Telephone: (613) 954-5021
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XXXXX
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HQR0000242
XXXXX 11735-1 (pl)
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XXXXX
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Subsections 123(1) & 149(1)
XXXXX Section 1, Part VII of Schedule V
XXXXX
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August 13, 1998
Dear XXXXX
This is in response to your previous letters and several subsequent telephone conversations regarding the application of the GST/HST to contributions made by employers into various employee benefit plans operated as union trust funds. We sincerely regret the undue delay in finalizing this matter.
You have asked us to review your analysis regarding these plans and provide you with our comments and concerns. It should be noted that since you did not wish to provide us with any trust documents or employment contracts related to these employee benefit plans (as you indicated in a previous telephone conversation), our comments hereinafter are general in nature and are based on the limited information included in your submissions.
Background
We understand that through negotiated contracts between single or multiple employers and the unions, certain employee benefit plans are legally established and operated as trust funds (namely, the Vacation Pay Fund, the Supplementary Unemployment Benefit Fund, the Pension Plan Fund, the Health, Accident and Dental Plan Fund, the Training Fund, and the Legal Fund). Included in the contracts are provisions for the funding of these plans confirming that contributions made into the trust funds are obligations of the employer and are generally based on a pre-determined formula codified in the contracts. We also understand that the trust funds are separate entities (i.e., persons) from their associated union in that they are established by trust documents and have separate trustees. Lastly, the beneficiaries of the trusts are the union members/employees who work for those employers.
With this in mind, we will now deal with your queries regarding the various benefit plans in the order that you presented them in your submissions.
Cash Flow
In your letter you state that there exists three different transactional processes by which the contribution may be received by the trust fund:
1) the employers may pay the required contributions directly to the trust fund;
2) the employers may pay the union who in turn redistributes the amount to the various trust funds; or
3) the employers may group the union dues and trust fund payments together and pay the amount to a third party fund administrator who then redistributes the money to the unions and trust funds for a fee.
4) It is your opinion that regardless of the transaction process used above by the employer, the method should not impact on the nature of the payment for GST/HST purposes, i.e., whether or not tax should be charged on the employer contributions.
Comments:
Based on the facts provided above, it is the Department's position that where the employer's contribution is paid to the union or to the fund administrator in an agency capacity, and that amount is then distributed to the various trust funds, the amount paid by the employer to fulfill its obligation under the contract, whether paid directly or indirectly to a trust fund, will not change the nature of the payment. However, please note that where a third party fund administrator (other than a small supplier who is not a registrant) provides these services for a fee, any consideration paid or payable for the supply of these services (including the service of redistributing the contributions into the trust funds) will be subject to GST/HST.
Employer Contributions to the Plans
You state in your letter that the employer contributions to the trust funds are calculated with respect to the number of hours worked by the employee. Having said this, you conclude that since the beneficiary of the trust funds is the employee, the employer's contributions are in respect of a supply of employment services supplied to an employer by an employee in relation to the employment of the employee. Accordingly, by definition of the word "service", under the Excise Tax Act (the ETA) you say that the contributions made by the employer into the trust funds are not considered to be a supply and therefore outside of the scope of the GST/HST.
Comments:
Based on this information, the contributions made to a trust fund by an employer under a contract of employment would be regarded as a form of remuneration for work performed or supplied to an employer by the employees in the course of or in relation to the office or employment of those employees which is explicitly excluded from the definition of "service" under paragraph 123(1)(c) of the ETA. Accordingly, the contributions would not be regarded as consideration for a supply under the ETA and as such would not be subject to tax.
However, notwithstanding the fact that payments made by the employer to the various trust funds may be in respect of employment and not subject to GST/HST, the question still remains as to whether the benefits received by the employees from the trusts are considered to be supplies (made by the trusts as separate persons), and if so, whether these supplies would be considered taxable or exempt supplies under the ETA. The answer to these questions can best be addressed in the context of the activities of each particular trust which are discussed below.
