11849-1(LFR)
XXXXX September 22, 1995
Dear XXXXX
This is in reply to XXXXX letter of May 4, 1994 to XXXXX of this Directorate in which he requested our views on the application of GST to administrative services supplied by the XXXXX to the XXXXX in its capacity as Trustee XXXXX (Trust Fund) x
On April 7, 1994, XXXXX wrote to the XXXXX Tax Services Office seeking clarification regarding the status of supplies made to the Trust Fund by the XXXXX In his letter, XXXXX questions whether XXXXX is exempt from paying GST on XXXXX supply of administrative services to the Trust Fund since the services are purchased from a trust that is funded by the Government of XXXXX and the province is exempt from paying GST.
Based upon the information submitted by your office, and that obtained directly from XXXXX and XXXXX we provide the following opinion. Please note that prior to issuing a GST ruling to XXXXX your office will need to obtain from XXXXX and XXXXX their authorization to do so since the transactions questioned by XXXXX involve these parties. XXXXX of XXXXX is aware that the Department will be approaching XXXXX and XXXXX in this regard.
Statement of Facts
1. XXXXX is listed on Schedule A to the Reciprocal Taxation Agreement between Canada and XXXXX and is relieved of paying GST on taxable purchases where the GST would be payable by XXXXX
2. The XXXXX operated under XXXXX and was part of the provincial government entity of XXXXX Pursuant to new subsection 132(1) of XXXXX , assented to June 24, 1992, XXXXX was discontinued. New subsection 132(3) of the XXXXX states that "All obligations and liabilities of the commission are deemed to be the obligations and liabilities of Her Majesty in right of the province."
3. XXXXX is a non-profit organization. It is a separate entity from that of the province of XXXXX and is registered for purposes of GST XXXXX
4. XXXXX a financial institution, is registered for GST XXXXX formerly called XXXXX administers the XXXXX (Plan), which became effective October 1, 1988. It adjudicates and reassesses claims, provides rehabilitation where applicable and pays claims under the Plan.
TRUST AGREEMENT
5. Under a Trust Agreement executed June 20, 1994 and effective October 1, 1988, XXXXX agrees "to act as Trustee, to receive, hold and disburse funds of the Long Term Disability Plan in accordance with the terms thereof and provisions of this Declaration of Trust." XXXXX also "declares that it has constituted a Trust Fund in connection with the organization and administration of the Long Term Disability Plan x and declares that it shall hold such Trust Fund as Trustee ..."
6. Article 2.01 of the Trust Agreement states that XXXXX "shall hold the Trust Fund in trust for the benefit of Covered employees for the purpose of providing Disability Benefits under the Plan to Covered Employees in accordance with the terms and provisions hereof and of the Plan Text."
7. Article 4.01 of the Trust Agreement states that XXXXX as Trustee of the Trust Fund, "shall have ... the following powers and authority in the administration of the property of the Trust Fund ... (h) to execute and deliver agreements, assignments, bills of sale, contracts, deeds, notes, powers of attorney, receipts and any and all other instruments in writing necessary or appropriate in the opinion of the Trustee for the settlement or administration of the Trust Fund ... (j) to employ and compensate agents, accountants, solicitors, brokers and other assistance and advisers deemed by it to be helpful, for the proper settlement or administration of the Trust Fund ..."
8. Article 5.01 states that XXXXX "shall be responsible for all aspects of the operation and administration of the Plan, and ... shall ... (c) determine the insurance company or companies from which insurance will be purchased as provided in Paragraph 5.04."
9. Article 5.04 (referred to as Paragraph 5.04 above) of the Trust Agreement states that "The Trustee shall purchase from an insurance company or companies licensed to carry on business in the Province of XXXXX (the "Plan Insurer") with the funds received by it as Employer Contributions and Employee Contributions a policy or policies of insurance whereunder the Plan Insurer shall undertake to pay all Disability Benefits due under the Plan except Uninsured Benefits."
