Please note that the following document, although correct at the time of issue, may not represent the current position of the Agency. / Veuillez prendre note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'Agence.
XXXXX
XXXXX
XXXXX
Excise and GST/HST Rulings Directorate
Place de Ville, Tower A, 15th floor
320 Queen Street
Ottawa ON K1A 0L5
Case Number: 108481
Attention: XXXXX XXXXX
July 29, 2010
Dear XXXXX:
Subject:
GST/HST RULING
ITC on Investment Management Fees Acquired by a Plan Trust
Thank you for your letter of XXXXX, concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to the recovery of GST paid on portfolio management fees by your pension plan trust. We apologized for the delay in responding.
Effective July 1, 2010, HST will apply at the rate of 15% in Nova Scotia, 13% in New Brunswick, Newfoundland and Labrador, and Ontario, and 12% in British Columbia. GST will continue to apply at the rate of 5% in the remaining provinces and territories.
All legislative references are to the Excise Tax Act (ETA) unless otherwise specified.
Statement of Facts
We understand that the facts are as follows:
1. XXXXX (the "Employer") is a GST registrant and is the sponsor and sole employer of a registered pension plan governed by the XXXXX.
2. The plan was established on XXXXX, to provide retirement benefits to salaried employees of the Employer and is a defined contribution arrangement with contributions from both employees and Employer.
3. As required under the plan, the Employer entered into a funding agreement with XXXXX (the "Trustee") to create a trust whose only activities are the receiving, holding, administering and investing of the contributions; the provision of pension benefits to employees and the payment of plan expenses such as investment management and actuary services.
4. The trust funds are invested in a balanced fund made up of cash, treasury bills, stocks and bonds. The trust does not invest in real property nor has any commercial activities. The trust is not a GST registrant.
5. The trust funds are managed by a third-party capital management company, which every month invoices the Employer for the plan trust portfolio investment management fees plus GST.
6. The Employer pays the fees, including the GST, and re-supplies them to the plan trust for the same amount plus GST. The Employer has been doing so since the establishment of the plan and trust.
7. The Employer's fiscal year ends on XXXXX, and the trust operates on a calendar year basis.
8. Since your request, the Department of Finance has announced on September 23, 2009, legislative changes with respect to the application of GST/HST to activities of pension plans and trusts. Our ruling below and related explanation is based on legislation in existence prior to that date.
Ruling Requested
You would like to know if the plan trust can register for GST purposes in order to recover as input tax credits (ITCs) the GST on the re-supply of the portfolio investment management fees.
Ruling Given
Based on the facts set out above, we rule that the plan trust is not required to register for GST/HST since it has no commercial activities. ITCs are available only to GST registrants involved in commercial activities.
This ruling is subject to the qualifications in GST/HST Memorandum 1.4, Excise and GST/HST Rulings and Interpretations Service. We are bound by this ruling provided that none of the above issues are currently under audit, objection, or appeal, that no future changes to the ETA, regulations or our interpretative policy affect its validity, and all relevant facts and transactions have been fully disclosed.
Explanation
Section 240 requires that every person who makes a taxable supply in Canada in the course of a commercial activity engaged in by the person in Canada be registered for GST/HST.
A trust is a person for GST purposes. A trust governed by a registered pension plan qualifies as an investment plan by virtue of subparagraph 149(5)(a)(i) and is included as a listed financial institution under subsection 149(1).
Generally, under section 169, where a person acquires or imports property or a service and, during a reporting period of the person in which the person is a registrant, the GST/HST in respect of the property or service becomes payable by the person or is paid by the person without having become payable, that person will be eligible to claim an ITC in respect of the tax to the extent (expressed as a percentage) the property or service is acquired or imported for consumption, use or supply in the course of the person's commercial activities.
A "commercial activity" of a person means a business carried on by the person, or an adventure or concern of the person in the nature of trade (other than certain exclusions that do not apply in this case), except to the extent that the business, adventure or concern in the nature of trade involves the making of exempt supplies by the person. A commercial activity also includes the making of a supply (other than an exempt supply) by the person of real property of the person, including anything done by the person in the course of or in connection with the making of the supply.
An essential function of a plan trust is to hold funds for investment purposes. Most services provided by a plan trust are normally financial services and are exempt from GST. The contribution of funds to the plan trust by the members of the plan and by the employer as well as the distribution of funds to the beneficiaries by the trust constitute financial services and are exempt. The investment of funds in financial instruments and the receipt of interest or dividends also constitute exempt supplies.
The facts of this case indicate that the trust only makes exempt supplies of financial services and as such is not involved in commercial activities. Since the trust is not involved in commercial activities, it is not eligible for GST/HST registration. Additionally, the trust is not entitled to claim ITCs on the GST paid to the Employer on the re-supply of the investment management services as it is neither a registrant nor involved in commercial activities.
In the present case, the Employer has acquired portfolio management services on which it has paid GST to the third party vendor. The Employer re-supplied the portfolio management services and charged GST to the plan trust.
The re-supply of the portfolio management services is a taxable supply made in the course of the Employer's commercial activities. The Employer is entitled to claim an ITC on the GST paid on the original supply made by the third party vendor, subject to section 169. Please note that the tax collected from the pension trust must be included in the Employer's net tax calculation on the return for the reporting period in which the supply was made.
Due to the close relationship of the employer and the plan trust, if the employer charges the plan trust an amount less than what it was charged by the supplier for the plan trust expenses, the CRA will take the position that the re-supply made by the employer cannot be said to have been made between persons dealing with each other at arm's length.
In this case, if the amount charged is less than the fair market value of the related property or services, section 155 applies on the fair market value unless the plan trust is a registrant who is acquiring the related property or services for consumption, use or supply exclusively in the course of its commercial activities. Section 155 deems the value of the consideration for the re-supply to be equal to the fair market value of the related property or services.
If the employer invoices the plan trust for the re-supply an amount equal to the amount it was charged by the original supplier, the CRA will generally accept that, for purposes of section 155, the amount invoiced by the employer is an appropriate approximation of the fair market value of the related property or services.
Further, on September 23, 2009, the Minister of Finance announced legislative amendments, which have now been passed into law, to implement a new GST/HST pension plan rebate. For your convenience, should you need more information on the rebate, you may refer to the following link at: http://www2.parl.gc.ca/HousePublications/Publication.aspx?DocId=4645839&Language=e&Mode=1&File=86
If you require clarification with respect to any of the issues discussed in this letter, please call me directly at 613-952-1512. 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
Specialty Tax Unit
Financial Institution and Real Property Division
Excise and GST/HST Rulings Directorate
UNCLASSIFIED
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