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.
GST/HST Rulings Directorate
Place de Ville, Tower A, 5th floor
320 Queen Street
Ottawa ON K1A 0L5
[Addressee]
Case Number: 241742
Business Number: […]
Dear [Client]:
Subject: GST/HST RULING
Eligibility for employer to claim input tax credits on investment management fees related to segregated funds of an insurer
Thank you for your correspondence of [mm/dd/yyyy], concerning the eligibility for […] (the Employer) to claim input tax credits (ITCs) for goods and services tax/harmonized sales tax (GST/HST) on certain investment management fees related to segregated funds of an insurer. We apologize for the delay in our response.
The HST applies in the participating provinces at the following rates: 13% in Ontario; and 15% in New Brunswick, Newfoundland and Labrador, Nova Scotia, and Prince Edward Island. The GST applies in the rest of Canada at the rate of 5%.
All legislative references are to the Excise Tax Act unless otherwise specified.
STATEMENT OF FACTS
From your incoming letter and the documentation you supplied, we understand the following:
1. The Employer is a […] company […][located in Canada].
2. The Employer is a GST/HST registrant.
3. The Employer has established, and is the plan sponsor and legal administrator of, a defined contribution pension plan: […], (the Plan). The Plan is governed by the laws of […][province X], and registered for purposes of the Income Tax Act […].
The Plan
4. In the Plan document you provided, the Employer is […] responsible […] for the operation and administration of the Plan. […].
5. […].
6. […]. The Plan fund will be maintained by a funding agent in accordance with the terms of the pension plan policy ( described below). […].
7. Under […] of the Plan document, the Employer is required to make contributions for the benefit of each Plan Member. Plan Members are not required to contribute, but may elect to do so. Plan Members may choose the investment options to be applied to contributions made on their behalf, from those option made available under the pension plan policy. Otherwise the contributions are invested in a default option.
8. According to […] of the Plan document, an account is maintained for each Plan Member that tracks the contributions made on behalf of that Member along with associated […][income] and withdrawals. Each of these accounts is used to provide benefits […]. Benefits are calculated in accordance with the terms of the pension plan policy.
9. Generally, Plan Members are entitled to a retirement annuity that provides equal monthly payments to the Plan Member until death, although some other settlement options are available.
The Pension Plan Policy
10. In [yyyy], […] ([…], (the Insurer)), as funding agent, issued […] (the Policy) to the Employer. The Policy generally dictates how contributions to the Plan are received and benefits/claims are computed, and is […] a group variable insurance contract.
11. The Insurer is federally regulated by the Office of the Superintendent of Financial Institutions and is licensed as a life insurer in the […][relevant provinces].
12. […][Additional terms of the Policy].
13. Under […] of the Policy, the Insurer will maintain an account for each [Plan Member] (Member Account). Contributions must be remitted to the Insurer. [Plan Members] may choose the investment options to be applied to contributions; otherwise the contributions are invested in the default option. Investment options include investment in variable investment funds (Funds) which are segregated funds offered and administered by the Insurer. The value of investments in the Funds are not guaranteed either as to earnings or principal, but will fluctuate with the financial experience of the Fund.
14. An investment management fee is charged in relation to the Funds and includes a fee for managing the Funds, a fee for providing other services under the Plan or Policy and may include […][other amounts]. The Insurer has established […][the Guidelines] […] relating to the management of the guaranteed investments and the Funds. The operation of the Plan is subject to the [Guidelines].
15. […] of the Policy provides that when a pension benefit becomes payable, the Insurer will typically provide such benefits by withdrawing values from the Member’s Account, and issuing an immediate or deferred annuity policy to the [Plan Member].
16. […], we understand that generally, the value of a Member Account at the time the annuity begins to be paid (e.g., at retirement) forms the basis for determining the annuity issued to the [Plan Member] as a pension benefit.
17. Under […] of the Policy, the Insurer will generally provide property and services in accordance with the […][terms of the Policy]
18. […] sets out the fees and charges payable under the Policy, and notes that the Employer must pay the fees required to be paid by it under […][the Policy].
19. […][The Policy] lists investment management fees charged for the Funds […] but does not otherwise stipulate who is required to pay the fees or how they are to be paid. Other fund operating expenses are reported as being charged against the assets in the Funds separately.
20. Under […] the Policy, the Insurer will […][regularly provide to the] Employer a report […] outlining financial activity under the Plan. You have provided a sample of such report for the period [dd/mm/yyyy to dd/mm/yyyy] wherein certain Funds are listed and […][the] total of the investment management fees for each Fund is shown. The report also shows GST/HST on those fees. The report is not an invoice and the Insurer has not otherwise invoiced the Employer any investment management fees.
The [Guidelines]
21. […][Under the Guidelines, Plan Members] are allocated one or more notional units of each Fund. […][Other terms of the Guidelines].
22. […]
23. […]. In the determination of the […][value of a Fund], […] [of the Guidelines] provides, in part, for the accrual of expenses or liabilities properly chargeable to each Fund, and this includes management fees payable to the Insurer, taxes including GST, and [...][other fees to manage the Fund].
24. […] of the [Guidelines] provides for the calculation of unit values for each Fund. The unit value is determined by dividing the [value of the Fund] at […][a specific date] less […][a part of] the Fund’s investment management fee as outlined in the […][Policy], by the number of Units in that Fund immediately before […][that specific date] (provided the fee is not paid separately by the Employer, or [Plan Member]).
RULING REQUESTED
You would like to know whether the Employer is eligible to claim ITCs for GST/HST on investment management fees related to the Funds.
RULING GIVEN
Based on the facts set out above, we rule that the Employer is not eligible to claim ITCs for GST/HST on investment management fees related to the Funds.