10. Article 6.01 of the Trust Agreement states that "The Trustee shall be entitled to be reimbursed for the full amount of all costs and expenses which it incurs in the operation of the Plan, including but not limited to ... (c) the cost of purchasing insurance from the Plan Insurer; (d) investment counsel, placement or other similar fees incurred in the administration and investment of the Trust Fund; (e) all office and administrative costs, including reasonable provision for overhead, incurred by the Trustee in fulfilling its obligations hereunder ..."
11. In accordance with the Trust Agreement, a Trust Fund was established by XXXXX for purposes of the Plan to receive contributions and pay benefits made under the Plan. The Trust Fund is a person for GST purposes. It is not registered for GST.
PLAN
12. Article 11.1 of the Plan states that "A Covered Employee shall ... contribute to the Plan ... at the rate of 1% of Monthly Earnings". Article 11.2 of the Plan states that "A Participating Facility shall contribute to the Plan such amounts as are from time to time required by the Trustee." A "Participating Facility" is defined in the Plan as "a member of the Organization who has applied to participate in the Plan and who has, or has had, one or more Covered Employees."
13. Article 11.4 of the Plan states that the "Trustee may enter an agreement with the Province of XXXXX to have some or all of the Disability Benefit provided by the Province through the Commission. In that event, the cost of that part of the Disability Benefit provided under such an agreement together with the associated expenses shall be paid to the Trust Fund by the Commission. The Trust Fund shall pay that part of the Disability Benefit provided under such an agreement directly to the Covered Employee or indirectly by paying the appropriate amount to the Insurer or Claims Administrator who would then pay it to the Covered Employee." "Commission" is defined in the Plan as the XXXXX
14. Article 12.3 of the Plan states that the "Trust Fund shall be chargeable with any expenses in respect of the Plan reasonably and properly incurred by the Trustee in the administration of the Plan."
DRAFT AGREEMENT
15. A draft agreement between XXXXX as Trustee of the Trust Fund, and XXXXX was prepared for purposes of formalizing procedures in respect to the implementation of the Plan. This draft agreement is referred to as XXXXX XXXXX (Agreement).
16. Under article 2.01 of the Agreement, XXXXX agrees to provide funds to the Trustee to pay a portion of the amount of all Disability Benefits payable under the Plan and to pay a portion of all Plan Operating Costs incurred by the Trustee in the operation of the Plan. This article of the Agreement states that XXXXX shall be required to pay one-half of the amount of the Disability Benefits payable under the Plan, and an amount in respect of Plan Operating Costs calculated as follows:
(a) the full amount payable by the Trustee to the Plan Insurer for administrative services rendered by the Plan Insurer which are reasonably attributable to any portion of the Disability Benefits payable under the Plan which are to be funded by XXXXX under the terms of this Agreement; and
(b) one-half of all remaining Plan Operating Costs."
"Plan Insurer" is defined under article 1.03(h) of the Agreement as "the Insurance Company or Insurance Companies from whom the Trustee purchases a long term disability insurance policy to pay the portion of the Disability Benefits payable under the Plan which are not funded by XXXXX pursuant to their Agreement."
Although this Agreement was not signed, XXXXX has indicated that XXXXX and XXXXX continue to comply with its terms and conditions.
XXXXX LETTER
17. A letter dated May 10, 1988 to XXXXX from XXXXX outlines the terms that were accepted by XXXXX regarding the implementation of the Plan, including funding procedures. Among the procedures identified is the requirement that XXXXX "be invoiced monthly by the Trust Fund or the carrier ... for 50% of the claims actually paid plus 50% of the administrative costs."
CONTRACT/POLICY
18. A contract (Policy) between XXXXX (now XXXXX and XXXXX as Trustee of the Trust Fund, for Group Disability Income Replacement Policy No. XXXXX was signed by XXXXX on November 27, 1990 and by XXXXX on December 20, 1991 for this purpose. According to the Policy, the effective date of the policy is October 1, 1988.
