge, collect and remit GST/HST on the supply to the plan trust where the supply is not exempt. However, the employer would be entitled to claim an input tax credit ("ITC") in respect of the acquisition or importation of the property or service being acquired or imported for supply to the plan trust, provided that all of the conditions of section 169 are met.
As you are aware, under GST/HST pension rules a "participating employer" of a pension plan may be required to account for the GST/HST under the deemed supply rules of section 172.1 even where it is required to account for the GST/HST on an actual taxable supply to a pension entity.
For this purpose, a "participating employer" of a pension plan is defined in subsection 123(1) to include an employer that has made, or is required to make, contributions to the plan or payments thereunder in respect of the employer's employees or former employees. A participating employer also includes an employer prescribed under subsection 8308(7) of the Income Tax Act Regulations, which describes certain cases where an employee of one employer renders services to, and receives remuneration from, another employer. An employer that made pension contributions to a pension plan in the past will remain a participating employer in respect of that pension plan even if it does not currently make contributions.
Generally, a participating employer is deemed to have made a taxable supply and collected tax under any of subsections 172.1(5), (6), or (7) if a particular "specified resource" or "employer resource" is for consumption, use or supply in respect of a "pension activity" of the pension plan.
For purposes of subsection 172.1(5), a "specified resource" is all or part of a particular property or service (other than an excluded resource) that the employer acquires for the purpose of supply to a pension entity for consumption, use or supply by the pension entity in the course of pension activities of the pension plan. For purposes of subsection 172.1(6), or (7), an "employer resource" is essentially anything (other than an excluded resource) acquired, created, developed and/or produced by the employer including the employee labour and overhead required to do these things.
Whether an employer is deemed to have made a taxable supply and collected tax under any of subsection 172.1(5), (6) or (7) is contingent on whether the particular specified resource or employer resource is for consumption, use, or supply, in the course of "pension activities" in respect of the pension plan.
For this purpose, a "pension activity" in respect of a pension plan is defined in subsection 172.1(1) as an activity (other than an "excluded activity") that relates to:
a) The establishment, management or administration of the pension plan or a pension entity of the pension plan; or
b) The management or administration of assets in respect of the pension plan.
An "excluded activity" is generally an activity that is normally carried on by an employer for purposes other than for administering a pension plan; accordingly, excluded activities are not considered "pension activities". Specifically, an "excluded activity" is defined in subsection 172.1(1) as an activity undertaken exclusively for:
a) Compliance by a participating employer of the pension plan as an issuer, or prospective issuer, of securities with reporting requirements under a law of Canada or of a province in respect of the regulation of securities;
b) Evaluating the feasibility or financial impact on a participating employer of the pension plan of establishing, altering, or winding-up the pension plan, other than an activity that relates to the preparation of an actuarial report in respect of the plan required under a law of Canada or of a province;
c) Evaluating the financial impact of the pension plan on the assets and liabilities of a participating employer of the pension plan; or
d) Negotiating changes to the benefits under the pension plan with a union or similar organization of employees.
Whether any particular item is regarded as a "pension activity" is determined on a case-by-case basis. In making a determination, CRA may look to the provisions of the relevant pension plan documents, pension legislation and related documents or agreements. Generally speaking, however, we would consider each of the following items to be in respect of a "pension activity" to which the deeming provisions may apply, subject to the conditions of section 172.1:
* Services in respect of the management and administration of a pension plan;
* Administration services related to the collection of pension contributions and the remittance of pension contributions to the pension plan;
* Selecting, monitoring and evaluating a fund manager;
* Producing information material to members.
On the other hand, you asked about "union negotiations". If the "union negotiations" relate to activities under paragraph 172.1(1)(d) above, they would not be in respect of a "pension activity"; this is "an excluded activity" and therefore would not be subject to the deeming rules of section 172.1.
