Tax Insights: Proposed GST/HST amendments to the SLFI Regulations

Issue 2023-23

In brief

On August 4, 2023, the Department of Finance released draft legislative proposals that amend the Selected Listed Financial Institutions (SLFIs) Attribution Method (GST/HST) Regulations (the SLFI Regulations). These amendments have implications for:

• insurers that issued life or accident and sickness insurance policies to Canadian residents who then became non-residents after their policies were issued
• investment plans that consolidate or merge with other investment plans by transferring their assets
• “qualifying private investment plans,” including master pension entities and trusts (that are governed by a registered pension plan (RPP), an employee profit sharing plan (EPSP), a retirement compensation arrangement (RCA), a defined profit sharing plan (DPSP) or an employee trust), that hold investments in distributed investment plans and are required to provide their “investor percentage”

This Tax Insights explains the particular amendments and how they may impact a SLFI’s GST/HST filings for reporting periods ending after August 4, 2023.

In detail

SLFI implications to insurers

Under the SLFI Regulations, there are various zero-rating rules that can apply when a financial service (such as insurance) is provided to a non-resident. For life or accident and sickness insurance policies, the supply of insurance is only zero-rated when it is issued to an individual who is a non-resident at the “time the policy becomes effective.” As such, when a person’s place of residency changes (from being a Canadian resident to becoming a non-resident) during the term of a policy, the supply is exempt (not zero-rated) and the “net premiums” earned by the insurer are not included in determining the insurer’s provincial attribution percentage (PAP). 

The proposed amendments address the above noted situation and should favourably impact an insurer’s calculation of its PAP when it is providing insurance (life or accident and sickness) to non-residents who were Canadian residents when their policies became effective. In these situations, the supply of insurance continues to be exempt, but when the insurer calculates its PAP, it will now be able to include the net premiums that are being paid by these particular non-residents when calculating the “total of its net premiums” (this increases the denominator of the PAP calculation and reduces the PAP for the respective participating provinces).

Investment plan mergers

When there is a “plan merger,” the resulting investment plan is required to recalculate its PAP based on the weighted average of the predecessor investment plans’ PAP. Under the SLFI Regulations, what constitutes a plan merger is defined in section 16, with paragraph 16(c) expressly excluding mergers that occurred “as a result of the acquisition of property of a particular trust, corporation or partnership by another trust, corporation or partnership, pursuant to the purchase of that property by the other trust, corporation or partnership or as a result of the distribution of that property to the other trust, corporation or partnership on the winding-up of the particular trust, corporation or partnership.” Since most investment plans typically merge by having one of the investment plans (i.e. the dissolving trust) transfer its asset to the other investment plan (i.e. the continuing trust) for units in the continuing trust, these types of mergers would not constitute a plan merger because of the exclusions in paragraph 16(c).  

The proposed amendments to the SLFI Regulations will no longer apply the exclusions in paragraph 16(c) for reporting periods ending after August 4, 2023 and, as such, consolidating two investment plans by having one investment plan transfer its assets into the other plan should now be treated as a “plan merger;” this will require the resulting investment plan to recalculate its PAP as of the date of the merger.

Determination of “investor percentage” that is provided by investors to distributed investment plans

Every year, distributed investment plans (DIPs) that are a selected listed financial institution (SLFI) are required to obtain information from its investors so that it can determine its PAP as of September 30 of that year. The information that the investor is required to provide generally depends on the value of the particular investor’s holdings in the DIP and the investor’s particular classification. Except for investors that are individuals and trusts (that are governed by a registered retirement savings plan, a tax-free savings account, a registered retirement income fund, a registered disability savings plan [and most registered education savings plans]), the following investors are generally required to provide their “investor percentage”:

Section 28 of the SLFI Regulations contain fairly specific rules for determining a person’s “investor percentage.” When the investor is a SLFI, their investor percentage is generally based on their most recently filed SLFI return (except when the investor is a DIP because they must recalculate their investor percentage and provide their current year’s PAP as of September 30). 

Qualifying small investment plans and qualifying private investment plans 

For investors that are a “qualifying small investment plan” (QSIP) and not a SLFI, their investor percentage is either:

• if the investment plan was previously required to file a SLFI return, the PAP from their most recent SLFI return
• if the investment plan was never required to file a SLFI return, the PAP calculated in accordance with the SLFI rules (as if the investor had been a SLFI) 

A QSIP is generally an investment plan (other than a DIP) that incurs GST/HST taxable expenses of less than $2,000,000 per annum; however, for fiscal years ending after August 9, 2022, it also excludes a “qualifying private investment plan” (QPIP). Pursuant to draft legislative amendments that were released on August 9, 2022, a QPIP is generally a plan that: 

• is a “private investment plan,” a “pension entity” of a pension plan or a “master pension entity,” and 
• in the preceding year, had:
  • less than 10% of its members reside in the HST provinces, and 
  • assets or actuarial liabilities attributable to members that reside in the HST provinces of less than $100,000,000 

The proposed amendments to the SLFI Regulations provide that the investor percentage of a QPIP will be calculated in the same manner as a QSIP; this means that this type of investment plan, to the extent it is required to provide a DIP with its investor percentage, may also need to determine what its PAP would be under the SLFI Regulations (as if it had been a SLFI). QPIPs that are not a SLFI will generally include:

• a master pension entity (e.g. a master trust with units owned by an RPP)
• trusts that are governed by an RPP, EPSP, RCA, DPSP or an employee trust, and

similar to a QSIP, their PAP will generally be calculated based on where their respective unitholders reside.

The takeaway

Investment plans, insurers and banks need to comply with the SLFI rules, which ultimately require a SLFI to calculate the amount of GST/HST owing based on its PAP. Given the significance of a SLFI’s PAP calculation, it is important for SLFIs to understand the specific rules and nuances that can impact their PAP calculation, including the August 4, 2023 draft legislative proposals. PwC can help you understand and comply with these rules.