Background
Pension plan trusts generally make only GST-exempt supplies and thus have no direct input tax credit entitlement. Currently, selected multi-employer pension plans are eligible for a 33% rebate of the goods and services tax (GST) paid on pension plan related expenses as a proxy for input tax credits to which their corresponding employer sponsors would have been entitled had certain of those expenses been paid for by them. This rebate does not apply to single employer pension plan trusts. In those cases, the current rules follow first principles of GST such that employers engaged in commercial activities that sponsor an employee pension plan may, in the proper fact scenario, qualify for full input tax credits on certain pension plan related expenses paid for by the employer.
The Department of Finance notes that their proposals are intended to implement a clearer and more equitable set of rules, given the complexity of different pension trust agreements and the predominantly exempt financial services provided by pension trusts. Considering the current court challenge as referenced below, it is questionable whether simplification and equity are the only intended objectives of the proposals.
Who is affected?
The proposals being tabled will affect all (single or multiple) employer-sponsored pension plan trusts and the related sponsoring employers.
What is the change?
The proposal is for the current 33% rebate for multi-employer pension trusts to be removed and replaced with a new 33% rebate available to all employer-sponsored pension plan trusts. The rebate will not be available to those trusts where 10% or more of the contributions are made by listed financial institutions, given that, according to Finance, listed financial institutions cannot generally claim input tax credits to recover GST paid on their expenses. Eligible trusts can claim the rebate with respect to GST paid on all pension plan expenditures, including investment and administration-related expenses.
Where an employer has received and paid for both administrative and investment related supplies that relate to the pension plan trust, the proposals indicate that the employer will be deemed to have made a re-supply of those inputs to the pension plan trust. This deemed supply will require the employer to collect GST from the pension plan trust, which in turn will be eligible for the 33% rebate.
Employers will no longer need to distinguish between the current administrative rules dealing with “employer expenses” and “pension trust expenses” to determine input tax credit entitlement.
The 33% rebate rate was chosen as this, according to Finance, reflects the proportion of pension trust expenses generally eligible for input tax credits.
How will this affect the taxpayer?
The deeming rules (on the employer’s supplies to the pension plan) and the corresponding input tax credits on such supplies will eliminate the GST cost to the employer, for employers engaged in commercial activities. However, the GST on all pension plan related expenses will be pushed down to the pension plan trust. The trust then will be entitled to the 33% rebate in respect of the GST it pays to the employer on the deemed supplies as well to third parties on other expenses.
Trusts where 10% or more of the contributions are made by listed financial institutions will not be entitled to the new rebate. Further, it appears that employers that are listed financial institutions will not be entitled to recover any such GST it pays on pension plan related costs.
The Canada Revenue Agency (CRA) has challenged the input tax credit claims by an employer for pension plan related expenses as described in a recently heard Tax Court of Canada case1. In that case, the employer is claiming it is entitled to recover GST paid on expenses it is responsible for in respect of an employee pension plan trust. The CRA views them as trust expenses for which input tax credits are not available. It is possible the CRA may lose this case and a potentially significant amount of GST is at stake. The proposed new rules deal with this possibility by effectively limiting recoveries of GST paid on pension plan related expenses to a maximum of 33% by virtue of the rebate claims that will be accorded to certain pension plan trusts.
When does it apply?
These changes are still at the proposal stage, and the Department of Finance is seeking written input from stakeholders and interested parties by April 30, 2007.
1The case has been heard recently and the Court should render its final decision in the near future. For a brief outline of the facts, see General Motors of Canada Limited v. The Queen 2006 TCC 184.
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