Selected Listed Financial Institutions Attribution Method (GST/HST) Regualtions

Section 3

Paragraph 3(c)new item

Articles

Allan Gelkopf, Zvi Halpern-Shavim, "Five Arbitrary Differences between Corporations and Partnerships for GST/HST Purposes", Sales and Use Tax, Federated Press, Volume XIII, No. 2, 2015, p. 674.

No SLFI permanent establishment for partnerships (p. 676)

. . . [F]or some reason, only loan corporations are deemed to have permanent establishments under paragraph 3(c) of the SLFI Regulations. A loan partnership, while still a listed financial institution, would only have permanent establishments in provinces where it has a physical presence. This means that a corporation might be a SLFI, whereas a partnership with the same operations would not be a SLFI.

Section 5

Administrative Policy

21 September 2011 Interpretation Case No. 125434

As part of a response to an inquiry as to the application of HST to services made by the manager (MangeCo) of an exchange-traded mutual fund trust (TrustCo), CRA stated:

The additional information requirements referred to in section 55 of the draft SLFI Regulations do not apply to an exchange-traded fund. Therefore, an exchange-traded fund calculates its provincial attribution percentage for a participating province based on the province of residency of its unitholders determined in accordance with section 6 of the draft SLFI Regulations (e.g., an individual is resident in the province in which the individual's principal mailing address in Canada is located). An exchange-traded fund is not required to obtain additional information based on the type of unitholder.

Draft section 11

Administrative Policy

19 October 2011 Interpretation Case No. 133414

General discussion of the circumstances in which a pension plan will be subject to the SLFI rules.

Subsection 26(1)

See Also

Farm Credit Canada v. The Queen, 2017 TCC 29

“loan corporation” is broader than its provincial regulatory meaning

The appellant was a federal Crown corporation which lent money under the supervision of the federal Minister of Agricultures and for the Canadian Wheat Board to farmers across Canada and businesses serving them. It was not registered or licensed to carry on business as a loan corporation under the relevant provincial trust and loan corporation legislation. It clearly was a selected listed financial institution (“SLFI”) given, inter alia, that its principal business was acknowledged to be lending money. However, for its reporting period in question, the Selected Listed Financial Institution Attribution Method (GST/HST) Regulations would have produced a more favourable result if it were considered to not be a “loan corporation.”

In finding that the appellant was a “loan corporation,” D'Arcy J stated (at paras. 117, 120-1, 135):

The Appellant places significant weight on the fact that the provincial legislation that regulates trust and loan corporations defines a “loan corporation” as being a corporation that is incorporated for the purpose of borrowing money from the public and then lending or investing such money.

A literal interpretation of the words loan corporation is that they mean a corporation that makes loans. …

[A] contextual and purposive analysis…leads to the conclusion that the words “loan corporation” as used in the Attribution Regulations…mean a corporation whose principal business is the making of loans….

There are no provisions in the GST Act that state that a listed financial institution whose principal business is the lending of money is only a “loan corporation” for the purposes of the Attribution Regulations if it accepts deposits from the public. In my view, if Parliament had intended such a result it would have added that specific condition to the legislation. …

Words and Phrases
loan corporation

Administrative Policy

CBAO National Commodity Tax, Customs and Trade Section – 2014 GST/HST Questions for Revenue Canada, Q. 19

purchasing debt securities not lending/meaning of trust or loan corporation
available with membership password at http://www.cba.org/CBA/sections_NSCTS/main/GST_HST.aspx

Would a person whose sole business activity is to purchase conditional sales contracts or mortgages be considered to be a trust and loan corporation? CRA responded:

A corporation would be considered to be a trust and loan corporation or a loan corporation for GST/HST purposes if it is considered as such a corporation under the federal Trust and Loan Companies Act or an equivalent provincial statute…[and] also [may] be [so] considered… if it is treated as such under other federal statutes.

…In addition…a corporation whose principal business is the lending of money or the making of loans is a loan corporation.

… Where a third party purchases or receives an assignment of a conditional sales contract, the third party would generally not be considered to be lending money or making a loan to the assignor of the conditional sales contract.