19. "Policyholder" is defined in the Policy as meaning "the Trustee of XXXXX
20. The preamble to the Policy states that "This Policy is issued in consideration of the Policyholder's application and the payment of premium due." Article 7.1 of the Policy states that "the Policyholder shall pay to the Company, a premium which shall be calculated from the Plan Effective Date on the basis of the rates then in effect." The "Company" is XXXXX
ADMINISTRATIVE SERVICES
21. Based upon information provided to us by XXXXX it is our understanding that agreements for the provision of administrative services carried out in respect of the Plan by XXXXX are between XXXXX and XXXXX Transactions
22. In accordance with the information contained in a letter dated April 7, 1994 from XXXXX of XXXXX to the Department, XXXXX (previously XXXXX notifies XXXXX on a quarterly basis of the monthly deposits required for a three-month period for purposes of covering its administrative services and projected claims payable under the Plan. XXXXX then notifies XXXXX of the amount required for deposit (i.e. 50% of XXXXX and XXXXX administrative costs and 50% of the amount of projected claim expenses, as confirmed by XXXXX on May 30, 1995). Upon receipt of this notification, XXXXX deposits the amount required into the Trust Fund. As Trustee of the Trust Fund, XXXXX draws funds from the Trust Fund to cover its costs in administering the Plan and makes payment to XXXXX using the funds contributed to the Trust Fund by XXXXX to cover XXXXX administrative costs and projected claim expenses.
23. In his January 18, 1995 letter to the Department, XXXXX indicated that XXXXX in its capacity as Trustee of the Trust Fund, had been charging XXXXX GST on the administrative services it carries out in respect of the Plan but has since reimbursed XXXXX GST charges since XXXXX is part of the provincial government of XXXXX
24. XXXXX continues to charge GST to XXXXX as Trustee of the Trust Fund, for its supply of administrative services to the Trust Fund.
OPINION REQUESTED
1. Is XXXXX required to pay GST on amounts it deposits into the Trust Fund to cover administrative costs of the Plan when notified by XXXXX of this requirement?
2. Is XXXXX supply of administrative services to the Trust Fund subject to GST where XXXXX in its capacity as Trustee of the Trust Fund, pays XXXXX for the supply of administrative services using funds drawn from the Trust Fund that are deposited by XXXXX
OPINION GIVEN
1. It is our opinion that XXXXX is not required to pay GST on amounts it deposits into the Trust Fund to cover administrative costs of the Plan when notified by XXXXX of this requirement since XXXXX is liable to pay XXXXX as Trustee of the Trust Fund, for these costs and XXXXX is within the government entity of XXXXX
2. It is our opinion that the supply of XXXXX administrative services to the Trust Fund is subject to GST where XXXXX in its capacity as Trustee of the Trust Fund, pays XXXXX for the supply of administrative services using funds drawn from the Trust Fund.
Although XXXXX does deposit funds into the Trust Fund, payments out of the Trust Fund are not Crown funds. The Trust Fund, which is liable to pay for these services, is a separate person for GST purposes and is not a part of or an agent of the provincial Crown. Further, as the amounts in the Trust Fund are comprised of amounts contributed by employees covered under the Plan as well as XXXXX payments drawn from the Trust Fund are a combination of both and could no longer be characterized as "Crown funds".
Analysis
Background
As a result of collective bargaining negotiations with the XXXXX The Long Term Disability Plan (Plan) was established on October 1, 1988 by the government of XXXXX During the process of collective bargaining, the XXXXX agreed to fund the employer's (i.e. health care facilities) cost of the Plan. At that time, XXXXX operated within the government entity of XXXXX Rather than administer the Plan itself, the government of XXXXX sought the services of the XXXXX , a non-profit organization. In the past, the government of XXXXX had used the services of XXXXX in negotiating collective bargaining agreements and in entering into Memorandums of Settlement, on its behalf, with unions representing employees of participating locals.
By means of a Trust Agreement, a Trust Fund was established in connection with the organization and administration of the Plan. Under this Trust Agreement, XXXXX agreed to act as the Trustee of the funds contributed to the Trust Fund in respect of the Plan. The effective date of this Trust Agreement is October 1, 1988.
A contract (Policy), effective October 1, 1988, was entered into between XXXXX and the XXXXX , now known as the XXXXX As a result of this Policy, XXXXX administers the Plan, through the payments of claims, etc. XXXXX charges the Trust Fund a fee for the administrative services it carries out in respect of the Plan.
