The cloud of complex new GST/HST rules affecting pension plans that came into effect in 2010 has a significant silver lining for many plan sponsors, particularly if they had not been maximizing GST input tax credits (ITCs) on pension-related expenses prior to the new rules. In fact, many (if not most) employers were not maximizing ITCs prior to 2010 as the administrative policy published by the Canada Revenue Agency (CRA) discouraged them from doing so. This policy, however, was struck down by the courts in a case involving General Motors Canada, and this legal result (which was contrary to the tax policy intentions of the federal government) was the genesis of the new GST/HST deemed supply and pension entity rebate rules.
Methods for collecting GST/HST tax credits differ between registered pension plans invested under a trust and those invested under an insurance contract with no trust present.
Trusteed plans
For registered pension plans invested under a custodial trust arrangement, the new rules allow a net tax benefit overall to employers that did not previously claim ITCs on pension-related expenses. In fact, my experience to date is that pension entity rebates are more than sufficient to cover reasonable costs of compliance with the new rules in most cases, and particularly so when ITCs were not previously claimed. There is a catch, though. Proactive compliance is required, as there is only a two-year window to make pension entity rebate claims. When (not if) compliance becomes enforced on a plan/employer consequent to an inevitable CRA audit, two years of GST/HST from the standard four-year lookback will be unavailable for rebate claims.
It’s quite easy for an eligible pension plan that’s not a selected listed financial institution (SLFI) to claim a pension entity rebate of 33% of GST/HST paid or deemed paid. In order to be eligible for the pension entity rebate, there must be a trust that is governed by a registered pension plan. For non-SLFI plans it’s a simple matter to complete CRA Form RC4607 to apply for the pension entity rebate on the full amount of GST or HST paid, or deemed paid, by the trust of the pension plan. All or a portion of this may be transferred to the employer, although fiduciary principles should be applied when considering this. (Unsure if your plan is an SLFI or not? Read No room for excuses on new GST/HST tax filings.)
Take note, though, that GST/HST in respect of pension plan deemed supply is a critical issue when making a pension entity rebate claim. Non-compliance of a participating employer in respect of the deemed supply rules for a plan that has more than 10% of its members in an HST province could partially invalidate past rebate claims if subsequently assessed deemed supply were to result in net GST of the pension plan exceeding the $10,000 threshold for a particular year. This would create a challenging mess that could be expensive to unravel.
Claiming rebates is somewhat more complicated for SLFI plans. CRA Form RC4607 is still used, but only for GST or the GST portion of HST paid. The 33% provincial pension entity rebate on the provincial value-added tax portion of the HST is claimed as a “prescribed amount” utilizing CRA Form GST494, which is the tax return every SLFI must file annually. Almost all registered pension plans will receive a refund on filing of the GST494, unless errors and omissions have been made in completing the return. Unfortunately, such errors and omissions are quite common as the return is very complex. Plan sponsors may find that professional help from a pension practitioner with experience in preparing GST494s to be quite worthwhile.
Plans invested under an insurance contract/policy
Pension entity rebates are not available to registered pension plans where no trust arrangement is present, which is most often the case if the plan is invested under an insurance contract or policy. The good news is that all GST/HST paid in respect of the plan may be claimed as ITCs by plan sponsors that engage in commercial activities. One hundred percent ITCs are three times better than the 33% pension entity rebate! Better yet, the pension plan deemed supply rules do not apply in respect of such plans.
Many employers miss out on ITCs by directing that expenses are paid out of the investment funds of the insurance contract/policy. Very often, insurers’ fees are automatically deducted from investment funds, and sometimes third-party invoices are sent to the insurer for full payment. A fee review by a pension tax expert who understands both pension funding arrangements and GST/HST matters can help plan sponsors restructure fees and expenses to ensure that net GST/HST paid in respect of their pension plan is significantly reduced or even eliminated.
As a final note, tax recordkeeping practices and processes will become a key aspect of minimizing net GST/HST costs in relation to administration of registered pension plans. Claims for pension entity rebates and pension-related ITCs are subject to routine CRA review, and even more in-depth audits. Few pension custodians (trustees or insurers) currently provide adequate recordkeeping for GST/HST purposes. I’ll delve into this area in more detail in my next column.