Vacation Pay Fund
In your letter you say that the Vacation Pay Fund is established to allow the employees to draw their vacation entitlement from the fund as they take their vacations. You also state that, for income tax purposes, the employees receive T4 slips for the vacation pay benefits they receive during the year from the fund. You therefore consider that the vacation payments made to the employees from the fund are not in respect of any supply made to the fund but are, by definition, a "financial service" rendered to the employees.
Furthermore, you say that the employer contributions made into the fund are used in short and long term arms-length investments to maximize the fund's earnings on behalf of the employees. In your view, by making financial investments and earning interest income, the fund is in fact making exempt supplies of "financial service" (pursuant to its definition in paragraph 123(1)(a) of the ETA) to third party debtors.
Comments:
With respect to the vacation payments made to the employees from the fund, it is the Department's position that since the employees have the right to be paid the money as they take their vacations (bound by a contractual agreement), these payments represent a supply of a "financial service" under paragraph 123(1)(f) of the ETA, and therefore considered an exempt supply under that Act.
Secondly, when the fund pays money to third party debtors to purchase financial instruments (pursuant to its definition under paragraphs 123(1)(a) or (b) of the ETA, i.e., debt or equity securities), the fund is considered to have acquired exempt supplies. Furthermore, any receipt of dividends, interest, or principal from these financial instruments will represent a "financial service" made to the fund in accordance with paragraph 123(1)(f) of the ETA. Accordingly, these receipts will also be considered exempt supplies under section 1, Part VII of Schedule V to the ETA.
Supplementary Unemployment Benefit Fund
As stated in your letter, the purpose of this fund is to pay unemployment benefits to temporarily laid off employees. You confirm that, for income tax purposes, the employees receive T4 slips for the benefits received during the year under this fund. Again, you believe that the moneys paid by the fund to the temporarily laid off employees are not in respect of any supply which the employees have made to the fund but rather that the payments made are a supply of a "financial service".
Also, you are of the opinion that any moneys paid by the fund to third parties for investment purposes is in respect of a supply of a "financial service" (in consideration for interest income), thereby making the supply an exempt supply for GST/HST purposes.
Comments:
We agree that the payments made from the fund to laid-off workers represents a supply of a "financial service" that, in general, would not be subject to GST/HST as these payments would be considered exempt supplies.
With respect to the transfer or payment of money to third parties for investment purposes (i.e., the purchase of financial instruments), as previously stated, the fund is considered to have acquired exempt supplies. Again, the interest, dividend, or principal received on the investments represents a "financial service" to the fund (as defined under paragraph 123(1)(f) of the ETA) and therefore considered an exempt supply.
Pension Plan Fund
As noted in your submission, the purpose of the Pension Plan Fund is similar to the two above-noted funds except that it represents pension plan entitlements to employees. You have also established that where an employee receives a benefit under this fund during the year, the employee will receive a T4 slip for income tax purposes. Once more, it is your opinion that payments made out of the fund to employees are not in respect of any supply while any supplies made inside the fund (i.e., interest income from investments) are considered supplies of a "financial service".
Comments:
As we explained in the Vacation Pay Fund, since the employees have the right to be paid the money (bound by a contractual agreement), the payments made by the fund to the employees represent a supply of a "financial service" pursuant to its definition under paragraph 123(1) of the ETA. Accordingly, the supply is considered an exempt supply under the ETA. Furthermore, where the investment activity is carried on by the trust (as noted above), the related supplies (i.e., interest, dividends and principal) will most likely qualify as "financial services" under the ETA which are exempt from the GST/HST 2.
Health, Accident and Dental Plans
You indicate that the benefit payments from the Health, Accident and Dental Plans are either made to the employee claimant as reimbursement for a health related service or made directly to a health practitioner. Furthermore, where the payment is in respect of wage loss coverage, that payment tends to be made directly to the employee rather than any individual employer. Inside these plans, the employee coverage may be through a self funding plan in which the contributions are invested in the plans, or an insured plan obtained from a third party insurer.
