The Department of Finance’s draft tax legislative proposals, published on Sept. 8, include amendments to improve the clarity and effectiveness of the goods and services tax and the harmonized sales tax rules as they apply to certain pension plans.

The proposed legislation would amend the pension plan deemed-supply rules to capture an employer’s expenses in relation to a master trust, proportionate to the interests of each pension entity of each employer participating in it.

It also contains a somewhat extraordinary provision that would provide a window of one year from the date when the proposed legislation passes for employers to claim a refund on master trust-related expenses that they erroneously included in pension plan deemed supply for a period between 2010 and 2016. This provision is extraordinary because it exceeds the standard limitations on tax refunds of two years for tax paid in error or rebates and four years for input tax credits. There’s a catch on this apparent generosity, but I’ll get to that after I’ve set the stage.

Read: Taming the complexities in GST/HST rules for pension plans

Presumably, the proposed extended period shows the government is acknowledging that there has been a lack of clarity from both the Department of Finance and the Canada Revenue Agency in response to ongoing queries from plan administrators and their tax advisors on how to deal with tax relating to master trust expenses. Prior to the proposal, the department didn’t have any actual policy to address those questions. And the Canada Revenue Agency’s GST/HST directorate has little in the way of technical expertise from which to understand the unique nature of single-employer pension trusts as a basis to provide coherent guidance.

The core problem is that trusts, unlike virtually every other entity that’s subject to taxation, aren’t persons in a strict legal sense. However, both the Excise Tax Act and the Income Tax Act artificially deem trusts to be persons to avoid some problematic tax consequences. In turn, however, a number of other issues arise.

When it comes to GST/HST matters, the Department of Finance, the Canada Revenue Agency and most tax practitioners project the personhood of a trust beyond the inherent limitations of deeming provisions and make the implicit (and false) assumption that it has the capacity to do anything that a corporate or natural person can do (at least in the context of taxation). The consequence is massive confusion, as demonstrated in the General Motors of Canada Co. case. Here, the courts struck down the Canada Revenue Agency’s position that GM couldn’t claim input tax credits for tax paid on its pension-related expenses. The case became the genesis for the creation of additional legislative fiction of the pension plan deemed-supply tax, which is now becoming even more complex for employers that use a master trust.

Read: New GST and HST changes affecting pension plans

The catch on the refund of pension plan deemed-supply remittances on expenses related to master trusts is that, if the employer received a reimbursement for or, alternatively, the vendors were paid the amount directly out of the trust’s funds on the employer’s behalf, the Canada Revenue Agency, on projecting additional personhood attributes beyond those actually deemed in the Excise Tax Act, may assess tax to the employer on that amount on the basis that the trust is the recipient of a resupply. However, that basis is false, as a trust can receive a supply only by virtue of the deeming provision upon receipt by the trustee. Trustees, of course, don’t receive such supplies as they aren’t at all in the domain of their duties and obligations as set out in the trust document.

To provide some clarity, I’ve formulated the following parable:

Dick is an employer. Tom is a guy with a bucket. Dick is looking for a guy like Tom to hold money in a bucket to give to Dick’s employees after they retire. Dick meets with Tom and says: “I’d like to put some cash in your bucket for you to hold for my employees until they retire, if we can agree on how you’ll look after and use the money in the bucket.”

“OK,” says Tom. “I’m willing, but first, you must understand that I own the bucket and everything that is put into it. Secondly, you’ll have to pay fees to me for the use of my bucket and for my services in looking after what’s in the bucket.”

Dick replies: “I’m OK with both of those requirements, provided that you agree to do whatever I tell you to do with the money I put in the bucket and anything else that gets put in the bucket.”

Read: Tax rules on pension plans and investment entities ‘extraordinarily complex:’ ACPM

Tom thinks about that and after a few minutes says, “Well, I guess I’m OK with that, as long as you agree that whatever you tell me to do will be according to the government’s rules — which among other things make you a fiduciary to your employees’ interests in the bucket — to make sure that most of the money in my bucket gets paid to your employees when they retire. And that, besides following your instructions, I’m not required to do anything else with whatever is in the bucket.”

“That’s exactly what I want,” says Dick. “But I may tell you to give me some of my cash back, too, in certain circumstances, like when I have to pay your fees. Don’t worry, though, the government’s rules allow for that. And besides, we’ll have the whole deal written out so that we both know how you’ll look after and use the money I put in the bucket.”

A few weeks later, Dick and Tom meet and agree on the following rules for Tom to follow:

  • Dick has hired Harry, an actuary, to provide periodic estimates of how much money he needs to put into Tom’s bucket to meet the promises he has made to his employees after they retire.
  • Dick will give Tom the amount of money Harry has calculated.
  • Dick has also hired Harriet, an investment manager, to tell Tom, on behalf of Dick, how to invest the money in the bucket and when to buy or sell any of the investments that are in it.
  • When Tom, Harry and Harriet bill for the services they’ve provided to Dick, he can choose:
    • To have Tom pay the bills with cash from the bucket;
    • Have Tom give him back some cash from the bucket to pay the bills; or
    • Just pay the bills himself.
  • If Harry tells Dick there’s a lot more money in the bucket now than he needs to pay his employees, he can tell Tom to give him back the extra cash from the bucket.
  • Dick will tell Tom when and how much he’s to pay out of the bucket to an employee who retires.

Read: Pension changes among issues in consultations on GST rules

So, to put the transactions described above into a GST/HST context, below are some questions along with my answers:

1. What supplies are being made by Dick and who’s the recipient?

Dick supplies cash to Tom to put in his bucket.

2. What supplies are being made by Tom and who’s the recipient?

Tom supplies:

  • The bucket and his custodial services to Dick; and
  • If Dick instructs Tom, cash from the bucket:
    • To himself;
    • To the retired employees;
    • To Harry or Harriet; or
    • To Dick.

3. What supplies are being made by Harry and who’s the recipient?

Harry supplies actuarial services to Dick.

4. What supplies are being made by Harriet and who’s the recipient?

Harriet supplies investment management services to Dick.

5. Is Dick supplying investment management or actuarial services to Tom?

No, under the terms of the agreement between Tom and Dick, Tom has no responsibilities related to, and thus no use for, either actuarial or investment management services.

6. Is Dick (as the Canada Revenue Agency and most tax advisors believe) resupplying custodial trustee, investment management or actuarial services to the bucket?

This is an absurd question, in two respects:

  • The bucket can’t do anything, except serve as a receptacle for the cash and investments. It can’t use custodial trustee, investment management or actuarial services, as they would be meaningless to a thing that’s only a receptacle. Those statements will be true, whether or not we were to adopt the idea that the bucket is a person.
  • There’s no resupply made by Dick. Unlike goods, services are of a temporal nature, performed by a particular party at a particular time and place. The concept of resupply in relation to services only has logical validity if they’re embedded into another supply. However, as noted above, the bucket has no use for such services, and thus Dick doesn’t make any supplies to the bucket.

The government’s proposed amendments are open for consultation until Oct. 10, 2017.

Greg Hurst is a Vancouver-based pension consultant with Greg Hurst & Associates Ltd.

These are the views of the author and not necessarily those of Benefits Canada.

Copyright © 2017 Transcontinental Media G.P. Originally published on benefitscanada.com

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