XXXXX and XXXXX It is our opinion that XXXXX is the recipient of administrative services carried out in respect of the Plan and therefore not required to pay GST on this supply since XXXXX is within the government entity of XXXXX Status as a Provincial Entity
In June 1992, XXXXX was discontinued by means of an amendment to the Health Services Insurance Act (Act). Amendments to the Act were affected by the Health Services Insurance Amendment And Consequential Amendment Act (Amendment). Prior to its discontinuance, XXXXX was part of the provincial entity of XXXXX (Source: May 21, 1993 listing of "Government Entities that Comprise the XXXXX Government For Purposes of GST.)
As a result of amendments made to the Act, all obligations and liabilities of the XXXXX were passed to the province of XXXXX Specifically, a new subsection 132(3) of the Act was added to state that "All obligations and liabilities of the commission are deemed to be obligations and liabilities of Her Majesty in right of the province." New subsection 132(1) of the Act makes reference to the XXXXX as the "commission".
Since the obligations and liabilities of the XXXXX were passed to XXXXX as a result of the Amendment, any amounts that would be payable by XXXXX would become payable by XXXXX Because section 125 of the Constitution Act, 1867 provides provincial immunity from taxation, provinces are relieved of GST on otherwise taxable purchases.
The Fiscal Arrangements Act gives Canada the authority to enter into agreements with the provinces respecting mutual taxation. As a result, a Federal-Provincial Reciprocal Taxation Agreement (RTA) has been made with most of the provinces, including XXXXX RTAs set out the circumstances under which provincial purchases will be relieved of GST. The intent of RTAs is that only purchases paid for directly with Crown funds are relieved of tax.
Article 4.(2) of the RTA between Canada and XXXXX states that " The Province covenants that, where, in respect of any transaction, matter or thing, the Goods and Services Tax is imposed or levied and would be payable by a corporation or agency of the Province, if the Goods and Services Tax were applicable to such corporation or agency, the corporation or agency, except for those corporations or agencies listed in Schedule A, shall pay the Goods and Services Tax ..." XXXXX is listed in Schedule A to the RTA and is therefore not required to pay GST. The issue at hand is whether XXXXX is liable to pay the Trust Fund, through XXXXX in its capacity as Trustee of the Trust Fund, for all or some of the administrative costs related to the Plan. If XXXXX is found liable, XXXXX as recipient of the supply, would be relieved from paying GST on this otherwise taxable purchase.
XXXXX as Recipient
Section 165 of the Excise Tax Act (ETA) provides that every recipient of a taxable supply, other than a zero-rated supply, is required to pay tax equal to 7% of the value of the consideration for the supply.
It is our view that XXXXX is the recipient of the supply of administrative services to the Trust Fund.
"Recipient" as defined in subsection 123(1) of the ETA means
"(a) where consideration for the supply is payable under an agreement for the supply, the person who is liable under the agreement to pay that consideration,
(b) where paragraph (a) does not apply and consideration is payable for the supply, the person who is liable to pay that consideration ..."
When the Financial Institutions and Corporate Reorganizations Division (FI) first consulted the Governmental and Federal/Provincial Relations Sector in early December 1994, we advised FI that GST would not be applicable if the supply of administrative services were paid for with Crown funds. This view was based upon the facts presented at that time. It should be noted that prior to its amendment in 1993 (which applies as of January 1, 1991) the definition of "recipient", as found in subsection 123(1) of the ETA read as "the person who pays or agrees to pay consideration for the supply ..." As a result, where Crown funds were used to pay for a taxable purchase, the province would be viewed as recipient for GST purposes and therefore not required to pay tax for the supply. Even if the province did not actually receive the taxable supply of property or service, it was still relieved of paying GST on the purchase as long as the payment made in respect of the supply was made with Crown funds.
Under the current definition of "recipient", as cited above, the person who is liable to pay the consideration for the supply is the recipient of that supply. In order to determine whether XXXXX is liable to pay GST on amounts deposited into the Trust Fund we looked to the terms and conditions under which XXXXX (i.e. XXXXX agreed to contribute funding for the operation of the Plan.