In addition, where a person that is a mortgagee assigns a loan to a third party that the mortgagee has made to a mortgagor, the third party would not be considered to be making a loan to the mortgagor.

Section 32

Subsection 32(1)

Commentary

Example:

An MFT (which was not registered for HST or QST purposes) had approximately $100M in assets and a single class of outstanding units. Its units (which were registered in the name of their owners) were held as follows on September 30, 2015 (the “attribution point” for determining its provincial attribution percentages for 2016 – see SLFI Regs. 48(3) and 16(1) – attribution point – (b)(i)):

  • individuals who are resident in Ontario on the basis of their recorded addresses (see SLFI Reg. 5(a)) – 60%;
  • various Canadian-controlled private corporations, each holding units with a value under $10M, whose principal place of business as recorded in the MFT’s records is in Ontario (see SLFI Reg. 5(b))- 20%;
  • another CCPC (related to the MFT manager), which is not a listed financial institution (e.g., it was not a trader or dealer in securities and its principal business is not money lending) and was known to have, as its only permanent establishment for purposes of Part IV of the Income Tax Regulations, an office in Ontario, holding units with a value over $10M – 15% (see SLFI Reg. 28(e)); and
  • individuals who were resident in Quebec on the basis of their recorded addresses– 5%.

The only expenses of the MFT for 2016 were management fees of $1.9M and professional fees of $0.1M. It paid HST of 13% on these fees and was not entitled to any input tax credit (or input tax refund in Quebec).

The MFT’s provincial attribution percentages were: 95% - Ontario; and 5% - Quebec. Accordingly, one would expect the MFT to be subject to a blended rate of tax of 13.09875% (=13%*0.95 + 14.975%*0.05). Accordingly, the general effect of the federal and Quebec SAM formulas is that the MFT would have a net payment obligation under the SLFI rules of 0.09875% of $2M, or $1,975.

In fact, the annual RC7294 return would first compute (consistently with SLFI Reg. 32(1) – B) a negative amount on the federal portion of the return of $8,000, calculated as the difference between the actual Ontario HST paid of $160,000 (8%/5%*$100,000) and the federal SAM amount of $152,000 (95% of $160,000), and then compute a positive $9,975 QST amount on the Quebec portion of the return, calculated as 9.975%/5% of the federal GST of $100,000 multiplied by the Quebec provincial attribution percentage of 5%.

On the above simple facts, no additional tax would be payable with the annual (RC7294) return given that the same amounts would already have been required (under ETA s. 238(2.1) and SLFI Reg. 48(10)) to be computed and remitted on a monthly basis (again using the same provincial attribution percentages as at September 30 of the preceding year), and reported (in an abbreviated manner) on the monthly RC7262 returns.

Section 34

Subsection 34(1)

Commentary

Set out below is an extended example illustrating the application of s. 34 of the Selected Listed Financial Institutions Attribution Method (GST/HST) Regulations the "SLFI Regs") to an exchange-traded mutual fund trust with only one class of units ("MFT").

MFT will be a selected listed financial institution ("SLFI") by virtue of being a mutual fund trust with units held by residents both of HST provinces ("participating provinces") and of non-HST ("non-participating provinces"): ETA s. 225.5(1) and ss. 9(a), 3(e), 1(10 – "distributed investment plan," and 4 of the "SLFI Regs. Corporations, partnerships, or trusts carrying on a business, which are resident in Canada are deemed (by s. 5 of the SLFI Regs) to be resident where their principal business in Canada is located, and most other Canadian residents including individuals and RRSP are deemed to be resident where their principal mailing address in Canada (or that of their annuitant) is located.

By virtue of having only a single class of units which is publicly listed, MFT will be subject to the SLFI rules applicable to exchange-traded "non-stratified investment plans" which are "exchange-traded funds."

