Plan earlier rather than later for harmonization

This doesn’t mean, however, that plan sponsors and administrators shouldn’t be preparing for harmonization. The Canada Revenue Agency will be seeking revenue opportunities during the transition to the harmonized sales tax (HST) system, and benefit and pension plans that don’t have their “ducks lined up” could face unexpected costs and possible penalties. Here are some of the ways that harmonization may impact these plans—and suggestions to prepare for the new tax regime.

Rebates
Currently, multi-employer pension plans pay GST on expenses and claim a rebate of 33% of GST paid. Typical expenses include investment management and custodial fees, consulting and professional fees as well as office expenses. Pension plans do not currently pay provincial sales tax on these expenses, however beginning July 1, they will be required to pay HST on them.

While the government has not yet made any specific announcements, a rebate for pension plans will likely be available for the provincial portion of the harmonized tax paid on eligible expenses. The Department of Finance usually determines a rebate percentage based on the amount of provincial sales tax organizations would have incurred prior to harmonization. Thus those that don’t pay significant provincial sales tax (PST) on expenses tend to receive a higher rebate.

Assuming the government establishes the same tax position for pension plans as pre-harmonization, and because these plans typically do not have substantial expenses subject to PST, the HST rebate rate should exceed 33%, which is the current GST rebate rate. If the rebate rate established is less than the rate required to break even, HST will be an added cost to pension plans.

As far as single employer pension plans are concerned, on September 23, 2009 the Department of Finance introduced a rebate of 33% of the GST (plus HST in applicable Maritime provinces) on pension plan expenses incurred by employers and the plan. The government also allowed them to jointly elect to transfer part or the entire rebate to some or all of the plan’s participating employers, provided they are GST/HST registrants.

This legislation will now extend the opportunity to more pension plans across the country to claim a GST/HST rebate, with one exception: plans that receive at least 10% of their contributions from “listed financial institutions” (since these institutions cannot claim input tax credits to recover GST/HST paid on their expenses).

When it comes to self-insured benefit plans (typically health and welfare trusts), there is too much revenue at stake for the Ontario government to change the status quo. Instead, plans that collect provincial sales tax on self-insured benefits are not expected to be impacted by harmonization on insurance premiums received or paid. Since GST does not apply to insurance premiums, the Ontario government will continue to administer the 8% retail sales tax on insurance premiums. There are no changes expected to premium taxes on self-insured benefit plans in B.C.

While it is hoped that harmonization in Ontario and B.C. will not have a dramatic impact on pension and benefit plans, sponsors and administrators can determine the potential financial impact by reviewing the plan’s annual income and expenses statement. Identify those expenses for which you currently pay only GST. Factor in the additional 8% or 7% tax on those items as well as the approximate rebate that will offset those additional costs. Then determine the potential savings from harmonization by identifying the expenses for which you currently pay PST.

Contracts
If you have annual supply or service contracts coming up for renewal, you should also do some planning. Suppliers are required to begin collecting HST as of May 1, 2010. If you have an agreement that will straddle the July 1, 2010 HST implementation date, the supplier is required to charge HST on the portion of the contract that includes the period after July 1.

Purchasing a contract earlier than May 1 will not reduce HST costs. If a plan incurs any expenses after Oct. 14, 2009 (when the transitional rules were introduced), which relate to the period after July 1, then it is required to self-assess the proportionate amount of HST on that expense. The plan must remit that tax with its GST filing if it is a GST registrant or, if not, with a government-prescribed form.

Since penalties will apply for failing to comply with these new requirements to collect or self assess the required HST, be assured that HST compliance will be the focus of government audits in the coming year. When taxes of 7% to 8% are involved, the revenue stakes are high and the government will maximize opportunities to tap this revenue stream. The bottom line: be prepared to be in compliance early in the new year.

Rino Bellavia is the leader of the Indirect Tax Practice and Rebecca Hughes is a tax associate of BDO Dunwoody LLP.

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