The terms and conditions agreed upon by XXXXX regarding its payment of a portion of Disability Benefits and related administrative expenses can be found in two documents. That is, they can be found under the unsigned Disability Plan Funding Agreement entered into between XXXXX and XXXXX and a letter of May 10, 1988 from XXXXX to XXXXX In accordance with the unsigned Agreement, XXXXX agrees to pay XXXXX in its capacity as Trustee of the Trust Fund, 50% of the administrative costs of the Plan. However, the procedures outlined in the May 10, 1988 letter to XXXXX from XXXXX indicates that XXXXX will pay for these costs either to XXXXX or the carrier (i.e. XXXXX depending upon what is decided.
Currently XXXXX in accordance with the draft Agreement, pays amounts of money into the Trust Fund. Consequently, it is our view that XXXXX is liable to pay the Trust Fund 50% of the Plan's administrative costs and is therefore the recipient of this supply provided by XXXXX Since XXXXX is within the entity of XXXXX , as Trustee of the Trust Fund, is not required to charge GST in respect of these costs when it notifies XXXXX of the 0need to deposit money into the Trust Fund for this purpose.
XXXXX and XXXXX It is our opinion that XXXXX as Trustee of the Trust Fund, is the recipient of the administrative services supplied by XXXXX in respect of the Plan.
XXXXX Status
In accordance with the Trust Agreement, XXXXX as Trustee of the Trust Fund, exercises independent powers and responsibilities in that it administers and manages funding contributed to the Trust Fund. Because of this, it is our opinion that the Trust Fund is not a bare trust. It is a separate person for GST purposes.
This view is based upon Policy Number P-015, Treatment of Bare Trusts Under the Excise Tax Act which states that "if independent powers and responsibilities in relation to the management of the property are given to the trustee of the trust instrument, the trustee will be considered to be carrying on a commercial activity in respect of the supplies related to the property ... In this case, a supply made by the trustee, as trustee, in respect of the trust property, will be an activity of the trust and the accounting for GST would be done by the trustee for the trust. Decision-making, administrative and managerial duties in relation to the property could include the authority to contract by way of lease, sale, acquisition, investment, etc. The trust would be required to register under the Act, unless it met one of the exceptions in section 240 ..."
From the information submitted, it is our understanding that XXXXX is registered for GST purposes, while the Trust Fund is not. As the activities carried out by XXXXX in its capacity as Trustee are viewed as those of the Trust Fund, it is the Trust Fund and not XXXXX which would be considered to be supplying the administrative services to XXXXX Therefore, it is the Trust Fund and not XXXXX which would be required to register for GST, unless XXXXX in its own right is engaged in commercial activities outside of those carried on in respect of the Trust Fund.
XXXXX as Recipient
It is our view that XXXXX as Trustee of the Trust Fund, is the recipient of XXXXX supply of administrative services in respect of the Plan since the Trust Fund is a "person" for GST purposes and is the recipient of the supply of XXXXX services. The funding drawn from the Trust Fund and used by XXXXX in its capacity as Trustee of the Trust Fund, to pay XXXXX for its supply of administrative services to the Trust Fund are no longer Crown funds.
In his April 7, 1994 letter to the Department, XXXXX questions whether the administrative services supplied by XXXXX to the Trust Fund are exempt since the trust is funded by the government of XXXXX Neither the XXXXX nor the Trust Fund are part of the provincial entity and are not entitled to relief on taxable purchases.
In order to establish whether XXXXX is liable to pay XXXXX for services it renders in respect of the Plan and is therefore the recipient of that supply, we reviewed the Trust Agreement executed by XXXXX on June 20, 1994 and effective October 1, 1988 to ascertain whether XXXXX in its capacity as Trustee of the Trust Fund, has the authority to enter into agreements for purposes acquiring administrative services for the Plan.
The Trust Agreement provides XXXXX with a wide range of authority with respect to the operation of the Trust Fund. Article 4.01 of the Trust Agreement gives XXXXX the power to enter into agreements with persons for purposes of administering the property of the Trust Fund.
Under article 5.01 of the Trust Agreement, XXXXX is also given the responsibility to select who will be the provider of insurance for purposes of the Plan, while under article 5.04 of the Trust Agreement, XXXXX is required to purchase insurance for purposes of the Plan.
