31 July 2003 GST/HST Ruling 41263 - GST Implications of Pension Plan Trust Investment Management Transactions

Dear XXXXX:

Thank you for your correspondence XXXXX (with attachments), concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to the transaction(s) between XXXXX, as the administrator of its pension plan trusts, the investment managers and the custodial trustee involving the salaried and hourly pension plan master trusts (and unitized trusts) in the context of XXXXX pension plan operations as described in the agreements provided and in our discussions.

Unless otherwise indicated, all legislative references contained herein are references to the Excise Tax Act (ETA).

Statement of Facts

You have provided the agreements relevant for the purposes of determining the GST implications of the transactions described in your request. These agreements are set out in Appendix 1 to this ruling letter.

In your letter XXXXX you have indicated that the terms of the Salaried and Hourly Unitized Trust Agreements are substantially identical as are the agreements entered into with offshore and resident investment managers, with the exception of the two agreements entered into by XXXXX with XXXXX (investment manager) and XXXXX (insurer). Based on the agreements provided and our discussions, our understanding of the facts, the transaction(s), and the purpose of the transaction(s) is as follows:

Parties and relationships:

XXXXX has established separate pension plans for hourly employees and for salaried employees.

XXXXX is the administrator of both its hourly and salaried employees' pension plans and it is governed as such by the provisions of the XXXXX XXXXX and related regulations.

As administrator of each of the plans, XXXXX is required to establish a trust fund for payment of pension benefits to beneficiaries of each of the plans. Both pension trusts are persons resident in Canada and registrants for the purposes of the ETA.

Certain corporations affiliated with XXXXX participate in the salaried plan so that their employees are covered by that plan; nevertheless, XXXXX has all the responsibilities as administrator. XXXXX, as administrator of the XXXXX plan trusts, has a fiduciary duty with respect to the assets of the trusts. Additionally, XXXXX has sole responsibility for the general administration of both of the plans (and is thus the only person empowered to deal with plan assets, except where it confers this power upon others by agreement).

XXXXX has retained XXXXX as the custodial trustee of both trusts. Under the master trust agreements, XXXXX performs all of the duties of a trustee. By virtue of the sub-agreements, XXXXX (or one of its delegates) is required to hold the plan assets and carry out "authorized instructions" in respect of the assets that it holds in trust for beneficiaries under the plans. Further, XXXXX has authority to take investment decisions in respect of assets of the trusts only if an investment manager ceases to act in respect of plan assets and is not replaced by XXXXX or XXXXX, or if XXXXX requests XXXXX to do so. According to discussions with the taxpayer representative, XXXXX has not acted as an investment manager to date.

For each plan, the trust arrangement is two-tiered: XXXXX has established master trusts ("MT") into which it pays the contributions required in relation to the individual plans (in the case of the salaried plan, the other employers pay contributions commensurate with coverage provided to their employees.) The funds in each of the MTs are invested in units of unitized trusts ("UT"), and the funds in the UTs are then assigned in differing portions to investment managers who have responsibility for managing the investment account ("IA") made up of specified plan assets and for making decisions to invest the funds in specific securities. In this scenario, the hourly and salaried employee plans each have a MT. In both cases, XXXXX contributions go into the MTs which then invest in UTs, which are vehicles or ways of pooling assets for investments. There are UTs for foreign and Canadian investments. On the books, MT purchases units of UT and UT issues units to MT. Therefore, on the books of the MT, there is an entry for the purchase of x units of xyz of the UT, and the supply is treated as an exempt financial service.

The types of investment for both the hourly and salaried plan are determined by XXXXX, and the contracts provided indicate the following types of investment: domestic equity, foreign equity, domestic fixed income, domestic short-term fixed income. Prior to XXXXX, all investment management agreements ("IMAs") were entered into between XXXXX and the individual investment managers.

XXXXX appointed XXXXX as the primary investment manager of the assets of the unitized trust funds (hourly and salaried), with power to delegate to sub-investment managers in its discretion, and XXXXX acknowledged that it is XXXXX agent and fiduciary with respect to the assets of the trust funds, and the unitized trust funds. XXXXX XXXXX requested the consent of all investment managers to its assignment of all investment management agreements to XXXXX, a non-resident, non-registrant. Such consent was granted, as evidenced by signature of the requests, with varying effective dates.

Under the terms of the plan documents, and in accordance with the terms of the XXXXX, both plans set out the mechanism for payment of the cost of administration of the pension plan and pension fund XXXXX XXXXX as being payment directly from XXXXX to the investment manager who has provided the services in respect of that trust with reimbursement directed to XXXXX from the relevant trust or payment directly out of the relevant trust upon the direction of XXXXX (or XXXXX following its appointment as principal investment manager). XXXXX XXXXX sets out that a "statement of changes in net assets" will include administration fees, including amounts paid to and on behalf of the administrator, inferring that the practice of having the administrator contract for supplies to a pension trust and be reimbursed by the trust was not unforeseen by the legislator. In this regard, you have indicated that in circumstances where there are not sufficient assets in the trusts, XXXXX is precluded from seeking reimbursement from the trusts under this Act, but that this did not occur during the periods relevant to the XXXXX rebate claims that formed the subject-matter of this request originally.

