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, 15th floor
320 Queen Street
Ottawa ON K1A 0L5
[Addressee]
Case Number: 142010
July 20, 2012
Dear [Client]:
Subject: GST/HST INTERPRETATION
Pension plans
This is further to your [correspondence] of [mm/dd/yyyy], in which you made inquiries on various scenarios involving pension plans and the application of section 172.1 of the Excise Tax Act (ETA).
All legislative references are to the ETA unless otherwise specified.
Issue 1
Background
A number of employers, all GST/HST registrants and “participating employers” as defined in subsection 172.1(1), are party to a pension plan agreement (the “Plan”). One of the employers (the “designated employer”) acquires and incurs all of the expenses relating to the goods and services (the “resources”) necessary for the management and administration of the Plan and incurs all of the related expenses. The resources are for “pension activities” of the Plan, as that term is defined in section 172.1(1). The remaining employers in the Plan do not use, consume or supply any resources in respect of pension activities of the Plan.
Question
Given that there are multiple participating employers, yet all Plan resources are acquired by and paid for by the designated employer, you have asked us to confirm that only the designated employer, and not the remaining qualifying employers, would be subject to the deeming provisions of section 172.1.
In this regard, you submit that, if the designated employer acquires all of the resources with respect to the management and administration of the Plan, only the designated employer would be subject to the deeming provisions of section 172.1, notwithstanding that it may make only a fraction of the total pension contributions to the Plan and employ only a fraction of the total Plan employees. In that case, you further submit that the “provincial factor” used to calculate the provincial part of the deemed tax collected on a deemed taxable supply under section 172.1 would be based on the Plan contributions and active members of the designated employer without reference to the Plan contributions and active members of the other qualifying employers.
Legislation
A “participating employer” of a pension plan that is a GST/HST registrant is generally deemed to have made a taxable supply where,
* under subsection 172.1(5), 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;
* under subsection 172.1(6), the employer consumes or uses an “employer resource” (Footnote 1) 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; and
* under subsection 172.1(7), 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.
An employer that is deemed to have made a taxable supply under subsections 172.1(5), (6) or (7) is also deemed to have collected tax in respect of the deemed taxable supply, meaning that the employer must self-assess tax equal to the deemed tax collected.
The amount of tax deemed collected is, generally speaking, calculated on the fair market value (FMV) of the employer resource or specified resource in question. As you are aware, the legislation essentially requires the deemed tax be calculated as the sum of federal and provincial parts of the GST/HST. The federal part is the amount determined by multiplying the FMV of the particular resource or part by the tax rate set out in subsection 165(1), which is currently 5%. The provincial part is generally determined by multiplying the FMV of the particular resource by the sum of the “provincial factors” calculated for each relevant participating province. The “provincial factor” is calculated with reference the definition of that term in subsection 172.1(1). For a full explanation and demonstration of this calculation, please consult example 10 in GST/HST Notice 257, The GST/HST Rebate for Pension Entities.
Interpretation
A particular employer in a pension plan may have a fiduciary responsibility to incur certain plan expenses pursuant to the plan agreements to which it is party. To the extent that the designated employer incurs expenses pursuant to the Plan agreements for the acquisition of employer resources or specified resources, the designated employer will be deemed to have made taxable supplies and must self-assess in respect of those resources, subject to subsections 172.1(5), (6) or (7) above. The provincial factors used in calculating the amount of the self-assessment would be determined using the active members of the designated employer and/or its contributions to the Plan.
We wish to note that if the designated employer were to acquire resources for or on behalf of another employer, there may be a supply by the designated employer to the other employer for GST/HST purposes. If so, the supply would be taxable unless an exempting provision applies. To the extent that the resources acquired relate to the other employer’s pension activities, that employer would be deemed to have made taxable supplies of those resources and must self-assess, subject to subsections 172.1(5), (6) or (7) above.
We also wish to confirm your statement that, where a pension entity of a pension plan is a selected listed financial institution (“SLFI”), the calculation of the “provincial attribution percentage” of the SLFI pension entity, in contrast with the calculation of the aforementioned “provincial factor”, would be made with reference to the residency of the members in the pension plan, which would include members from all of the employers.
As you are aware, the provincial attribution percentage is not relevant for purposes of the calculation of the deemed tax collected under section 172.1 above. Instead, it is relevant for SLFIs that are required to calculate their liability for the provincial part of the HST using the Special Attribution Method (SAM). Further information on the reporting requirements of SLFIs can be found in GST/HST Technical Information Bulletin B-107, Investment Plans (Including Segregated Funds of an Insurer) and the HST.
