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: 202403
[Dear Client]
Subject: GST/HST RULING
Eligibility for employer to claim ITCs on amounts related to investment management services for pooled funds of an insurer
Thank you for your [correspondence] of [mm/dd/yyyy], regarding the application of Goods and Services Tax/Harmonized Sales Tax (GST/HST) to certain amounts in respect of investment management services.
All legislative references are to the Excise Tax Act (ETA) unless otherwise specified.
INTERPRETATIONS REQUESTED
You […][have asked] whether [...] (the Employer) is eligible to claim input tax credits (ITCs) in respect of amounts for investment management services related to certain pooled funds of an insurer. The plans are administered under insurance policies that [. . .] (the Insurer) issued to the Employer in respect of the plans. The amounts are shown on certain statements provided to the Employer as being deducted from unit values of the Insurer’s Pooled Funds that are allocated to certain employee pension plan accounts, and are described as pertaining to annual investment management fees (IMFs).
To that end, you have asked the following questions in relation to these amounts:
1. Do the supplies to which the above-described IMFs pertain constitute financial services as defined in subsection 123(1) of the ETA?
2. Subsection 131(1) deems a segregated fund of an insurer to be a trust for purposes of Part IX. Do the Pooled Funds in question qualify as segregated funds under the ETA?
3. Paragraph 131(1)(c) provides in part that where an amount is deducted from the fund and if the amount is in respect of a service the fund is considered to have acquired from the insurer, that supply of the service is deemed to be a taxable supply and the amount shall be deemed to be consideration for that supply. Does this paragraph apply to the IMFs […] ?
FACTS/BACKGROUND
Based on the information you provided, we understand the following:
1. […]
2. [...] the Employer is the sponsor and administrator of certain pension plans that it has established for its employees as well as employees of certain related entities.
3. The Employer, as administrator, has contracted with the Insurer for the Insurer to provide certain pension benefits out of the Insurer’s Funds (that the Insurer will invest and manage), and to provide policy-related administration in respect of two of the Employer’s pension plans, under which such benefits will accrue.
4. The terms of the relationship between the Employer and the Insurer in respect of the two pension plans are set out in two policies: […] (Policy 1) and […] (Policy 2) (together, the Policies). [...]
5. The Policies are […] insurance policies whereby the Employer agrees to pay certain premiums, and, in exchange, the Insurer agrees to pay the Employer sums of money […] upon the happening of certain events (as defined by the terms of the pension plan, but would typically be upon the retirement or death of a Member). Payment of premiums […] is discussed in [...] each Policy, which generally outlines the timing of remittances and how the premiums will be invested.
6. A Member is defined in each Policy to generally mean […][quote from Policies] and we understand this would generally include an employee of the Employer or its related entities.
7. As provided in […] each Policy, the Insurer agrees to invest the premiums received in accordance with instructions from the Employer. Various investment choices are set out in […] each Policy, including variable funds for which the value will fluctuate with the market, based on the market value of a specified group of assets ([…] “Pooled Funds”).
8. The Pooled Funds and any premiums allocated to the Pooled Funds under each Policy are kept separate from the Insurer’s general funds, as required by law. The value of amounts invested in Pooled Funds fluctuate with the market value of such Funds.
9. […] of the Policies provides that the Pooled Funds assets are subdivided into notional fund units that are attributable to specific policies. The value of each unit is also defined in […] the Policies.
10. The Insurer maintains a record for each Member (Member Account) of the total number of notional fund units allocated to that Member and total value of premiums received in respect of that Member.
11. […] of each Policy sets out that benefits are generally paid out under the terms of the pension plan and applicable legislation.
12. The calculation of pension benefits […] detailed in […] the Policies […], in part, generally provides that the Insurer will provide an annuity to the Member upon retirement. While the Policies are not explicit as to exactly how pension benefits are calculated, 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 Member as a pension benefit. Each Policy also indicates that it includes benefits that fluctuate with the market value of the assets of the underlying Funds.
