The Department of Finance of Canada has released amendments to the Goods and Services Tax/Harmonized Sales Tax (GST/HST) legislation to implement proposals first released in January 2007. Those proposals introduce a rebate system that will replace the current GST/HST input tax credit (ITC) mechanism for many pension plans.¹ 

This Communiqué will be of interest to all Canadian sponsors of registered pension plans funded by means of a trust or certain pension corporations.

Eligible Expenses

The proposed rebate system will apply to all employer-sponsored pension trusts and certain pension corporations,²  irrespective of whether they are currently GST/HST registrants. Pension entities sponsored by listed financial institutions, such as banks and insurers, will not be eligible for the rebate.

Expenses relating to pension activities will qualify. Expenses relating to excluded activities will not, although they may generate ITCs in accordance with the general rules.

¹ In effect, the proposals extend the current rebate mechanism for multi-employer pension plans to a broader category of plans.
² The legislation appears to contain a flaw in that it does not apply to pension corporations that administer a retirement compensation arrangements (RCA) in addition to a registered pension plan. We expect that this flaw will be corrected.

Pension activities are those that relate to the establishment, management or administration of a plan or associated pension entity. They also include activities related to the management or administration of assets in respect of a plan. Pension activities do not include excluded activities.

Excluded activities are those undertaken exclusively for any of the following:

• complying with the employer’s obligations under securities legislation;
• evaluating the feasibility or financial impact on the employer of establishing, altering or winding up a pension plan, except the preparation of a statutorily required actuarial report;
• evaluating the financial impact of the pension plan on the assets and liabilities of the employer; and
• negotiating changes to the benefits under the pension plan with a collective bargaining agent.

Key Features

The main features of the proposed rebate system are as follows:

• Expenses relating to pension activities will not be eligible for ITCs, regardless of who pays the expenses. This rule would not apply, where the pension entity is a GST registrant,³  to expenses incurred by the entity in the course of its commercial activities.
• A rebate of 33 per cent will be provided for expenses relating to pension activities. The rebate may be taken by the pension entity, may be shared with the employer or may be transferred in its entirety to the employer.⁴
• An employer who uses internal resources for the benefit of a pension entity will be deemed to have made a taxable supply to the entity and to have collected GST/HST from the entity. The employer will be required to remit the GST/HST, and the value of the supply will be eligible for the rebate.
• Special rules will apply where the employer invoices the pension entity, either for plan expenses that the employer paid directly or for employer resources used to benefit the plan. Those rules would effectively allow the employer to transfer GST/HST liability to the plan entity, by means of an “adjustment note” procedure.

³ Most of the time pension entities are not GST registrants and do not qualify for GST registration.
⁴ The rebate may be shared with all employers who participate in any particular plan.

Québec

The Québec government has not announced any measure to change its sales tax system at this time. If similar rules are adopted by Québec, given the current Québec system, it might be expected that 100 per cent of the Québec sales tax relating to pension plan expenses would qualify for the tax rebate. We understand that the Québec Ministry of Finance is studying the federal amendments.

Effective Date

These changes will apply for fiscal years of employers beginning after September 22, 2009. For pension entities that are GST/HST registrants, the new regime applies to reporting periods commencing after that date. For other pension entities, the changes will apply to the earlier of the following two periods that begin after September 22, 2009:

• the first two fiscal quarters of a fiscal year; and
• the last two fiscal quarters of a fiscal year.

Comments

The new rebate system is intended to replace and simplify the existing regime. Unfortunately, there is considerable confusion about precisely which rules apply under the existing regime, given the recent decisions of the Federal Court of Appeal in General Motors and CMPA and their effect upon the Canada Revenue Agency’s assessing policy as set out in its Technical Information Bulletin B-032R. The financial impact of the new system may depend on the filing positions adopted by plan sponsors under the existing regime.

For example, an employer who paid all pension plan expenses could have relied on the General Motors case to claim ITCs in respect of all GST/HST paid on those expenses. Such an employer would see the new rebate mechanism as an increase in GST/HST, since its GST/HST recovery rate would in effect be reduced from 100 per cent to 33 per cent. 

The first bone of contention for plan sponsors is likely the carving out of excluded activities from pension activities. Instead of adopting the less precise, but more accurate, concept of an activity “for the benefit of plan beneficiaries”, the legislation has opted for a specific listing of activities that will permit ITC claims, with no rebate, and those that will not permit ITC claims, but with a rebate. Most GST/HST registrants will prefer characterization of an expense as one relating to an excluded activity, but that category is very limited.

The next bone of contention is the 33 per cent rebate rate. To the extent that ITCs are currently sheltering GST/HST at a greater percentage, the rebate mechanism will result in increased taxation for plan sponsors.

Finally, the legislation is neutral with respect to the propriety of sharing the GST/HST refund. It leaves the decision to share to the discretion of the parties. It is the parties who must determine, based on the general law of pensions, what principles govern the sharing of the refund. Similarly, the legislation leaves it to the parties to determine whether the employer can validly transfer GST/HST liability to the pension entity by means of the “adjustment note” procedure. Both these questions involve the application, at least in common law provinces, of the principles set out in the Supreme Court of Canada’s decision in Kerry.

What Should Employers Do?

The legislation is complex. Its interpretation very much depends on the government’s view of the governing tax policy, a view that may not always be shared by the courts. Employers should take this opportunity to review their current GST/HST filing positions and assess the financial impact of the new legislation. They will also need to determine whether they can, given their pension documents and the current state of the law on expenses, use the rebate sharing and “adjustment note” procedures. We have asked the Department of Finance for clarification of certain provisions of the legislation and will keep our readers informed of any developments.