Major GST/HST changes for Canadian pension plans

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Episode 30: Major GST/HST changes for Canadian pension plans

Release date: November 26, 2010
Guest: Jason Cooper
Running time: 11:51 minutes

Pension plans and plan sponsors will have to start doing some things differently, as a result of new GST/HST rules. Pension plans that are Selected Listed Financial Institutions (SLFIs) need to consider the elections they should file and be aware of the GST/HST return reporting obligations. Former PwC tax senior manager Jason Cooper provides the background and addresses other challenges, including the deemed supply issue, which demands careful modeling of the fair market value of the supplies that will be deemed to be made to the pension plan.

Jason’s principal focus is the application of indirect taxes to financial institutions. In this capacity he has worked with a number of institutions on diverse matters such as advising on the unique application of sales taxes to the financial services sector to designing and implementing controls. In addition, Jason has assisted in preparing harmonized sales tax impact analyses.

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Major GST/HST Changes for Canadian Pension Plans

You’re listening to another episode of PwC’s Tax Tracks at www.pwc.com/ca/taxtracks. This series looks at the most pressing technical and management issues affecting today’s busiest tax directors.

Gerry Lewandowski: Here with us today is Jason Cooper, a senior manager with PwC’s Indirect Tax practice. Jason has been with PwC for 12 years and he provides advice, interpretation, and technical solutions to both residents and non-residents on the GST, HST, PST and QST, primarily to financial institutions. Jason is also the leader of the Value Added Tax or VAT Solutions Group, a group of VAT specialists located across Canada providing support to Canadian businesses.

Thanks for joining us, Jason.

Jason: You’re welcome, Gerry.

Gerry: Jason, because of the new GST/HST rules, pension plan sponsors will have to start doing things differently. In a few simple words, can you highlight what they are facing?

Jason: Well Gerry, as you’ve said there are a number of new requirements and these requirements, they change the way that the pension plans and also the employer, the sponsors of the pension plans, will operate. So, there’s a whole raff, slew rather, of new compliance requirements that they will have to comply with.

If we look at the context of why these rules exist, and I think maybe that will better frame the time that we have together and help us through this discussion. Essentially, the theory is that the pension plan itself should be transparent. By that I mean it does not matter where the pension plan resides, what is the key driver in working out the ultimate HST or tax liability of the pension plan should be determined with reference to where the plan members reside. That, as you will appreciate, is a simplification of what these rules are trying to achieve and there’s other rules trying to achieve different things aside from that.

So, for my own mind, I like to think of the changes into three main categories of change and those are:

  • The filing requirements
  • The new elections that are available to the pension plan, and also
  • An issue of deemed supplies made by the plan sponsors to the pension plan

Gerry: Jason, can you talk through each of these areas? Let’s start with the filing requirements.

Jason: Well, the filing requirements is an interesting one, Gerry. Pension plans typically have plan members who reside in more than one province. So we have pension plan members, some of which may be in HST provinces, some of which may be in GST provinces for example, and these provinces have different tax rates that apply. Interestingly, I said earlier, because whether the pension plan is registered for GST/HST purposes or not, it is still required to file a GST/HST return as a Selected Listed Financial Institution (SLFI). And that is really quite unusual and perhaps not very intuitive.

Gerry: Jason, can you explain why the pension plan that is a SLFI will file a return?

Jason: Yes, Gerry. That is a good question. I like to think of the SLFI return almost like an equalization calculation. And, perhaps I can explain that best by way of a simple example.

Let’s say that the pension plan resides in Ontario and 50% of the plan members are also resident in Ontario and 50% of the plan members are in Alberta. Under the new place of supply rules, expenses such as investment management services, will be taxed at 13% being where the pension plan resides. You could argue that it would be unfair for the pension plan to bare tax at 13% given 50% of the plan holders are outside of a 13% HST zone. Because of that, the SLFI calculation allows the pension plan to claim a refund of 50%, being the number of pension plan members outside of Ontario, of 8% being the provincial component of HST applicable in Ontario of the HST paid. So, in such a way, the pension plan will receive a refund. And, as you will appreciate, I have simplified that calculation just for the example.