You also indicate that where the plan provides health services and group sickness or accident insurance, these plans will not be taxable in the hands of the employees for income tax purposes (i.e., no T4 slips will be issued to the employees). However, benefits such as life insurance in excess of $25,000 are taxable and, accordingly, T4 slips will be issued to the employees in this case.
In your view, these plans primarily involve the making and receipt of "financial services" based on the following arguments:
1) where the coverage payment is made to the employee, there is no supply made to the plans (as previously discussed in other plans);
2) where the payment is made to a medical practitioner (including a dentist), the nature of the medical/dental supply will determine the tax status (which has no effect on the employee);
3) any self-funding plan generally involves the purchase of interest-bearing financial instruments of third parties; and
4) any third party insurance purchase (i.e., premium) by the plans are consideration for "financial services".
5) XXXXX[.]
Comments:
It is the Department's opinion that, in the case of a self-funding plan, where the investment activity is carried on by the trust (as noted in the above plans), the purchase of the financial instruments will be considered acquisitions of exempt supplies. Moreover, supplies received by the trust from the investments (i.e., interest, dividend and principal) will qualify as "financial services" pursuant to its definition in paragraph 123(1)(f) of the ETA.
In cases where the plans are covered by a third party insurer, the insurance policy meets the definition of "financial instrument" (paragraph 123(1)(c) of the ETA) which is a "financial service" pursuant to its definition in paragraph 123(1)(d) of the ETA (i.e., "the issue, granting, ... of a financial instrument"). Therefore, any transfer of moneys by the trust to the insurer as premiums for an insurance policy represents consideration for an exempt supply.
Finally an "insurance policy" is defined in subsection 123(1) of the ETA to mean, inter alia:
(a) a policy or contract of insurance ... that is issued by an insurer ..., and
(b) a policy or contract in the nature of accident and sickness insurance, whether the policy is issued, or the contract is entered into, by an insurer.
(c) XXXXX
This would indicate that, regardless of whether the plan is a self-funding plan or an insured plan, the plan will be considered an "insurance policy" provided it covers only accident and/or sickness insurance. Therefore, in the case at hand, if the Health, Accident and Dental Plans are indeed "insurance policies" for GST/HST purposes, they will be considered "financial instruments". Accordingly, the payment or receipt of an amount in satisfaction of a claim arising under the insurance policy will be considered a "financial service" as stated under paragraph (f.1) of its definition in subsection 123(1) of the ETA.
Training Funds
We understand there are two types of training funds:
1) training funds which may rent facilities and hire instructors where the training courses are presented under the auspices of the fund itself. The courses offered are trade accreditation or upgrading in nature and are certified by the Ministry of Employment and Immigration; and
2) training funds which reimburse employees for studies provided by separately constituted private educational institutions (e.g. colleges offering trade accreditation courses).
In either case, you indicate that there are no taxable benefits conferred to the employees under the Income Tax Act where such benefits have been received during the year under this fund (i.e., no T4 slips issued to the employees).
With respect to the first type of training fund described above (i.e., the fund provides the training courses to the employees), you believe that, although the training funds generally meet the criteria of "vocational schools", the training courses do not meet the criteria for exemption in either of sections 6 or 8 of Part III of Schedule V to the ETA. Accordingly, you conclude that any training fees charged to attendees will be in respect of a taxable supply. As well, to the extent that the attendees are required to pay for any portion of the training, books or other supplies, you conclude that these will also be taxable (provided the training trust fund is a GST/HST registrant.
With respect to the second type of training fund noted above (i.e., the fund reimburses employees for accredited courses), you believe that the Training Fund is not conducting any commercial activity of their own but rather is the consumer of services.