EXPLANATION
Subsection 169(1) generally provides that a person may be eligible to claim an ITC to the extent the person acquires property or a service for consumption use or supply in the course of its commercial activities, and during a reporting period of the person during which the person is a registrant, tax in respect of the supply became payable by the person or is paid without having become payable.
A “recipient” of a supply of property or a service is generally defined in subsection 123(1) to be the person liable to pay the consideration for the supply (where consideration is payable).
Supply acquired
In this case, what the Insurer has supplied to the Employer is an insurance policy. Subsection 123(1) defines an “insurance policy” to mean, in part, a policy or contract of insurance (other than certain warranties) issued by an insurer and includes a contract issued by an insurer all or a part of the insurer’s reserves for which vary in amount depending on the value of a specified group of assets.
Subsection 123(1) also defines an “insurer” to mean, in part, a person licensed or otherwise authorized under laws of Canada or a province to carry on an insurance business in Canada. It is clear that the Insurer meets the definition of an “insurer” for GST/HST purposes, and the Policy is included in the definition of insurance policy for GST/HST purposes.
For GST/HST purposes, a financial service is defined in subsection 123(1) to means anything that is included in any of paragraphs (a) to (m) and is not excluded by any of paragraphs (n) to (t) of that same definition. Of particular relevance in this case, the provision by an insurer of insurance under an insurance policy is included in paragraph (d) of the definition of “financial service” and is not excluded from that definition by any of paragraphs (n) to (t). Supplies of financial services are generally exempt from GST/HST under section 1 of Part VII of Schedule V.
The Policy provides for the payment of pension benefits to [Plan Members] upon the occurrence of certain specified events (generally upon the eligible retirement or death of a [Plan Member]). A payment of pension benefits by the Insurer under the Policy would generally be considered a payment in full or partial satisfaction of a claim arising under an insurance policy which is included in paragraph (f.1) of the definition of financial service and is generally not excluded by any of paragraphs (n) to (t).
The premiums (referred to in the Policy as Contributions) are consideration payable for the Insurer’s supply of insurance to the Employer, and the Employer is liable to pay the premiums to the Insurer under the Policies. Since the Insurer is supplying an exempt financial service to the Employer, neither the pension benefits nor the premiums are subject to GST/HST.
There is no indication in the Policy that the Insurer is supplying any services to the Employer for which the investment management fees would constitute consideration, nor has the Insurer invoiced the Employer in respect of such services. […] the Policy […][sets out] the services being supplied by the Insurer to the Employer under the Policy. Investment management services are not listed therein.
Tax paid or payable in respect of investment management fees
The […] Policy lists the investment management fees charged for each Fund but does not stipulate who is required to pay the investment management fees or how they are to be paid. However we may look to the [Guidelines] for clarification since the [Guidelines] form part of the Policy and relate to the management of the guaranteed investments and the Funds into which the Plan assets have been invested.
[…] of the [Guidelines] generally provides that investment management fees payable to the Insurer are considered to be properly chargeable to the Funds and are deducted from the […][value of each Fund].
The [Guidelines] further stipulate that the Insurer is the sole owner of the assets of each Fund and the records and accounts kept in connection therewith will not be deemed to confer either beneficial or legal ownership upon any other person nor create any trust.
The premiums that the Employer paid to the Insurer became property of the Insurer, and the Funds into which the premiums were invested are also property of the Insurer. Therefore, the investment management fees (and any associated GST/HST) have been deducted from the Insurer’s property.
It is our understanding that the investment management fees were also incorporated into the value of the Fund units held in each Member Account, and the value of the Member Accounts is used for purposes of calculating each [Plan Member’s] pension benefit entitlement. However, Member Accounts do not confer any beneficial or legal ownership of the underlying investments to anyone other than the Insurer. Therefore, as they pertain to the Employer and [Plan Member], it appears the investment management fees (and any associated GST/HST) simply factor into the calculation determining the [Plan Members’] pension benefit entitlements as agreed upon by the Employer and the Insurer under the Policy which, when paid, is the payment of a claim under an insurance policy.
You had indicated in your letter that, under the Plan document, the ultimate responsibility for the investment of the Plan assets falls to the Employer, and on this basis the Employer is ultimately liable to pay the investment management fees in relation to the Funds. However, there is no indication in the Plan document that the Employer acquired services from anyone to which the associated investment management fees could apply. Nor, as noted above, were such services supplied to the Employer under the Policy or under any other separate agreement. The Insurer did not issue any invoices to the Employer for investment management fees. Rather, the investment management fees were deducted from the Funds’ assets, which are owned by the Insurer.
Accordingly, the Employer was not liable to pay any investment management fees, and it was not a recipient of, nor did it acquire, the associated services. Tax on such fees has not been paid or become payable by the Employer and therefore it is not eligible to claim ITCs for GST/HST on such amounts.
DISCLAIMER
In accordance with the qualifications and guidelines set out in GST/HST Memorandum 1-4, Excise and GST/HST Rulings and Interpretations Service, the Canada Revenue Agency (CRA) is bound by the ruling(s) given in this letter provided that: none of the issues discussed in the ruling(s) are currently under audit, objection, or appeal; no future changes to the ETA, regulations or the CRA’s interpretative policy affect its validity; and all relevant facts and transactions have been fully and accurately disclosed.
CONTACT
If you require clarification with respect to any of the issues discussed in this letter, please call me directly at 236-330-8100. Should you have additional questions on the interpretation and application of the GST/HST, please contact a GST/HST Rulings officer at 1-800-959-8287.
Yours truly,
Frankie Fenton
Industry Sector Specialist
Insurance and ITC Allocation Unit
Financial Institutions and Real Property Division
GST/HST Rulings Directorate
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