Under these rules, MFT will use the specified attribution method ("SAM") formula (set out in ETA s. 225.2(2)) to calculate its liability for provincial HST for each participating province, and will be entitled to a refund (or reduction in its remittance obligations), to the extent that these SAM amounts are less than the provincial HST that was charged to it by its suppliers (generally at a rate of 8% given its Ontario main office) – and conversely if they are higher.

Ignoring various adjustments of a more technical nature, the SAM formula (in ETA s. 225.2(2) and s. 48 of the SLFI Regs) for computing the adjustment to provincial HST for each participating province is

(A-B) * C * (D/E) - F

where

A is the (federal) GST payable by MFT in the reporting period (assumed to be a year),

B is its ITCs for the year,

C is the provincial attribution percentage for that province (and assuming that MFT made a reconciliation election on RC4609 "Election or Revocation of Election To Use the Real-Time Calculation Method or the Reconciliation Method" it would use the provincial attribution percentages for its current taxation year),

D is the provincial HST rate for that province,

E is the GST rate of 5%, and

F is the provincial part of the HST that is payable for that year by MFT,

so that a negative amount under this formula would represent a refund entitlement.

Accordingly, the principal driver for the SAM formula is the provincial attribution percentage (determined in the case of a non-stratified exchange-traded fund under s. 34 of the SLFI Regs) for each participating province:

To the extent that MFT "knows" that it has unitholders resident in non-participating provinces, its computed liability will be lowered based on the relative value of the units held by those unitholders. The relative value of units is measured at different "attribution points" in the year, i.e., in the case of an exchange-traded fund, September 30 and one or more (as determined by the fund) of March 31, June 30 and December 31, with the relative share values on each attribution point then being given equal weight.

Unless it elects otherwise (under ETA s. 225.4(7)), it can treat the unitholders whom it knows to be non-resident as if they were resident in a non-participating province, thereby further lowering the effective rate. To the extent that MFT incurs expenses outside Canada (as determined in accordance with detailed rules in ETA s. 217) "in respect of" the units of the non-residents then (by virtue of a deeming rule in ETA s. 225.4(c)), it could be required under s. 218.01 to self-assess GST of 5% on the amount of such expenses. Such GST would be included in "A" of the SAM formula.

However, to the extent that the residence status of its unitholders is not known, a substantial portion of them effectively are deemed to be resident in the participating province with the highest provincial HST rate (i.e., Nova Scotia with a rate of 10%) – or if the number of "known" unitholders is below 50%, all of the "unknown" unitholders effectively are deemed to be resident in Nova Scotia.

The provisions of s. 52 of the SLFI Regs requiring most unitholders who are "investment plans" (such a s mutual fund trusts, mutual fund corporations mortgage investment corporations and pooled fund trusts) to provide their investors percentages by participating province to the SLFI in which they are invested do not apply where that SLFI is an exchange-traded fund. Conversely, it appears that there is nothing requiring that MFT "look through" SLFIs which hold its units, so that if such a SLFI is resident in a particular province under the rules in s. 5 of the SLFI Regs, that residence will govern rather than the residence of its beneficiaries or investors.

If MFT cannot determine the relevant addresses of a satisfactorily large number of its unitholders, it potentially can obtain advance approval from CRA for using a third-party report to estimate the provincial residence of its unitholders: s. 16(1) – "attribution point" - (b)(ii) of the SLFI Regs. This assumes that MFT does not make an attribution point election under s. 18(1) to determine attribution points on another basis.

B-107 "Investment Plans (Including Segregated Funds of an Insurer) and the HST" April 2013 states:

"For example, if a non-stratified exchange-traded fund has a large group of objecting beneficial owners and it is unable to obtain residency information required to determine the province of residency…for these unit holders from a third party service provider, the non-stratified exchange-traded fund may apply to the Minister for authorization to use an alternative method to determine its provincial attribution percentage for a participating province. A geographical analysis report from a third party indicating the province of residence of the unit holder that does not meet the specific information requirements in section 6 of the draft SLFI Regulations [now, s. 5] could be included to support the application to use an alternative method under section 225.3... ."