13. Fees and charges that pertain to the Policies are […] set out in […] each Policy. Specifically, amounts in respect of annual investment management fees ( i.e., the IMFs) are deducted from the unit values of Pooled Funds, using varying rates […]. […][quote from policy].
14. All premiums paid to the Insurer become the property of the Insurer. […] [quote from policy]
15. The Insurer is federally regulated by the Office of the Superintendent of Financial Institutions and is licensed as a life insurer in the province of […].
16. The Insurer has not issued any invoices to the Employer or its Members for the IMFs, and there is no other agreement in place between the Employer and the Insurer covering investment management services. Certain […] statements provided to the Employer represent the IMF’s as being deducted from […][the unit value] of the Pooled Funds that are allocated to certain Member Accounts. The same statements also show GST/HST calculated on the IMFs and similarly deducted from unit values.
[…]
GST/HST appears to have been calculated in respect of the IMFs and also incorporated into the […][unit values] of Pooled Funds, as shown in the […] statements that the Insurer provided to the Employer. […].
INTERPRETATIONS GIVEN
Before addressing your specific questions, we would like to first explain our position in respect of the IMFs and whether the Employer can be viewed as a recipient of investment management services under the Policy. We will also briefly discuss the ownership of segregated funds that hold properties in respect of insurance policies.
As indicated in the facts described above, annual IMFs are deducted from the […] Value of a Pooled Fund to determine the […][net value]. These [unit values] also form part of the basis for determining a Member’s pension benefit entitlements (as tracked in the Member Accounts).
We do not have enough information to determine with certainty whether the IMFs are actually deducted from the Pooled Fund assets or merely form part of the formula used to determine the [unit values] of the Pooled Funds used for purposes of valuing the Member Accounts and members’ benefit entitlements. Regardless, based on the information provided, we do not consider the Employer to be the recipient of a supply of investment management services under either Policy.
The supply, recipient and consideration
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).
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 insurers reserves for which vary in amount depending on the value of a specified group of assets. It is clear that the Insurer meets the definition of an “insurer” for GST/HST purposes (also found in subsection 123(1)), and the Policies are policies of insurance.
The Policies provide for the payment of pension benefits to Members upon the occurrence of certain specified events (generally upon the eligible retirement or death of a Member). In our view, a payment of pension benefits by the Insurer under a Policy is a payment in full or partial satisfaction of a claim arising under an insurance policy. The value of the Member Accounts form part of the Insurer’s basis for computing the value of a particular pension benefit at any given point in time.
The premiums are consideration payable for the Insurer’s supplies of insurance to the Employer, and the Employer is liable to pay the premiums to the Insurer under the Policies. As you know, for GST/HST purposes the provision by an insurer of insurance under an insurance policy is a financial service, falling within paragraph (d) of the definition of “financial service” in subsection 123(1). As such, the Insurer is making supplies of financial services to the Employer under the Policies which are exempt under section 1 of Part VII of Schedule V and the premiums are not subject to GST/HST.
There is no indication within either Policy that the Insurer is supplying investment management services to the Employer, nor has the Insurer invoiced the Employer in respect of the IMFs. The IMFs are simply deducted from the […][unit values] of the Pooled Funds, and the Pooled Funds are owned by the Insurer. Therefore, in our view, there are two possible results:
- If the IMFs are deducted from the assets of particular Pooled Funds, then it is likely each Pooled Fund has paid the IMFs (the relationship between a segregated fund and insurer are explained in the next two sections under ‘Fund ownership’ and ‘Segregated funds’); or
- If the IMFs merely form part of the calculation of the [unit value] of Pooled Funds used for purposes of determining the value of a Member Account, then the IMFs are not consideration for any supply. In this case, the IMF amounts merely represent an element of the calculation for determining the Members’ pension benefit entitlements as agreed to by the Employer and the Insurer under each Policy.
In either event, in our view the Employer has not acquired investment management services under the Policies, nor paid GST/HST on the value of the consideration for such services.