You also mention that these type of training funds tend not to charge the attendees i.e., the cost is paid out of the fund. Accordingly you believe that even though there may be no consideration for the training courses, it can be argued that a supply is being made and that the supply (of the training course) is taxable.
Comments:
Where the fund itself provides the training courses to the employees, it is our view that the fund is making a taxable supply of training to the employer for no consideration. In this situation the employer contributions would remain tax-free (as noted beforehand, the employer contributions are amounts paid by the employer for supplies made by the employees in the course of or in relation to the employees' office or employment). Furthermore, where the trust pays tax on the inputs it acquires to provide the services to the employer (for example, the trust hires trainers), the trust, if a GST/HST registrant, would not be entitled to any input tax credits in respect of the tax paid or payable on those inputs since subsection 141.01(2) of the ETA would apply [i.e., although the inputs are deemed to have been acquired in the course of an endeavour of the trust for consumption or use in its commercial activities, those inputs were not acquired for the purpose of making taxable supplies for consideration (note that for purposes of applying subsection 141.01(2), among others, the term "consideration" does not include nominal consideration - see subsection 141.01(1.1) of the ETA)].
Where the trust is reimbursing employees for expenses incurred by them for training provided by separately constituted educational institutions, the trust could be seen as simply administering the payment. Where this is the case, these payments would be considered exempt supplies (a supply of a financial service), and accordingly no input tax credits would be allowed to the trust (if a GST/HST registrant) in respect of the reimbursements made in relation to that exempt activity.
Lastly, if there are separate charges for books or supplies related to these courses, such supplies will be taxable. However, where the books or supplies are provided with the course for a single consideration (and these supplies are incidental to the course) they will be treated the same as the course itself for GST/HST purposes.
Legal Fund
You indicate that the Legal Fund either hires lawyers to act on behalf of their members (the employees) or reimburse specified legal services rendered by independent legal counsel to fund members. You also say that in general, the contributions are allocated equally to the members and reported on their T4 slips for income tax purposes. Alternatively, the benefits may only be allocated to those members for which legal services were used (accordingly, T4 slips would only be issued to those beneficiaries).
Lastly, you state that since there is never a solicitor/client or supplier/recipient relationship between the fund and the employees, any payment made out of the fund would represent exempt "financial services".
Comments:
Please note that the facts included in your submissions are not sufficient for the Department to comment on the nature of the services provided nor on the payments made to employees from the Legal Fund. However, in general, the provision of legal services are taxable supplies for GST/HST purposes. You may also wish to consider our comments provided above concerning the Training Fund since the same principles would appear to apply.
Financial Institutions
You state that most of these trust funds dealt with herein appear to meet the definition of a "financial institution" under paragraph 149(1)(b) of the ETA (i.e., a "de minimus" financial institution). As well, you say that some of the funds appear to be "listed financial institutions" pursuant to paragraph 149(1)(a) of the ETA. With this in mind, since most of the funds' receipts are not in respect of a supply, you believe that even the small amounts of interest income causes any fund to be a financial institution.
Comments:
As you can appreciate, whether a person is a financial institution in accordance with subsections 149(1)(a) or (b) of the ETA is a question of fact. Although some of the funds may in fact qualify as listed financial institutions, we cannot make such determinations since we did not receive any agreements providing details of the particular funds. Lastly, whether a trust fund is considered a de minimus "financial institution" is based on the formula provided under paragraph 149(1)(b) of the ETA. Again we do not have sufficient information to comment.
The foregoing comments represent our general views with respect to the subject matter of your letter. Proposed amendments to the Excise Tax Act, if enacted, could have an effect on our views provided herein. These comments are not rulings and, in accordance with the guidelines set out in section 1.4 of Chapter 1 of the GST/HST Memoranda Series, do not bind the Department with respect to a particular situation.
Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 954-9700.
Yours Truly,
Paul Lafond
Acting Senior Rulings Officer
General Operations and Border Issues Division
GST Rulings and Interpretations Directorate
Policy and Legislation Branch
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