Issue 2
A particular pension plan (the “Plan”) has two legal components: a defined benefit component for which there is a trust, and a non-trusteed, defined contribution component that is a segregated fund of an insurance contract.
Question
You wish to determine the application of the deeming provisions of subsections 172.1(5), (6) and (7) above where there is a hybrid plan containing both defined benefits and defined contribution components.
In this regard, you submit that the definition of “pension plan” in subsection 172.1(1) would exclude the defined contribution component of such a plan, thus precluding the application of the deemed supply rules with respect to pension expenses that are attributable to that component.
Legislation and Interpretation
As previously noted, subsections 172.1(5) and (6) may apply where an employer makes a supply to a “pension entity” of a “pension plan”.
Subsection 172.1(5) will generally apply where a participating employer acquires a “specified resource” for the purpose of making a supply to a “pension entity” for consumption, use or supply by the “pension entity” in the course of pension activities of the “pension plan”. Where subsection 172.1(5) applies, the employer is deemed, on the last day of its fiscal year, to have made a taxable supply of the specified resource, or part, that was made to the “pension entity”, and is deemed to have collected tax in respect of the deemed taxable supply.
Similarly, subsection 172.1(6) will generally apply where a participating employer consumes or uses an “employer resource” for the purpose of making a supply to a “pension entity” for consumption, use or supply by the “pension entity” in the course of pension activities of the “pension plan”. Where subsection 172.1(6) applies, the employer, on the last day of its fiscal year, is deemed to have made a taxable supply of the employer resource that was made to the “pension entity”, and is deemed to have collected tax in respect of the deemed taxable supply.
For this purpose, the term “pension plan” is in defined in subsection 172.1(1) to include a registered pension plan (as defined in subsection 248(1) of the Income Tax Act) that governs a person that is a trust or that is deemed to be a trust under that Act. Further, a “pension entity” of a pension plan is defined in subsection 172.1(1) to include such a trust.
In the present example, since the Plan governs the trust pertaining to the defined benefits component, the entire Plan, including the defined contribution component, would qualify as a “pension plan” for purposes of sections 172.1. However, the “pension entity” in this situation would only extend to the trust.
Given that the deeming provisions of subsections 172.1(5) and 172.1(6) pertain only to employer resources and specified resources (or part thereof) that are for supply to a pension entity; i.e., the trust relating to the defined benefits component of the Plan, a specified or employer resource, or part thereof, that is attributable to the defined contribution component of the Plan would not be subject to subsections 172.1(5) or 172.1(6).
Note that if an employer resource is acquired by the employer for consumption or use in pension activities but not for supply to a pension entity, the deeming provisions of subsection 172.1(7) must be considered. Under that provision, a participating employer of a pension plan that is a GST/HST registrant is generally deemed to have made a taxable supply where the employer consumes or uses the 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 to a pension entity. Similar to the provisions of subsections 172.1(5) and (6), where subsection 172.1(7) applies, the employer is deemed, on the last day of its fiscal year, to have made a taxable supply of the employer resource, and is deemed to have collected tax in respect of the deemed taxable supply.
The deeming provisions of subsection 172.1(7) essentially require a participating employer to self-assess on employer resources used or consumed in pension activities of a “pension plan”. As discussed above, a registered pension plan having a defined benefits component for which there exists a trust element would qualify as a “pension plan” under subsection 172.1(1) as long as the plan governs the trust. This would be true notwithstanding that the pension plan includes a non-trusteed, defined contribution component, as in the present example. As such, the deemed tax collected by the participating employer of the Plan would be calculated under subsection 172.1(7) using the value of all employer resources that are for consumption or use in pension activities of the pension plan, notwithstanding the existence of a non-trusteed, defined contribution component.
Finally, we acknowledge your question on whether a segregated fund may be deemed to be a trust and, if so, whether such a trust may effectively create a “pension entity” for purposes of the deeming provisions of section 172.1. Our response to this question requires further research and will be provided to you under separate cover as soon as possible.
The foregoing interpretations represent our general views with respect to the subject matter of your request. These interpretations 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 these interpretations.
We trust that this information will be of some assistance. If you require clarification with respect to any of the issues discussed in this letter, please call me directly at 613-952-8816.
Yours truly,
Paul Hawtin
Special Provisions Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate
FOOTNOTES
1 For purposes of subsection 172.1(6) and (7), an “employer resource” is essentially anything acquired, created, developed and/or produced by the employer including the employee labour and overhead required to do these things.
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