The Department of Finance has now released proposed changes to the Harmonized Sales Tax (HST) rules for financial institutions relating to the calculation of the provincial component of the HST. These proposed changes are intended to provide a level playing field for financial institutions, regardless of where they locate or purchase their business inputs, and ensure that the appropriate amount of tax is collected for the HST provinces.
The current GST/HST legislation provides for a special net tax calculation for Selected Listed Financial Institutions (“SLFIs”), called the special attribution method (“SAM”). Conceptually, the purpose of the SAM calculation is to ensure that HST does not impose a competitive disadvantage on businesses in the participating provinces that supply goods and services to financial institutions, or discourage financial institutions from establishing operations, such as branches or call centres, in participating provinces. In simple terms, the SAM grosses up a SLFI’s unrecoverable GST for the year to derive an unrecoverable provincial component of HST that is compared to the actual provincial component of the HST paid.
Under the proposed changes, the definition of a SFLI will be amended so that a person will be considered to be a SLFI throughout a reporting period if the person meets both a listed financial institution (“LFI”) test and a permanent establishment (“PE”) test at any time in the particular fiscal year that includes that reporting period. Under the current rules, a two-year test applies to determine if an organization is considered to be a SLFI. In addition, under the proposed changes, the provincial income allocation test generally will no longer be used to determine if a person is a SLFI.
Under the current rules, LFIs operating only in participating provinces are not subject to SLFI rules. However, with the harmonization taking place on July 1, 2010, different HST rates will be in place in the various participating provinces. This situation could create an incentive for an LFI operating only in participating provinces to acquire inputs in the participating province with the lowest HST rate, since the existing SLFI rules would not apply to that LFI. To address this potential issue, the proposed rules will include an amendment to treat an LFI, with certain exceptions, as an SLFI throughout a reporting period of the LFI if, at any time in the fiscal year that includes the reporting period, it has PEs in two or more participating provinces.
In addition, the proposal contains amendments to the PE test and the methods to be used in determining the provincial attribution percentages for each specific type of SLFI, including banks, insurance corporations, trust and loan corporations, investment plans and segregated funds, and other corporations, individuals and trusts.
For further details on the proposed changes to the rules for certain financial institutions and the proposed transitional rules for SLFIs with respect to the implementation of the HST in Ontario and British Columbia on July 1, 2010, please see the documents listed below:
Finance Canada NR 2010-050
Backgrounder – Proposed FI HST Rules