On September 23, 2009, the Department of Finance released proposed legislation, draft regulations and explanatory notes relating to changes to the goods and services tax ("GST") levied under the Excise Tax Act (the "ETA"). Essentially, the GST changes relate to previously announced measures affecting GST accounting and reporting by financial institutions ("FIs") and the introduction of a new rebate mechanism for GST paid on registered pension plan expenses.
Changes to Rules for Financial Institutions
The changes to the GST rules applicable to FIs involve the following:
- Self-assessment of GST on certain imported taxable supplies;
- Imposition of an extended assessment period for imported taxable supplies;
- Input tax credit allocation methods;
- Rules for the annual information return; and
- Changes to the filing date for annual GST returns.
The changes to the rules governing self-assessment of GST by FIs on imported taxable supplies under Division IV of Part IX of the ETA were originally announced in a Department of Finance backgrounder released on November 17, 2005. The changes are designed to deal with the perceived adverse decision by the Tax Court of Canada in State Farm et al v. The Queen , 2003 GTC 622. Finance originally issued proposed draft legislation and explanatory notes for the self-assessment rules in January 2007. The September 23rd revised proposals are substantively the same, but add several relieving changes that address concerns raised by FIs.
The revised draft legislation will allow FIs resident in Canada that conduct business through foreign branches to elect to self-assess GST on charges from their foreign branches on a basis similar to that used for supplies from foreign subsidiaries. The election will permit FIs to self-assess GST on an internal charge that is generally an amount that is treated, for income tax purposes, both as income or profit in a country other than Canada and as a deduction from income in Canada. FIs resident in Canada will be permitted to make the election retroactively for periods back to the proposed 2005 effective date for the self-assessment rules. The Finance backgrounder states that that election will allow FIs to make a global or “top down” analysis of business expenses that are related to Canadian activities on which GST is required to be self-assessed. The more detailed (and extremely complex) cost-based self-assessment approach set out in the January 26, 2007 proposed legislation will remain an option.
In addition, certain financial derivative transactions will be excluded from the FI self-assessment obligation provided that specified requirements are met.
3. Assessment Periods for Certain Imported Taxable Supplies
Although not stated in the Finance backgrounder, the proposed changes include an extension of the normal assessment/reassessment period — from four years to seven years — in respect of imported taxable supplies which must be self-assessed pursuant to proposed section 218.01 and subsection 218.1(1.2) of the ETA. The seven year limitation period commences on the later of the day on or before which the person was required to file the particular return and the day it was filed and applies only in respect of tax that was payable after November 16, 2005. The existing four year limitation is preserved for other amounts of tax payable under Division IV of the ETA.
4. ITC Allocation
FIs make a mix of taxable and exempt supplies for GST purposes. Where an expense relates to both taxable and exempt supplies, an FI must allocate GST paid between taxable and exempt supplies to determine the proportion that can be claimed as an ITC. The January 26, 2007 draft legislation announced new detailed ITC allocation rules for FIs which are effectively designed to control the ability of FIs to recover GST. Those rules require large banks, insurers and securities dealers to develop an allocation method and seek the approval of the Canada Revenue Agency (“CRA”) to use that method. Where pre-approval is not obtained, banks, insurers and securities dealers are required to use a prescribed ITC recovery percentage for GST paid on mixed inputs.
The September 23, 2009 legislative proposals provide several relieving modifications. The proposed changes would allow large banks, insurers and securities dealers to use an allocation method that does not receive pre-approval by the CRA where the FI can establish that it has met certain requirements and the CRA has not acted fairly and diligently. The changes would also provide the CRA and FIs more flexibility in the use of the pre-approval process and allow the CRA to extend the deadline for pre-approval.
5. Information Returns for FIs and Filing Due Date
On January 26, 2007, Finance announced the introduction of a new GST annual information return for FIs, but no legislative requirements for the return were released at that time. The September 23rd announcement released draft legislation governing the preparation and filing of the return. The information return is required to be filed within six months after the end of the fiscal year of an FI commencing for fiscal years after 2006. The draft legislation includes failure to file penalties and modifications to the information required in the return.
FIs are annual filers for GST purposes unless they have elected to file monthly or quarterly. Currently, the annual GST return is due within three months after the end of a FI's fiscal year. The proposed legislation will extend the filing due date for GST returns by FIs to six months after the end of the fiscal year.
GST Rebate for Pension Plans
The position of Finance is that input tax credits ("ITCs") relating to pension plan expenses should only be recoverable where the expense relates to the commercial activities of a sponsoring employer and that ITCs should not be available for expenses relating to the investment activities of a pension entity. The administrative policy of the CRA has been that ITCs are limited to expenses related to employer functions such as the collection of contributions and the payment of benefits, but that expenses relating to the financial assets of a pension plan do not qualify for ITCs.
In order to provide a legislative basis for the CRA's position, and to provide common treatment for all employer-sponsored registered pension plans, Finance announced a proposal to introduce a GST rebate system on January 26, 2007. The September 23rd announcement released draft legislation that would deem all GST on pension-related expenses incurred by employers to have been paid by the relevant pension entity. The pension entity will be entitled to claim a rebate of 33 per cent of the GST paid (other than pension plans where 10% or more of the contributions are made by FIs). The new rules will provide an election to permit the pension entity and any participating employers to transfer some or all of the rebate entitlement to the participating employers. The new rules for pension plan expenses will apply for fiscal years of employers beginning on or after September 23, 2009. For pension entities, the proposed rules will apply to claim periods beginning on or after that date.