Numerical example of application of SAM formula

Assumptions

In 2015 MFT incurs third-party expenses of $1 million, which are subject to federal GST of $50,000 and Ontario HST of $80,000, as all such supplies are considered to be made in Ontario. It is not entitled to ITCs for any of the GST of $50,000. It is an "annual filer," so that it annually files the SLFI return (GST494 "Goods and Services Tax/Harmonized Sales Tax Final Return for Selected Listed Financial Institutions") and does not file "regular" (GST34) interim returns in addition. In addition to its assigned "attribution point" of September 30, MFT has selected a second attribution point of March 31.

In Scenarios 1, MFT knows on December 31, 2015 the residence of all of its unitholders on the two attribution points. In Scenarios 2 and 3 it has knowledge of the residence on those dates of unitholders holding 50% (in scenario 2) or 49.99% (in Scenario 3) of its units. The respective values of the total shareholdings held by the different categories of unitholders are shown in the Table below. For arithmetical convenience, MFT is treated as if it had a market cap of only $100. In addition it is assumed that the relative allocation of shareholdings was the same on the two attribution points. If they differed, the computations summarized below to determining the applicable percentage for the applicable participating province would be performed on each of the two dates, with those two results then averaged to determine the percentage for 2015:

Scenario 1 Scenarios 2/3
Ontario $40 $20
Alberta $20 $10
Non-resident $40 $20
Unknown nil $50
Total $100 $100

We assume no other relevant elements in the SAM formula. We also assume that MFT has not elected (under ETA s. 225.4(7)) to exclude non-residents from the calculation of its provincial attribution percentages. Accordingly, the units known to be held by non-residents are effectively deemed to be known to be held by residents of a non-participating province (such as Alberta).

Scenario 1

The participating percentage for Ontario is determined in accordance with the formula:

(A1/A2) + [A3 ×(A1/A4)]

where

A1 is the value of the units in the particular participating province (Ontario) ($40)

A2 is the value of all the units other than those known to be non-resident units ($100 – given no s. 225.4(7) election)

A3 is the lesser of 0.10 and the ratio of the unknown units (0) to A2 (0)

A4 is to total value of the known units for Canadian residents with a known provincial residence ($100)

Accordingly, the Ontario participating percentage is

(40/100) + [0 ×(40/100)], or 40%.

The participating percentage formula for Nova Scotia (i.e., the province with the highest HST rate) is (with applying A1 to Nova Scotia rather than Ontario):

(A1/A2) + [A3 × (A1/A4)] + [(1 – A3) – (A4/A2)], namely,

As the value of the Nova Scotia units is nil, this amount is:

(0/100) + [0 × (0/100)] + [(1 – 0) – (100/100, namely, 0.

Accordingly, the Ontario HST payable by MFT for 2015 is determined by applying its Ontario participating percentage of 40% to the federal GST (net of any ITCs) of $50,000 as grossed-up for the higher Ontario provincial HST rate of 8%:

40%*8%/5%*$50,000, or $32,000

Accordingly, MFT is entitled to an HST refund of $80,000-$32,000, or $48,000.

Scenario 2

The same Ontario participating percentage formula applies:

(A1/A2) + [A3 ×(A1/A4)]

where

A1 is the value of the units in the particular participating province (Ontario) ($20)

A2 is the value of all the units other than those known to be non-resident units ($100 – given no s. 225.4(7) election)

A3 is the lesser of 0.10 and the ratio of the unknown units (50) to A2 (i.e., A3 is the lesser of .10 and 50/100)

A4 is to total value of the known units for Canadian residents with a known provincial residence ($50)

Accordingly, the Ontario participating percentage is

(20/100) + [.10 ×(20/50)], or 24%.

The participating percentage formula for Nova Scotia is:

(A1/A2) + [A3 × (A1/A4)] + [(1 – A3) – (A4/A2)]

As the value of the Nova Scotia units is nil, this amount is:

(0/100) + [.10 × (0/50)] + [(1 –.10) – (50/100)], namely, 40%.