Under subsections 172.1(5) and (6) of the ETA, unless a registrant participating employer is a "selected qualifying employer", it is generally deemed to have made a taxable supply and to have collected tax in respect of that supply where,
* the employer acquires a particular property or a service (i.e., a "specified resource") for the purpose of re-supplying some or all of that property or service to a pension entity for consumption, use or supply by the pension entity in the course of pension activities of the pension plan; or
* the employer consumes or uses an "employer resource" for the purpose of making a supply of property or a service to a pension entity for consumption, use or supply by the pension entity in the course of pension activities in respect of the pension plan.
Under the amendments to subsection 172.1(7), unless the employer is a "qualifying employer", a participating employer of a pension plan that is a GST/HST registrant is generally deemed to have made a taxable supply and to have collected tax in respect of that supply where the employer consumes or uses an "employer resource" in the course of pension activities of the pension plan and the consumption or use is not for the purpose of making a supply of property or a service to the relevant pension entity.
Therefore, in determining whether the deeming provisions of subsections 172.1(5), (6), or (7) apply, it is first necessary to determine whether a particular participating employer is a "selected qualifying employer" and/or a "qualifying employer".
Selected Qualifying Employer
Subsection 172.1(9) sets out conditions for determining whether a particular participating employer of a pension plan is a "selected qualifying employer" of the plan for a particular fiscal year of the employer. If so, note that the employer will also be a "qualifying employer" of the plan under subsection 172.1(10), (discussed below) for that particular fiscal year.
To determine whether a particular participating employer of a pension plan is a "selected qualifying employer" of the plan for a particular fiscal year of the employer, the employer must meet the following general conditions:
* The employer must not have a joint election in effect in the particular fiscal year under subsection 157(2) with any pension entity of the pension plan to treat taxable supplies as having been made for no consideration (this election is discussed below).
* The employer must not have become a "participating employer" of the pension plan in the particular fiscal year (if it did then the provisions of subsection 172.1(11) must be used to determine whether the employer is a "selected qualifying employer" (Footnote 1)).
* The amount of GST or federal component of the HST in the preceding fiscal year of the employer in respect of deemed taxable supplies is less than both
• $5,000 and
• 10% of the total GST and federal part of the HST actually paid or deemed to have been paid by all pension entities of that pension plan in that preceding year (minus certain amounts explained below).
The calculation of the $5,000 and 10% thresholds described in the last point above is specifically described in subsection 172.1(9). Under that subsection, the 10% threshold is calculated using the formula A/(B-C), whereas the $5,000 threshold is measured by element A of that formula.
The amounts to be included in element A are specifically described in paragraphs (a) through (g) of that element. These amounts essentially consist of the GST or the federal portion of the HST that the particular participating employer (and any related participating employers) is required to account for under paragraphs 172.1(5)(c), (6)(c) or (7)(c) in the preceding fiscal year (Footnote 2) of the particular participating employer (Footnote 3) . Those employers that were a "selected qualifying employer" (or a "qualifying employer" as explained below) in the preceding fiscal year (and thus relieved from accounting for tax under the deemed supply rules in that year) must also include in the calculation any amounts that would have been included in element A had the employer not been a selected qualifying employer in that year.
The amounts to be included in element B are specifically described in paragraphs (a) through (c) of that element. Generally, element B is the sum of:
* the amount of the GST or federal portion of the HST that all pension entities of the pension plan actually paid during a fiscal year of the entity that ends in the preceding fiscal year of the particular participating employer, but only to the extent that the amounts are "eligible amounts" for a claim period under section 261.01;
* the total amount of the GST or federal part of the HST deemed to have been collected by all participating employers of the pension plan pursuant to subsections 172.1(5), (6) and (7) during the preceding fiscal year of the particular participating employer;
* amounts that must be added to the net tax of any pension entity of the pension plan under paragraphs 232.01(5)(b) or 232.02(4)(b) for a reporting period of the pension entity that ends in the preceding fiscal year of the particular participating employer (these amounts are in respect of an input tax credit that must be "repaid" by the pension entity as a result of the issuance of a TAN by a participating employer of the plan (Footnote 4)).
