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© Copyright 2000 Rogers Media. The following article first appeared in the January 2001 edition of
BENEFITS CANADA magazine.
View Point
New GST rules affect pension income
By Greg Hurst
Insurers should be more straightforward with plan sponsors.
At the close of the last sitting of the House of Commons prior to the federal election, a bill containing a
provision that will erode the retirement savings of Canadians who have invested in segregated funds of
insurance companies was quietly passed. Under section 19 of Bill C-24, the goods and services tax (GST)
will apply to the full amount of investment administration fees (IAFs) that insurers deduct from their
segregated funds. IAFs include the costs of investing and operating the funds and administering investor
accounts. The broadened application of the GST under C-24 could reduce pensions provided from segregated
funds by up to 3% per annum.
On March 16, 1999, the Department of Finance notified insurers that legislation was being prepared to
impose the GST fully to IAFs paid from segregated fund assets, effective March 19, 1999. Few insurers have
yet advised plan sponsors or plan members of the broadened application of the GST in respect of IAFs. I
believe there are two reasons for keeping plan sponsors, their advisers and plan members in the dark:
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The retroactive application of the GST already paid prior to March 19, 1999 may expose certain insurers
to a fiduciary liability of a significant magnitude.
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A general reluctance on the part of insurers to explicitly disclose fees to plan members.
The retroactivity provisions are necessary for the government to keep GST that was, in fact, erroneously
paid by some insurers. I believe any insurer that erroneously paid GST prior to March 19, 1999 may be
exposed to liability claims from investors.
My experience suggests that insurers have a general reluctance to fully disclose the fees and expenses
deducted from the segregated funds to plan sponsors and plan members. Fees and expenses charged under an
insurance policy are exempt from GST. To avoid the application of GST to IAFs, the charges must be
explicitly disclosed to plan members as deductions from their accounts.
Although insurers are comfortable disclosing IAFs to plan sponsors and members on a rate sheet basis,
detailed information on expenses actually paid out of their segregated funds is much harder to obtain.
It is time to make insurers more accountable in fully disclosing fees and expenses charged to their
segregated funds. I, for one, am looking forward to the discussion paper soon to be released by the Joint
Forum of Financial Market Regulators regarding investment disclosure.
In the meantime, plan sponsors are well advised to closely question the fees and expenses charged against
the segregated funds their plan members are invested in.
Greg Hurst is manager of the pension division of Heath Lambert Benefits Consulting in Vancouver.
g.hurst@heath.ca.
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