On September 23, 2009 the Department of Finance released draft legislation aimed at improving and streamlining the application of the GST and the HST for the financial services sector.

Imported Services and Intangible Personal Property

The draft legislation would allow financial institutions resident in Canada that conduct business through foreign branches to elect to self-assess tax for a particular year on an internal charge that is generally an amount that is treated, for income tax purposes, both as income or profit in a particular country other than Canada and as a deduction from income in Canada. The election could be made retroactively for periods back to 2005. The previous more detialed cost-based approach announced in the January 26, 2007 proposed draft legislation remains an option. The revised draft legislative proposals would exclude certain financial derivative transactions from self-assessment if all or substantially all of the value of the financial derivative transaction attributable to Canada represent financial elements, profit margin and employee compensation.

Input Tax Credits

Financial instituitons must apply a method to allocate the use of inputs between taxable and exempt supplies in order to determine the percentage of GST paid on the input that can be recovered as an ITC. Amendments to the GST legislation were released on January 26, 2007 that provide detailed ITC allocation rules for financial institutions. The revised draft legislative proposals contain several relieving modifications to those proposed amendments.

New Rebate for Pension Plans

Draft legislation will deem all of the GST on pension-related expenses incurred by employers participating in a pension plan to have been paid by the relevant pension entity. The pension entity would then be entitled to claim a rebate of 33% of the GST it has paid or is deemed to have paid. The rebate would be available irrespective of the nature of the plan arrangements or whether the pension entity is registered for the GST. Certain restrictions are noted that would apply to plans where 10% or more of pension contributions are made by financial institutions. It is also proposed that the pension entity and all the participating employers could jointly elect to transfer some or all of the entity’s rebate entitlement to some or all of the plan’s participating employers that are GST registrants. The deeming rules would apply for fiscal years of employers beginning on or after the Announcement Date; and the proposed rules for pension entities would apply to claim periods beginning on or after the Announcement Date.

GST Information Return for Financial Institutions

In a January 26, 2007 press release, the Department of Finance announced the introduction of a new GST annual information schedule for financial institutions. The new draft legislation sets out a legislative framework for compliance and administration related to the return and modifications are being made to assist financial institutions in complying with their reporting obligations.

Extension of filing date for GST returns

The filing due date of GST returns (GST34 or GST494) for financial institutions that are annual filers is being extended to six months after the end of their fiscal year; and the filing due date of GST494 returns for selected listed financial institutions that are monthly and quarterly filers will be extended to six months after the end of their fiscal year. These proposed changes come into effect for reporting periods of a financial institution commencing after 2009.

Please see the following links for more information:

Government of Canada Proposes Improvements to the Application of the GST to the Financial Services Sector

http://www.fin.gc.ca/n08/09-088-eng.asp

Le gouvernement du Canada propose d'améliorer l'application de la TPS au secteur des services financiers

http://www.fin.gc.ca/n08/09-088-fra.asp

Backgrounder

http://www.fin.gc.ca/n08/data/09-088_1-eng.asp

Document d'information

http://www.fin.gc.ca/n08/data/09-088_1-fra.asp