The amounts to be included in element C are specifically described in paragraphs (a) and (b) of that element. Generally, element C is the sum of the following:
* The federal component amount included in a TAN issued under section 232.01 or 232.02 by all participating employer of the pension plan to a pension entity of the plan during a fiscal year of the pension entity that ends in the preceding fiscal year of the particular participating employer. (Footnote 5)
* The federal component of a "recoverable amount" (Footnote 6) of all pension entities of the pension plan for each entity's claim period that ends in the entity's fiscal year that ends in the preceding fiscal year of the particular participating employer. The federal component is calculated with reference to amounts determined under subsections 172.1(5), (6) and (7) for deemed tax paid by the pension entity for purposes of section 261.01.
A participating employer that does not meet the above thresholds is not a "selected qualifying employer" and therefore would not generally be entitled to relief from the deeming rules of subsections 172.1(5), (6) and (7) above. However, the employer may still be entitled to relief from accounting for taxable supplies deemed to have been made under subsection 172.1(7) if it is otherwise a "qualifying employer" for a particular fiscal year of the employer.
Qualifying Employer
Subsection 172.1(10), sets out the conditions for determining whether a particular participating employer of a pension plan is a "qualifying employer" of the plan for a particular fiscal year of the employer. In general terms, a participating employer is a qualifying employer for purposes of subsection 172.1(7) where:
* the employer did not become a participating employer of the plan in the particular fiscal year (if it did then the provisions of subsection 172.1(11) must be used to determine whether the employer is a "qualifying employer");
* the amount of GST or federal component of the HST for deemed supplies made by the employer under subsection 172.1(7) in the preceding year is less than $5000;
* the amount of GST or federal component of the HST in the preceding fiscal year of the employer in respect of deemed taxable supplies is less than 10% of the total GST or federal component of the HST (net certain adjustments) paid by all pension entities of that pension plan in that preceding year.
The 10% threshold described in the last point above is specifically described in subsection 172.1(10). Under that subsection, the 10% threshold is calculated using the formula A/(B-C), whereas the $5,000 threshold is measured by element A of that formula.
The amounts to be included in element A are specifically described in paragraphs (a) through (d) of that element. The calculation of element A is similar to that calculated for Element A of subsection 172.1(9) above, except that that the amounts are calculated with reference to deemed tax collected under subsection 172.1(7) only. The amounts generally consist of the GST or the federal portion of the HST that the particular participating employer (and any related participating employers) is required to account for under paragraph 172.1(7)(c) in the preceding fiscal year of the particular participating employer (Footnote 7). Similarly, those employers that were a "qualifying employer" in the preceding fiscal year (and thus relieved from accounting for tax under subsection 172.1(7) in that year) must also include in the calculation any amounts that would have been included in element A had the employer not been a qualifying employer in that year.
The amounts to be included in elements B and C of the above formula have the same meaning as described above for a "selected qualifying employer" as provided under subsection 172.1(9).
To summarize, a participating employer may not have to account for tax under the deeming provisions of subsection 172.1(5), (6) or (7) where the employer is a "selected qualifying employer". Where the employer is not a "selected qualifying employer", the employer may nevertheless be relieved of its obligation to account for deemed tax collected under subsection 172.1(7) if the employer is a "qualifying employer". If the employer is neither a "selected qualifying employer" nor a "qualifying employer", then it would be required to account for tax if the remaining conditions of subsections 172.1(5), (6) and/or (7) are met.
ADDITIONAL INFORMATION
Section 157 - election for nil consideration on actual taxable supplies
Subject to section 157, a participating employer of a pension plan may jointly elect with a pension entity of the plan to treat certain actual taxable supplies by the employer to the pension entity as being made for no consideration. Specifically, this election applies to a supply of property or services that is acquired by the pension entity in the course of pension activities of the pension plan. Where an election is made, the employer would not be required to account for tax on an actual taxable supply made to the pension entity, nor would the pension entity be required to pay it. However, this general rule is subject to certain exceptions delineated in subsection 157(3). Specifically, an electing employer would have to account for GST/HST and the recipient pension entity would have to pay that tax if:
* the supply of property or services is not acquired by the pension entity in the course of pension activities of the pension plan; and
* the employer makes a supply of property or services to the pension entity that was acquired, used or consumed by the employer at a time when the employer was a "selected qualifying employer" as defined in subsection 172.1(9) above.