Hourly Plan Trust

Prior to Assignment of IMAs by XXXXX to XXXXX:

The hourly plan is funded through a trust fund created by a trust agreement between XXXXX and XXXXX in XXXXX, under which XXXXX holds and administers the trust fund as custodial trustee. XXXXX entered into a unitized trust agreement with XXXXX in respect of domestic pension investments, whereby XXXXX in its capacity as custodial trustee of the Trust, agreed to act on the authorized instructions of XXXXX or its investment managers with respect to the assets of the trusts. This plan is a single employer pension plan entitled to benefit from the administrative treatment set out in TIB-B032R.

XXXXX, as principal, has engaged the domestic investment managers, as its XXXXX XXXXX[.]

Pursuant to the terms of the IMAs relating to XXXXX, the investment managers agree that they XXXXX XXXXX[.]

Additionally, the IMAs set out, with respect to XXXXX XXXXX XXXXX[.] Following the Assignment of IMAs by XXXXX to XXXXX entered into an investment management agreement with XXXXX, appointing XXXXX as the primary investment manager of the assets of the unitized trust fund, with the power to delegate to sub-investment managers in its discretion, in accordance with the terms of the agreement. Under this agreement, XXXXX acts as XXXXX with respect to the assets of the trust. On the same day, XXXXX amended its hourly foreign unitized trust agreement with XXXXX, to the effect that, XXXXX in its capacity as custodial trustee of the plan trust agrees to act on the authorized instructions of XXXXX, XXXXX or its investment managers with respect to the assets of the trust. XXXXX has the same authority to act in respect of the trust assets as do the other investment managers, as well as additional powers, including the power to authorize XXXXX to disburse fees of other investment managers from the investment accounts and the power to re-allocate assets as between investment accounts.

XXXXX requested the consent of its investment managers to the assignment of its hourly investment management agreements to XXXXX ; all but one investment manager agreed to the assignment with XXXXX amended the document to read XXXXX as opposed to XXXXX[.]

Salaried Plan Trust

The plan documents were received XXXXX. According to the letter XXXXX, the salaried plan is comprised of terms substantially identical to those in the hourly plan document. However, this plan involves more than one employer and both employee and employer contribute to the plan whereas the hourly plan is a single employer plan funded by employer contributions only. The plan is registered and is not a multi-employer pension plan for the purposes of section 261.01 and would not be eligible to benefit from the administrative treatment set out in TIB-B032R. Notwithstanding these basic differences, given that XXXXX is the administrator of both plans, bears sole responsibility for their administration, and its obligations and treatment of supplies by investment managers to both trusts are similar, the analysis relating to the application of GST to transactions involving assets of the hourly plan trust will apply to the transactions of the salaried plan trust.

Pre-Assignment:

The investment managers invoice XXXXX directly for a taxable supply of investment management services.

Post-Assignment of Agreements from XXXXX to XXXXX:

The sub-investment managers invoice XXXXX directly and XXXXX, as primary investment manager, directs XXXXX to pay the sub-IM fees out of the trust fund assets (either as reimbursement to XXXXX or directly to the sub-investment manager). XXXXX, invoices XXXXX directly for its services as primary investment manager, XXXXX pays the invoice and directs XXXXX to reimburse XXXXX for this amount.

Ruling Requested

1. That the trusts for the XXXXX pension plans are not required to self-assess GST with respect to investment management services provided by offshore investment managers, both for the period XXXXX covered by the rebate claims which the XXXXX TSO has approved, and for subsequent periods;

2. That XXXXX is entitled to claim input tax credits (ITCs) with respect to investment management services that it has procured under agreements with investment managers that are registered for GST because XXXXX is the administrator of the XXXXX pension plans and has acquired the investment managers' services in relation to its commercial activities: (In fact, upon discussion with the taxpayer representative, where a taxpayer administers a pension plan, the legislation, agreements, and so forth, all indicate that the pension fund is the employers' responsibility and risk. In this context, XXXXX would like the CCRA to confirm the following three corollaries that it has presented:

Corollary #1: IMs in Canada — XXXXX pays GST on consideration and wants ITCs (investment advice as input to commercial activities of XXXXX;

#2 offshore IMs (GST remitted in error by XXXXX on behalf of XXXXX pension plan, subsequently returned by way of rebate) — XXXXX wants a ruling to the effect that XXXXX does not have to self-assess GST because of paragraph 217(a)(i) of the ETA (supply is excluded from definition of "Imported taxable supply" where it is acquired for consumption, use or supply exclusively in the course of commercial activities of the person"); and

#3 XXXXX wants ruling that it is entitled to full ITCs on GST paid to Canadian IMs)[,] and

3. That XXXXX is not required to charge GST on a notional "resupply" of the investment management services referred to in (b) to the Trusts for the XXXXX pension plans, because XXXXX itself has consumed those services; did not procure the services for the purpose of "resupply"; and had no contractual relationship with the Trustee to provide services to the Trustee or the trusts.

