On July 22, 2016, the Department of Finance released proposed amendments to the GST/HST legislation in a number of areas, including significant amendments for pension plans that include a master trust.
Background
GST/HST legislation was introduced, effective September 23, 2009, to attempt to consistently apply GST/HST to transactions undertaken by most registered pension plans and related to employer participation in those registered pension plans. The current legislation includes deemed supply and participating employer tax liability rules for situations in which a participating employer makes pension-related supplies to a pension entity or a participating employer consumes pension-related resources not for supply to the pension entity. These rules can be found under section 172.1 of the Excise Tax Act (“ETA”).
In addition, any actual supplies made by a participating employer to a pension entity require the employer to charge GST/HST to the pension entity. Tax adjustment notes may be issued by the employer to eliminate any double taxation resulting from deemed and actual tax on the same supplies (sections 232.01 and 232.02 of the ETA). There is also the option to jointly elect to not account for the GST/HST on actual supplies, with some restrictions (under section 157). The pension entity is generally entitled to a 33% rebate for both the tax on actual supplies and the deemed tax (under section 261.01). In theory, the net tax cost to be absorbed between the participating employer and a pension entity from the effect of these provisions is 67% of the GST/HST paid.
However, the current legislation does not consider the use of a master trust in an employer’s pension plan structure. A master trust is used to consolidate the pension assets of two or more pension entities, generally to obtain more advantageous investment options. Currently, a master trust is not generally entitled to claim the 33% GST/HST pension entity rebate, which is reserved for pension entities, as defined in the legislation. The master trust will likely incur unrecoverable GST/HST, as a result of being charged GST/HST on actual supplies from a participating employer and/or by being charged GST/HST on supplies made directly by third party service providers. By barring a master trust from claiming the 33% pension entity rebate, an inequity results for those employers that utilize a master trust in their pension plan structures.
Proposed Amendments
The proposed GST/HST amendments related to master trusts are intended to level the playing field for businesses that incorporate the use of a master trust in the structure of their pension plans. The amendments would be deemed to come into force on the announcement date, July 22, 2016, unless otherwise noted. Highlights of the proposals related to master trusts are summarized below.
The proposed amendments introduce the definition of a “master pension entity” of a pension plan (would be deemed to come into force on September 23, 2009), which means:
“a person that is not a pension entity of the pension plan and that is
(a) a corporation described in paragraph 149(1)(o.2) of the Income Tax Act, one or more shares of which are owned by a pension entity of the pension plan, or
(b) a trust described in paragraph 149(1)(o.4) of the Income Tax Act, one or more units of which are owned by a pension entity of the pension plan.”
New deemed supply rules specifically for a master pension entity are proposed for subsections 172.1(5.1), (6.1) and (7.1), which mirror the current deemed supply rules, respectively, for:
• supplies acquired for supply to the master pension entity;
• employer resources for supply to the master pension entity; and
• employer resources consumed, but not for supply to, the master pension entity.
Current subsection 172.1(7), the deemed supply rule for employer resources consumed, but not for supply, is proposed to be amended and backdated to September 23, 2009, to exclude the following activities:
• the establishment, management or administration of a master pension entity of the pension plan; and
• the management or administration of assets in respect of a pension plan that are held by a master pension entity of the pension plan.
The impact of this amendment to subsection 172.1(7) would be to exclude the master pension entity activities from this deemed supply rule starting with the inception of the GST/HST pension rebate rules. Where a participating employer had included an amount of deemed tax under subsection 172.1(7) in respect of a master trust, a transitional rule would allow an employer to request, in writing, a reassessment of net tax to exclude the amount of overpaid deemed tax. An eligible person would be entitled to request this reassessment until the day that is one year from the day this amendment receives Royal Assent. Where the particular deemed tax amount was included as an eligible amount in the determination of a pension rebate (under section 261.01), the Minister would also reassess the rebate, including situations where an election was made to transfer the rebate to the employer.
Proposed amendments to sections 232.01 and 232.02 of the ETA would provide for a tax adjustment note to be issued by an employer to a pension entity in respect of any double taxation for actual supplies made to the master pension entity that are also included in a deemed supply to the master pension entity. In addition, the proposed amendments include new subsection 157(2.1), which provides an election for nil consideration for all taxable supplies made by a participating employer to a master pension entity, avoiding the need for a tax adjustment note. This election would be made jointly between a participating employer and a master pension entity of the pension plan. To be entitled to make this election, the pension entities of the pension plan must hold at least 90% of the units in the master pension entity.
Furthermore, proposed amendments to the pension rebate rules in section 261.01 would include the following in the “eligible amount” for a rebate: the deemed tax paid in respect of pension entities and master pension entities under section 172.1; and tax on actual supplies made to a master pension entity that is deemed under subsection 172.2 to be paid by a designated pension entity. As a result, the 33% pension rebate would be available on these amounts. If the master pension entity of a pension plan has more than one pension entity, then the master pension entity and one of the pension entities would be required to make a joint election for a designated pension entity to be entitled to claim the 33% pension rebate for the tax on actual supplies made to the master pension entity.
More Information
Additional Information on these proposed amendments to the ETA can be found in the Department of Finance Legislative and Regulatory Proposals Relating to the Goods and Services Tax/Harmonized Sales Tax and the Explanatory Notes found below:
GST/HST Legislative Proposals - July 22, 2016
Explanatory Notes to the GST/HST Legislative Proposals - July 22, 2016.pdf