Fund ownership
[…][The Policies] clearly stipulate that the Insurer owns the Pooled Funds, […]. […] the Employer merely holds insurance contracts (the Policies) as a policyholder with the Insurer. As noted in each Policy, any premiums paid to the Insurer become property of the Insurer, and as such the […][“pension plan funds”] are property of the Insurer. There is no evidence that the Employer owns or has any vested interest in any pension plan funds under either Policy simply by being the policyholder of those Policies.
.[…][Quote from submission.]
[…] there is nothing in either Policy to suggest that the IMFs were not deducted from the Pooled Funds. While it is possible that the IMF rates […] used to calculate the IMFs may be specific to each Policy, there is nothing that suggests these IMFs are “policyholder specific charges”. Rather, it appears the IMFs are nothing more than an element of the calculation used to determine the members’ pension benefit entitlements as agreed upon by the Employer and the Insurer under the Policy. The Member Accounts are only a mechanism used to record the premiums allocated to each Member and to calculate each Member’s pension benefit entitlement.
Segregated funds
In our view, the above discussion resolves the issue of whether the Employer is entitled to ITCs in respect of the GST/HST computed on the IMFs. Whether or not the Pooled Funds constitute segregated funds to which section 131 applies will not bear relevance to the Employer’s ITC entitlement. However, we do wish to provide some general comments on the pension plans and section 131 in light of your specific questions.
We note that neither pension plan constitutes a “pension entity” for GST/HST purposes, since they are administered under insurance policies. Neither a trust, nor a corporation, has been formed to be governed by, or for the administration of, either plan.
Subsection 131(1) provides that a segregated fund of an insurer is deemed to be a trust that is a separate person from the insurer that does not deal at arm's length with the insurer. Further, subparagraph 131(1)(c)(i) generally provides that where an amount is deducted from the segregated fund, and that amount is in respect of a supply of property or a service that the fund is considered to have acquired from the insurer, that supply is deemed to be a taxable supply and the amount deducted is deemed to be consideration for that supply. Subparagraph 131(1)(c)(ii) generally provides that if the amount deducted from the fund is not in respect of property or a service considered to have been acquired from the insurer or another person, the insurer is deemed to have made, and the fund to have received, a taxable supply and the amount deducted is deemed to be consideration for that supply. Certain exceptions apply to paragraph 131(1)(c).
As such, in many cases, where an amount is deducted from a segregated fund, the amount will be deemed to be consideration paid by the segregated fund to the insurer for a taxable supply made to it by the insurer.
A beneficiary’s benefit entitlement under a segregated fund insurance policy will typically fluctuate with the market value of the assets in the related segregated fund. Where this is the case, it appears there could be some degree of correlation between the value of a segregated fund and the value of any notional fund units attributed to a specific beneficiary of the related segregated fund insurance policy. For example, there could be a correlation between the value of the Pooled Funds assets and the [unit value] of the notional fund units that have been allocated to the Member Account.
Where an insurer deducts an amount from a segregated fund and has made a taxable supply to the fund, the insurer is also required under section 165 to calculate and remit GST/HST in respect of the consideration payable for that supply (i.e., the amount deducted from the fund). The GST/HST in respect of the deduction may possibly also be deducted from the fund assets. When this happens, it is possible that the deduction and associated GST/HST may also be reflected in the value of the notional fund units and by extension, in the beneficiary’s benefit entitlement (as tracked in a Member Account).
However, this should not be construed as an invoicing of tax by the insurer to the policyholder.
Where an insurer deducts an amount from a segregated fund and has made a taxable supply to the fund pursuant to paragraph 131(1)(c), the segregated fund is the recipient of that supply. Since the segregated fund is deemed to be a separate person from the Insurer, it has paid (and was required to pay) the consideration, for GST/HST purposes.
[…]. If you have further questions or require clarification on the above information, please contact me at 236-330-8100.
Sincerely,
Frankie Fenton
Acting Industry Sector Specialist
Insurance and ITC Allocation Unit
Place de Ville, Tower A, 5th floor
320 Queen Street
Ottawa AB K1A 0L5
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