Gerry: That is a substantial change. You also mentioned new elections.

Jason: That’s right, Gerry. There are three new elections that I want to mention to you. And they are, the:

  • reporting entity election 
  • consolidated filing election and 
  • tax transfer election

And each of these elections, as you would imagine, has a different purpose.

The reporting entity election allows the pension plan to appoint the administrator as the filer of the return. The consolidated filing election allows multiple plans to be filed together as a single return and even under a single GST/HST number. And the tax transfer election allows the refund that we described in our previous example to be transferred to the administrator and the administrator will make an adjustment to its tax collected from the pension plan for an equivalent amount of this tax adjustment.

Gerry: Now, who can make the elections and what is the process around these elections?

Jason: Well, the pension plan and the manager may make the elections together. And the manager is a new term defined by the Income Tax Act as the administrator of the pension plan. Interestingly, on this issue of who can make the elections, registration is required by a pension plan that wishes to make an election. And registration is required for no other purpose other than making the election. Again, I want to reiterate the point that we mentioned earlier, that whether the pension plan is registered for GST/HST purposes or not, it will still have to file a SLFI return if it is indeed it is a SLFI.

Gerry: Deemed supplies was the third change you mentioned. Can you elaborate?

Jason: Yes, Gerry. And this really is an area of added complexity. I’m going to keep it as simple as I possibly can. In short, these rules attempt to impose a tax remittance obligation on deemed supplies of property and services required for re-supply in the course of pension plan activities and also deemed supplies of employer resources and specified resources consumed in pension activities.

The theory behind the deemed supply rules is to take account of resources consumed by the pension plan that has been supplied by the employer. For example, the tax staff of the employer may be working on pension plan activities. So a fair market value assessment of their time needs to be made. The employer can also issue a tax adjustment note to the pension plan if the employer was deemed to have collected tax in respect of a specified resource of the pension plan and tax was already paid by the pension entity.

Again, I’ve really tried to capture the essence of these rules.

Gerry: If the pension plan is registered and files a GST/HST return, can it claim ITCs?

Jason: Unfortunately not. Because the pension plan is not engaged in commercial activities, it is not entitled to claim ITCs. It is entitled, though, to claim a 33% rebate of the tax it pays and the 33% rebate applies to the federal component of the tax only.

Gerry: Thank you for providing your insights, Jason, and your perspectives. What should be done now?

Jason: Well, I think the issues to address now for pension plans that are Selected Listed Financial Institutions, there should be some consideration around what elections should be filed. I would also recommend that a process around the calculations that the pension plan will have to complete as part of its SLFI reporting is put in place.

In addition, the deemed supply issue that I mentioned to you, I would recommend some modeling around the fair market value of the supplies that will be deemed to be made to the pension plan. That process should probably start now so that there is not a rush when the return is filed.

Gerry: We’d like to thank Jason Cooper for sharing with us the substantial changes in the way that pension plans and employer sponsors are treated for GST/HST purposes. For additional information on this issue, please contact our PwC Indirect Tax group or go to pwc.com/ca/indirecttax and read our PwC Tax Memo: Major GST/HST Changes for Pension Plans listed under “Of further interest."

Thank you for tuning into Tax Tracks at www.pwc.com/ca/taxtracks.

The information in this podcast is provided with the understanding that the authors and publishers are not herein engaged in rendering legal, accounting, tax or other professional advice or services. The audience should discuss with professional advisors how the information may apply to their specific situation.

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Through interviews with prominent PwC tax subject matter professionals, Tax Tracks is an audio podcast series that is designed to bring succinct commentary on tax technical, policy and administrative issues that provides busy tax directors information they require.