In January 2007, the Department of Finance ("Finance") proposed a new regime to rebate to single employer pension plan trusts a fixed percentage of the goods and services tax and harmonized sales tax ("GST/HST") incurred by both employers and pension plan trusts on pension plan expenses. The proposal was to cap the recovery by employers and pension plan trusts of GST/HST incurred on pension plan expenses.
33% Rebate to Replace Employer Claimed Input Tax Credits
Finance has tabled revised draft legislation, albeit more than two and a half years after the announcement and five months after the federal government lost the appeal before the Federal Court in Her Majesty the Queen v. General Motors of Canada Limited, in which General Motors was found to be entitled to fully recover the GST/HST it had paid to investment managers on investment services for its pension plan trusts.
The proposed mechanism would have the effect of deeming all of the GST/HST 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/HST. The rebate would be available irrespective of the nature of the plan arrangements or whether the pension entity is registered for the GST/HST.
In addition, a GST/HST election will be provided whereby the pension entity and all the participating employers may 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/HST registrants. Where all the participating employers are exclusively engaged in commercial activities, that is, the making of GST/HST taxable supplies, the pension entity and the employers would be free to transfer the rebate entitlement as they choose. Where any of the participating employers are not engaged exclusively in commercial activities, the maximum proportion of the rebate entitlement transferable to an employer under the GST election would be in proportion to that employer's share of the total pension contributions. (In that case, the deduction would be further limited by the employer's tax recovery rate, which is generally the percentage determined by dividing the total of input tax credits and public service bodies rebates that the employer is entitled to by the employer's total tax paid.)
The only pension entities that would not be eligible for the rebate would be pension entities of pension plans where 10% or more of the contributions to the pension plan are made by "listed financial institutions", for example, banks, credit unions, other lenders, insurers, certain investment plans, etc.. This restriction applies since "listed financial institutions" cannot generally claim input tax credits to recover GST/HST paid on their expenses. However, a pension entity of such a plan and the participating employers of the plan would be permitted to make a different joint election whereby the participating employers could make a deduction in determining their net tax in respect of what would otherwise have been the pension entity's rebate entitlement. As outlined above, this deduction would be limited by the employer's share of the total pension contributions and the employer's tax recovery rate.
These GST elections raise interesting issues with respect to the exercise of fiduciary obligations, conflicts of interest, and reversion of plan assets to employers, all of which will need to be considered prior to making any decision to elect.
These proposed deeming rules would apply for fiscal years of employers beginning on or after the September 23, 2009. With respect to pension entities, the proposed rules would apply to a pension entity's claim periods (i.e., a reporting period if the pension entity is a registrant or the first two or last two fiscal quarters of a fiscal year if the pension entity is not a registrant) beginning on or after September 23, 2009.