On January 28, 2011, the Department of Finance released its initial response to industry calls for clarification and modification of proposed draft legislation and regulations in respect of the harmonized sales tax (“HST”) by financial institutions. The January 28, 2011 Backgrounder (the “Backgrounder”) contains a number of changes and clarifications to the proposed rules announced by the Department of Finance in releases dated May 19, 2010 and June 30, 2010.

The Backgrounder is divided into three parts:

(1) proposed changes reflected in draft amendments to the legislation and regulations, which are attached to the Backgrounder;

(2) rules for new investment plans; and (3) issues requiring further research, analysis and consultation with the financial services industry.  

The first part of the Backgrounder clarifies and changes various rules announced in the Department of Finance’s May 19 and June 30 releases, which have been captured in the draft legislation and regulations accompanying the Backgrounder. Highlights include a proposal to relieve non-distributed investment plans with substantially all of their members in nonparticipating provinces from the SLFI rules, a proposal to include section 172.1 deemed tax as a factor in determining whether a pension entity qualifies as a Qualifying Small Investment Plan and clarification on the application of the specified investor rules.

The second part of the Backgrounder clarifies and changes previously announced rules contained in the May 19 and June 30 releases for new investment plans or new series of an investment plan, including those plans and series created by way of merger. These proposed clarifications and changes have not been included in the draft legislation and regulations attached to the Backgrounder.

The third part of the Backgrounder identifies a number of issues raised by the industry for which the Department of Finance requires further research, analysis and consultation. These issues include whether the SLFI rules should apply to entities not subject to them but that are similar to investment entities that are (e.g., investment trusts and partnerships with investors in more than one province, trusts holding assets of SLFI pension entities, etc.) and the application of the SLFI rules to third party purchasers for an SLFI investment plan (e.g., an employer that pays for the expenses of a trust governed by a retirement compensation arrangement).

As was the case with the existing proposals, the newly proposed HST rules for financial institutions are complicated and important for those in the financial services industry to understand. With this latest package, the Department of Finance has signalled that its consultations with the industry, and, therefore, modifications and clarifications to the HST rules affecting it, remain ongoing.

The Backgrounder and accompanying draft legislation and regulations can be found here: http://www.fin.gc.ca/n11/11-009-eng.asp.  

Comments to the Department of Finance on the proposals described above must be submitted by March 31, 2011.