It is clear from the Trust Agreement, that XXXXX is given the power and authority to enter into agreements for purposes of the Plan, including those in respect of its administration.
Having established that XXXXX is authorized to enter into agreements necessary for the operation of the Plan, we reviewed the Policy signed by XXXXX (now XXXXX on November 27, 1990 and by XXXXX (as Trustee of the Trust Fund) on December 20, 1991 in order to determine whether XXXXX is liable. As a result of this Policy, XXXXX administers the Plan, through adjudication, reassessment and payment of claims and rehabilitation, where applicable. The first year of this contract commenced October 1, 1988.
Under the Policy, XXXXX as the Policy holder, agrees to pay XXXXX a premium, calculated from the Plan Effective Date on the basis of the rates then in effect. The Policy does not make reference to XXXXX supply of administrative services.
Although no written agreements evidencing XXXXX liability to pay XXXXX for its supply of administrative services were provided for our review, we were advised by XXXXX of XXXXX that XXXXX insurance contracts and administrative services agreements under the Plan are between XXXXX and XXXXX as Trustee of the Trust Fund. A letter dated June 7, 1995 to this effect was provided by XXXXX to the Department.
Therefore, even though XXXXX did agree to contribute funding to the administration of the Plan and did agree to pay either the Trust Fund or the carrier, the agreements for XXXXX supply of administrative services are between XXXXX and XXXXX as Trustee of the Trust Fund. They are not between XXXXX and XXXXX There is no evidence in the information provided that it is XXXXX who is liable to pay XXXXX for its supply of administrative services. As such, it is XXXXX as Trustee of the Trust Fund, who is liable to pay XXXXX for services rendered and is the recipient of these services, not XXXXX As the amounts are payable to XXXXX by XXXXX as Trustee of the Trust Fund, the Trust Fund is the recipient of the supply of administrative services provided by XXXXX not XXXXX Since the Trust Fund is the recipient of XXXXX supply of administrative services and is liable to pay for these services, the payments made by XXXXX as Trustee of the Trust Fund, to XXXXX in respect of this supply are subject to GST.
Contributions to the Trust Fund are made by both XXXXX and employees covered under the Plan. These contributions are pooled together to form the Trust Fund and are used to purchase the administrative services of XXXXX The fact that the payments are made by XXXXX to XXXXX using funds deposited by XXXXX into the Trust Fund, does not in itself provide relief on purchases made by the Trust Fund. The funds drawn from the Trust Fund no longer constitute Crown funds. The funds taken out of the Trust Fund and used for payment to XXXXX are comprised of contributions made by both XXXXX and employees covered under the Plan. We were advised by XXXXX of XXXXX that cheques to XXXXX are not issued by XXXXX in the name of XXXXX nor are they issued by XXXXX as agent of XXXXX Cheques are issued to XXXXX in the name of XXXXX as Trustee of the Trust Fund.
With respect to XXXXX entitlement to recover GST on its acquisition of XXXXX administrative services, we again refer to the Department's policy regarding the treatment of bare trusts. Pursuant to section 169 of the ETA, a registrant will be entitled to claim ITCs for tax paid or payable on inputs to be consumed, used or supplied in the course of commercial activities. The policy states that "In a trust situation, the person whose commercial activities the inputs relate to will be entitled to claim ITCs ... The trustee of a trust would be the one to claim ITCs for the trust where tax has been paid by the trustee in respect of commercial activities of the trust." Hence, XXXXX in its capacity as Trustee of the Trust Fund, would be entitled to claim input tax credits for the Trust Fund on the taxable acquisition of administrative services from XXXXX to the extent that tax paid by XXXXX is in respect of commercial activities of the Trust Fund.
We hope these comments are of assistance to you. Should you wish to discuss this further, please call me at (613) 954-3551 or Lynn Renner, Policy Officer at (613) 952-9262.
Yours truly,
Marilyn Viger
Manager
Governmental Sector and Federal/Provincial Relations
GST Rulings and Interpretations
c.c.: J.A. Venne
R. Osudar
P. Tang
R. Wong
L.F. Renner (Doc. 1498)
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