7 February 2001 GST/HST Ruling 31467 - Eligibility for GST Refund

Dear XXXXX:

Thank you for your letter of May 19, 2000 (with attachments), concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to certain services acquired by the City XXXXX (i.e., "the City") that are subsequently resupplied to pension plan trusts.

XXXXX

Statement of Facts

Our understanding of the facts, the transactions, and the purpose of the transactions is as follows:

1) The City is involved in a number of single employer pension plans, XXXXX[.]

2) The plans have each been set up as trusts and are separate legal entities from the City. None of the pension plans is registered for the purposes of the GST/HST.

3) The City appoints members of a Pension Board (i.e., "the Board") to administer the pension plans. The duties of the Board include the establishment of overall policies for these plans. The Board is not a separate legal entity and is not a "person" for GST purposes. As such, it is part of the City.

4) The XXXXX of the City carries out the administrative functions of the Board.

5) The XXXXX of the City carries out the investment functions of the Board.

6) The XXXXX are not separate persons from the City. Its employees are employees of the City.

7) The City, through the XXXXX, incurs the following expenses on behalf of the pension plans:

•   salaries, benefits, membership dues (professional accounting, pension and benefits association) and allowances of employees of the XXXXX and members of the administrative board who work with the pension plans;

•   conference fees, seminar fees and related travel for items that deal with the administration of the plans;

•   telephone rental, long distance, fax, photocopying, postage, printing and courier charges for items that deal with the plans;

•   data processing charges for using an outside service to administer the plans database;

•   actuarial and legal fees for each pension plan;

•   fees to maintain the registration of the plans with the XXXXX; and

•   other items such as stationary, office supplies, industry publications, furniture and fixtures.

8) The City, through the XXXXX, incurs the following expenses on behalf of the plans:

•   salaries, benefits, membership dues (professional accounting) and allowances of employees of the XXXXX and members of the administrative board who work with the pension plans;

•   conference fees, seminar fees and travel regarding investment decisions, policies and procedures used for the investment portfolio for the plans;

•   telephone rental, long distance, fax, photocopying, postage, printing and courier charges for items that deal with the plans;

•   external financial audit of the plans;

•   investment manager fees, portfolio measurement fees, custodial service fees and banking fees related to the investments of the plans; and

•   other items such as stationary, office supplies, industry publications, furniture and fixtures.

9) The City is invoiced for, and pays from its accounts all expenses incurred by the XXXXX and the XXXXX. These expenses are allocated at cost to the various pension plans every six months by internal journal entry. The City does not charge GST to the plans when it recovers the costs for the services acquired in its name for the plans.

Ruling Requested

1) Does the direct cost rule apply where the City makes a resupply of administrative, custodial and investment services to the pension plan trusts at a cost that is equal to the price paid, less the municipal rebate?

2) Is the City entitled to claim the municipal rebate of 57.14% for the GST paid on these specific plan costs?

Ruling Given

Based on the facts set out above, we rule that the exemption provided in section 6 of Part VI to Schedule V of the ETA applies where the City is the recipient of administrative, custodial and investment services and subsequently resupplies these services to the pension plan trusts at a cost that is equal to the price paid, less the municipal rebate.

As the City is a selected public service body for the purposes of section 259 of the ETA, it is entitled to claim a public service body rebate for its non-creditable tax charged. Therefore, it may claim a 57.14% rebate of the GST paid on services acquired for the purpose of resupply on an exempt basis to the pension plan trusts.

Explanation

The Canada Customs and Revenue Agency (i.e., "CCRA") policy on pension plan costs and whether the GST paid thereon is refundable is contained in Technical Interpretation Bulletin (TIB) B-032R Registered Pension Plans. This TIB concentrates on differentiating employer expenses and pension plan expenses and outlines the CCRA's position where an employer is invoiced and pays for pension plan expenses or where a pension plan is invoiced and pays for employer expenses.

In accordance with this policy, all of the expenses noted above are considered to be Employer Expenses with the exception of the following expenses incurred by the XXXXX which are considered to be Plan Trust Expenses:

•   conference fees, seminar fees and travel regarding investment decisions, policies and procedures used for the investment portfolio for the pension plans;

•   external financial audit of the pension plans; and

•   investment manager fees, custodial service fees and banking fees related to the investments of the pension plans.

Where one party is invoiced and pays for property or services acquired for the other party, the CCRA's view is that the property or service has been resupplied to the other party. For example, where an employer acquires or imports and pays for the pension plan trusts' expenses, since the related property or services are required by the pension plan trust for use in its operations, the employer is considered to have resupplied this property or service to the pension plan trust at the fair market value (which will generally be accepted as the cost of the expense). In commercial organizations, this treatment ensures that the pension fund is charged with the appropriate amount of non-refundable GST.

In view of the above policy, there are a number of implications for public service bodies in respect of costs related to pension plans. For example, if a public service body is invoiced for and pays the pension plan expenses, CCRA considers that the public service body has resupplied the property or service to the pension plan trust.

Section 6 of Part VI of Schedule V to the ETA provides that a public service body, (including a municipality) that sells services on a cost recovery basis can choose to sell them as either taxable or exempt. Where a public service body does not charge an amount as tax, the supply will be exempt, if the charge to the recipient does not exceed the direct cost of the supply.

Consequently, the direct cost exemption in section 6 of Part VI of Schedule V of the ETA will apply where a public service body who is the recipient of a supply of services subsequently resupplies those services at cost or less than cost to the pension plan.

Pursuant to section 259, a rebate may be claimed by a public service body for its non-creditable tax charged, subject to certain exceptions. As a selected public service body, the City may claim 57.14% of the GST paid on the exempt services it resupplies to the pension plan.

In addition to the resupply of services acquired from outside sources by an employer to the pension plan, there may be situations where the employer may make an in-house supply of services to the pension plan. If there is no charge for the supply or if the charge is less than fair market value, the CCRA will apply section 155 of the ETA. In general, the CCRA will accept the cost to the employer of providing the in-house supply as the fair market value as long as it includes both direct and indirect costs.

For public service bodies, supplies made for consideration that is less than the direct cost of the supply, are exempt. Care must be taken in applying the direct cost rules in this situation. In-house supplies provided to a plan trust will normally be services provided by employees of the sponsor. Salaries are not included in the calculation of direct costs for purposes of section 6 of Part VI of Schedule V to the ETA, so in this case, virtually any charge will exceed the direct cost, making the supply taxable.

This ruling is subject to the general limitations and qualifications outlined in section 1.4 of Chapter 1 of the GST/HST Memoranda Series. We are bound by this ruling provided that none of the above issues is currently under audit, objection, or appeal; that there are no relevant changes in the future to the Excise Tax Act, or to our interpretative policy; and that you have fully described all necessary facts and transactions for which you requested a ruling.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 952-9590.

Yours truly,

Elaine Bonnah
Municipalities and Health Care Services Unit
Public Service Bodies and Governments Division
Excise and GST/HST Rulings Directorate