Accordingly, an electing employer that is a "selected qualifying employer" in these circumstances would not be able to treat supplies it makes to the pension entity as being for no consideration. On the other hand, where the electing employer is not a "selected qualifying employer", it may, subject to section 157, treat supplies it makes to the pension entity as being for no consideration. In that case, however, the employer would be subject to the deeming provisions of subsections 172.1(5) and (6), as described above. Note that if the employer were not a "selected qualifying employer" but were nevertheless a "qualifying employer", it would be relieved from the requirement to account for tax under the deeming provisions of subsection 172.1(7) above and would also be allowed to make the joint election under section 157.
Lastly, note that the election should be filed on or before the first day of the employer's fiscal year for which the election is to have effect or any later day that the Minister may allow. In this regard, an election may be filed after the first day of the employer's fiscal year that includes March 21, 2013, provided that (i) the employer was a participating employer on the first day of that fiscal year; (ii) the election is filed by the end of the 2013 calendar year; and (iii) the employer and pension entity acted after March 21, 2013 as if the election had been in place. Where these conditions are met, the election would apply only to actual supplies made after March 21, 2013. Once the joint election is made, it remains in effect until it is revoked jointly by the participating employer of the pension plan and a pension entity of the pension plan.
The foregoing comments represent our general views with respect to the subject matter of your request. These comments are not rulings and, in accordance with the guidelines set out in GST/HST Memorandum 1.4, Excise and GST/HST Rulings and Interpretations Service, do not bind the Canada Revenue Agency with respect to a particular situation. Future changes to the ETA, regulations, or our interpretative policy could affect this interpretation.
If you require clarification with respect to any of the issues discussed in this letter, please call me directly at 613-952-8811. 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,
Monica Ma
Special Provisions - FI Unit
Financial Services and Real Property Division
Excise and GST/HST Rulings Directorate
Footnotes:
1. Note that in circumstances where an employer becomes a "participating employer" of a pension plan in a particular fiscal year, new subsection 172.1(11) generally requires the employer to use its reasonable expectations of tax amounts for the current year rather than actual tax amounts for a preceding year to determine if is a "selected qualifying employer" or "qualifying employer", whichever the case.
2. The "preceding fiscal" year is the fiscal year of the particular participating employer preceding the fiscal year for which the employer is determining if it is a selected qualifying employer.
3. These amounts are calculated with reference to the federal part of the deemed tax collected as represented by element A in each of paragraphs 172.1(5)(c), 6(c) and 7(c). For more information on the calculation of deemed tax collected, see sections 1, 2 and 3 of Part IV of GST/HST Notice 257, The GST/HST Rebate for Pension Entities.
4. More information on this subject is available in Part V of GST/HST Notice 257, The GST/HST Rebate for Pension Entities.
5. This amount is represented by element A in subsections 232.01(4) or 232.02(3) respectively.
6. A "recoverable amount" is defined in subsection 261.01(1) and can be generally described as an amount that: (1) is included in determining an ITC of the pension entity for the claim period; (2) the pension entity was entitled to recover through a rebate, refund or remission; and (3) could reasonably be regarded as having been included in an amount adjusted, refunded or credited in favor of the pension entity for credit notes received or debit notes issued.
7. This is calculated with reference to the federal part of the deemed tax collected as represented by element A in paragraph 172.1(7)(c). For more information on the calculation of deemed tax collected, see sections 1, 2 and 3 of Part IV of GST/HST Notice 257, The GST/HST Rebate for Pension Entities.
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