Ruling Given

Based on the facts set out above, we rule that:

1. Where XXXXX is the recipient of the supply of investment advice provided by the investment managers, XXXXX is required to self-assess GST with respect to investment management services provided by offshore investment managers under the provisions of Division IV of the ETA, both for the period XXXXX XXXXX and for subsequent periods.

2. XXXXX is not entitled to claim ITCs with respect to investment management services that it has procured under agreements with investment managers because these services are acquired by XXXXX solely for consumption by the registered pension trusts resident in Canada and are not acquired by XXXXX for use, consumption or supply in the course of its own commercial activities. Further, the supplies made by non-resident investment managers for direct consumption by the trusts, with XXXXX as recipient are "imported taxable supplies" pursuant to s. 217 and XXXXX must therefore self-assess GST/HST on these supplies; and

3. XXXXX is not required to charge GST on its supply of the investment management services referred to in (2) to the trusts for the XXXXX pension plans. XXXXX has entered into agreements with the investment managers in its capacity of administrator of the trusts. According to the plan and trust agreements provided, XXXXX in its role as administrator of the plans has the responsibility of providing administration and investment advice to the trusts and the XXXXX pension plan trusts have the obligation to either pay directly for supplies of investment management services or, where XXXXX has paid for such supplies to the trust, to reimburse XXXXX for the amounts so paid. The plan and trust documents clearly set out that the advice is for consumption by the trust, with respect to plan assets held by the trustee. XXXXX has not acquired the services for resupply to the trusts, rather the supply to XXXXX is clearly intended for direct consumption by the trusts.

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 transaction(s) for which you requested a ruling.

Explanation

XXXXX and each of the trusts are persons under the definition of "person" found at subsection 123(1). Each of these persons are Canadian residents and "registrants" under the ETA. When contracting for the supply of services to the trusts, prior to XXXXX, as the person liable under the agreement to pay the consideration for the supply of investment management services, is the "recipient," under the terms of the ETA, of the investment management services provided to the trusts by its investment managers (both resident and non-resident). Under the terms of the agreements provided, these supplies are solely for consumption by the trusts which are held in Canada.

Section 165 imposes GST/HST on the "recipient" of a "taxable supply." The supplies from the investment managers to XXXXX are taxable supplies and XXXXX is liable for the GST/HST relating to these supplies. Subsection 169(1) sets out the general rule for ITCs. XXXXX is not entitled to claim input tax credits (ITCs) with respect to investment management services procured by virtue of agreements with investment managers because, XXXXX as the administrator of the XXXXX pension plans, has acquired the investment managers' services for use otherwise than in the course of XXXXX commercial activities. The terms of the investment agreements clearly indicate that the services provided by the investment manager are to be provided in relation to the trust assets, through direct communication with the custodial trustee, and that the parties intend that the services be for use by the trusts as set out in each of the IMAs, viz., XXXXX XXXXX XXXXX obtains these services in order to fulfil its responsibilities under XXXXX, which sets out that the administrator of a pension plan has a fiduciary duty relating to the administration and investment of the pension fund. For these reasons, it is our view that the services are acquired by XXXXX in its role as administrator of the trusts, solely for consumption by the trusts, in the hands of the custodial trustee, and not for use, consumption or supply by XXXXX in the course of XXXXX commercial activities.

Pursuant to paragraph 169(1)(c), XXXXX would be eligible for ITCs only with respect to supplies that it acquires "for consumption, use or supply in the course of commercial activities of the person [XXXXX]." For the purposes of section 169, XXXXX cannot make the case that it is entitled to ITCs in respect of the supply because XXXXX has confirmed to us that it does not acquire the services for resupply to the trusts and because the stated intention in the agreements structuring these supplies is their consumption by another person.

Additionally, section 218 imposes tax on the "recipient" of an "imported taxable supply." The supplies of investment management services from non-resident IMs are taxable supplies acquired for consumption in Canada by the trusts in the course of their activities and are "imported taxable supply" as defined at section 217. Accordingly, XXXXX must self-assess the GST/HST payable with respect to these supplies.

As you may be aware, exports of services may be zero-rated under certain circumstances set out in Part V of Schedule VI to the ETA; however, in this fact scenario, the terms of the agreements as between XXXXX and XXXXX clearly indicate that XXXXX acts as agent and fiduciary of XXXXX when entering into agreements for the supplies of the sub-IMs and when directing the Trustee to effect payment of IM fees to the sub-IMs from the Trust. Where neither the services, nor payment for the services is reflected in the supply by XXXXX to XXXXX, it is our view that the IMs have made a supply to XXXXX as administrator of the Trust. For this reason, following the assignment of agreements from XXXXX to XXXXX as agent and fiduciary of XXXXX, XXXXX remains the recipient of all supplies made by investment managers for consumption in Canada by the XXXXX pension plan trusts. Therefore, supplies by Canadian IMs will not be zero-rated as exports in such circumstances.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at 613-952-9262.

Yours truly,

Sheena France
Financial Institutions Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate