Just two years ago, on July 12, 2010, the new GST/HST legislative regime that affects pension and other employee benefits plans was passed into law.
The new rules are painfully complicated, and there are lessons to be learned from the trials and tribulations of achieving compliance with them.
There is some good news! For the most part, the new GST/HST rules can result in net rebates/refunds when expenses and resources are appropriately allocated.
As an example, the table below shows gains achieved for a client with multiple plans when expense and resource allocations were optimized in 2011 from 2010:
|Deemed Supply GST/HST||$87,000||$30,000|
|Pension Entity Rebate and SAM* Adjustments||51,000||43,000|
|Net GST/HST Cost (Gain)||$36,000||($13,000)|
*special allocation method (SAM) for selected listed financial institution (SLFI)
Avoid making transfer elections (pension entity rebate transfer or tax adjustment transfer election). In most cases, the majority of GST/HST is paid from the assets of the pension plan, thus rebates should accrue back to the pension plan to avoid any potential fiduciary complications. Transfer elections will also significantly complicate special allocation method (SAM) calculations.
Avoid tax adjustment notes (TANs) on deemed supply, particularly when the plan is a selected listed financial institution (SLFI) pension plan. TANs, as with transfer elections, significantly complicate SAM calculations.
Sponsors of multiple SLFI pension plans should avoid making a consolidated filing election (CFE). The SLFI rules are not specific to pension plans but cover all financial institutions and other types of investment plans (such as mutual funds, pooled funds and segregated funds). CFEs and related elections can be useful for other types of investment plans, but they are worse than useless for pension plans. Plan-specific SAM calculations must be carried out, even if a CFE has been made.
The only value of the CFE is to permit calculations to be consolidated into a single return. This benefits the Canada Revenue Agency (CRA), as it only has to process the single filing, but it adds considerable work for the administrator of the pension plans to track and correctly allocate any refund/rebate received to the constituent plans.
If you are a participating employer in a pension plan and a QST (Quebec Sales Tax) registrant, you are in double trouble. QST has deemed supply and pension entity rebate rules that parallel the GST/HST rules, except that there is a 100% QST pension entity rebate. The catch is that affected employers are required to remit taxes on deemed supply, but the rebate claim is voluntary and subject to expiry after two years. Furthermore, Revenue Québec (RQ) has not published a QST rebate application form and instead advises affected taxpayers to utilize their FP4607 form, modified for QST.
Neither the CRA nor RQ has a well-oiled machine for administering or auditing GST/HST or QST for pension plans. The new rules are just as new to the CRA and RQ as they are to taxpayers. As such, review/audit mistakes are common—and good luck with any telephone enquiries.
Master trusts are a big problem for those who do not understand them and confuse them with trusts that are pension entities (trusts governed by a registered pension plan). This includes groups such as the Department of Finance, the CRA GST/HST Rulings Division, most commodity/sales tax advisors (usually accountants and lawyers), custodial trustees and most corporate plan administrators. The implications of GST/HST and pension entity rebates upon master trusts are currently a large mess that may be contributing to the Department of Finance’s delay in finalizing the draft GST/HST Financial Institution Regulations.
Under the Income Tax Act, master trusts are intended to be unitized investment trust arrangements that pool assets for investment purposes. Units of a master trust may be subscribed only to registered pension plans and deferred profit sharing plans. After the filing of an initial income tax return, master trusts are spared from any future income tax filings. Consequently, financial recordkeeping in some master trust arrangements by certain custodians reflect consolidated receipt and disbursement information of participating trusts, which is not conducive to new GST/HST tax-reporting requirements and pension entity rebate claims. Hence the confusion over master trusts, which are not pension entities and thus not eligible to make pension entity rebate claims.
The solution to the master trust mess is to clean up financial reporting to reflect segregation of the master trust from its participating pension trust unitholders and to ensure expenses are appropriately allocated between trusts and the plan administrator according to the purpose of each trust. This will facilitate appropriate tax reporting and pension rebate claims without further requirements for legislative/regulatory changes.
The SLFI rules also potentially apply to trusts that are governed by other types of benefits plans, including health and welfare plans, retirement compensation arrangements, deferred profit sharing plans, etc. The rules are a little less complex for these arrangements as there are no deemed supply or pension entity rebate components. Nevertheless, failure of any affected plan to register and make required tax filings could result in major headaches years from now for administrators.
Ignore the new GST/HST rules at your own peril. It is pretty clear that the majority of plan administrators have yet to comply with the new rules. The lessons in this article are only a starting point. Many more painful lessons will no doubt be learned as the CRA gears up to enforce the new regime.
These are the views of the author and not necessarily that of Benefits Canada.