Accordingly, the Ontario HST payable by MFT for 2015 is as follows:

24%*8%/5%*$50,000, or $19,200

And the Nova Scotia HST is:

40%*10%/5%*$50,000, or $40,000

Accordingly, MFT is entitled to an HST refund of $80,000-$19,200-$40,000, or $20,800.

Scenario 3

In this scenario, the units whose holders' residence in fact is not known are deemed to be known to be held by Nova Scotia residents.

The same Ontario participating percentage formula applies:

(A1/A2) + [A3 ×(A1/A4)]

where

A1 is the value of the units in the particular participating province (Ontario) ($20)

A2 is the value of all the units other than those known to be non-resident units ($100)

A3 is the lesser of 0.10 and the ratio of the unknown units (0) to A2 (0)

A4 is to total value of the known units of Canadian residents (in contrast to Scenario 2 including unknown unitholders who are deemed to be known Nova Scotian unitholders) ($100)

Accordingly, the Ontario participating percentage is

(20/100) + [0 ×(20/100)], or 20%.

The participating percentage formula for Nova Scotia is:

(A1/A2) + [A3 × (A1/A4)] + [(1 – A3) – (A4/A2)]

As the value of the Nova Scotia units is approximately $50, this amount is:

(50/100) + [0 × (50/100)] + [(1 –0) – (100/100)], namely, 50%.

Accordingly, the Ontario HST payable by MFT for 2015 is as follows:

20%*8%/5%*$50,000, or $16,000

And the Nova Scotia HST is:

50%*9%/5%*$50,000, or $45,000

Accordingly, MFT is entitled to a refund of $80,000-$16,000-$50,000, or $14,000.

Administrative Policy

B-107 "Investment Plans (Including Segregated Funds of an Insurer) and the HST" April 2013

19.1.1 Provincial attribution percentage – selected province..

As with other non-stratified investment plans, the last part of the formula (in the last set of square brackets of the formula) used by exchange-traded funds to calculate element A accounts for amounts that are unallocated to a particular participating province (the province of residence is unknown to the non-stratified investment plan on December 31). In general, as a result of the application of the last set of square brackets of the formula used to calculate element A, where the value of units, when information is missing, represents more than 10% of the value of units of the exchange-traded fund, the part of the formula used to calculate element A in the last set of square brackets is applied to allocate the value of these units to the selected province.

Subsection 50(1)

Forms

RC4609 "Election or Revocation of Election To Use the Real-Time Calculation Method or the Reconciliation Method"

Generally, a reconciliation method election allows an investment plan to elect to use its current year provincial attribution percentage for the purposes of the SAM formula.

Draft section 58

Administrative Policy

21 September 2011 Interpretation Case No. 125434

As part of a response to an inquiry as to the application of HST to services made by the manager (MangeCo) of an exchange-traded mutual fund trust (TrustCo), CRA stated:

The amounts that can be transferred where a tax adjustment transfer election is in effect between an investment plan and manager vary depending on whether or not a reporting entity election under section 56 of the draft SLFI Regulations is also in effect. Where a tax adjustment transfer election under section 58 and a reporting entity election under section 56 of the draft SLFI Regulations are both in effect for a reporting period, the tax adjustment transfer amount would be the positive or negative net tax adjustment amount determined by the application of the SAM formula in subsection 225.2(2). Where only the tax adjustment transfer election under section 58 of the draft SLFI Regulations is in effect for a reporting period without a reporting entity election under section 56 of the draft SLFI Regulations, the tax adjustment transfer amount allowed to be transferred to the investment plan manager would generally be limited to the provincial part of the HST with respect to supplies made by the manager to the SLFI investment plan in applying the SAM formula in subsection 225.2(2). If there is a positive net tax adjustment (i.e., an amount owed by the investment plan) this liability with respect to the provincial part of the HST of the investment plan would be an adjustment to be added when determining the net tax of the investment plan manager. If there is a negative net tax adjustment (i.e., the investment plan would be eligible for a credit), where the investment plan manager has credited that amount of the provincial part of the HST to the investment plan, this credit would be an adjustment to be deducted when determining the net tax of the investment plan manager.