New rebate for pension plans; Sales tax rate increases
Canadian Indirect Tax News, April 27, 2010 (10-4)
While the harmonized sales tax (HST) is receiving a lot of attention, we must also keep our eyes on other legislative amendments. Changes regarding the application of the goods and services tax (GST)/HST to pension plan costs were first announced in January 2007. Additional changes were released in September 2009. While they have yet to receive Royal Assent, we anticipate that these changes will be enacted in the near future. We will outline what is changing and the expected impact for GST/HST purposes.
The existing policy was intended to prevent an employer from recovering the GST/HST paid on specific expenses considered to have been incurred by the pension plan entity. This issue was the subject of litigation and the court disagreed with CRA’s position. This resulted in more confusion as to what expenses are eligible for GST/HST recovery and who is entitled to recover the GST/HST paid. The current legislative proposals aim to codify the CRA’s views and provide clarity in this area.
The spirit of these changes is to shift all of the GST/HST on pension-related costs into the hands of the pension plan entity. A rebate mechanism has been introduced to allow most pension plan entities to recover only 33% of the GST/HST paid. The rebate system is aimed at simplifying processes and removing inconsistencies. However, it may result in higher costs to some pension plans, especially as more provinces are adopting the HST. There is no longer an incentive to have the employer claim a pension-related expense, since the GST/HST is ultimately shifted to the pension plan entity.
The changes introduce deeming provisions that will trigger a taxable resupply to the pension plan entity. Readers should pay close attention to these provisions: They deem the employer to have made a taxable supply not only of the expenses incurred directly for pension plan activities, but also of indirect expenses that support the pension entity’s activities.
A taxable supply will be deemed to have been made in relation to inputs such as third party costs, employee resource costs (salaries and benefits) used to administer the pension plan, and, possibly, infrastructure costs. This will create a GST/HST cost where it did not exist! This will also create the need for detailed tracking, allocation and valuation of costs to support the amount of GST/HST determined to be resupplied. We anticipate that this will create an administrative burden for some employers, as well as some challenges with respect to allocation approaches.
In circumstances were the pension plan entity is not eligible for the rebate, the employer may be entitled to make the claim. Following the filing of a joint election, the employer would claim a deduction equal to some or all of the rebate claim and reduce the amount of net tax for that period. The rebate deduction will hinge on the extent to which the employer is engaged in commercial activities.
As noted, the legislation has not yet been enacted. However, we recommend that readers begin tracking pension-related transactions and determine the impact to operations in advance of the effective dates.
There are a number of sales tax rate increases across the country that readers may wish to take note of:
- In its 2009 budget, Quebec announced an increase in the Quebec sales tax rate from 7.5% to 8.5%, effective January 1, 2011.
- Quebec will also increase its tobacco tax rate effective January 1, 2011 as follows:
- the rate of 10.3 cents per cigarette will be raised to 10.6 cents per cigarette;
- the rate of 10.3 cents per gram of loose tobacco or leaf tobacco will be raised to 10.6 cents per gram;
- the rate of 15.85 cents per gram of any tobacco other than cigarettes, loose tobacco, leaf tobacco and cigars will be raised to 16.31 cents per gram; and
- the minimum rate applicable to a tobacco stick will be raised from 10.3 to 10.6 cents per stick.
- In its 2010 budget, Nova Scotia announced the proposed HST rate increase from 13% to 15%, effective July 1, 2010.
- The B.C. carbon tax rate will increase again on July 1, 2010 on various energy sources such as gasoline, natural gas, aviation fuel, coal, etc.
- Effective March 3, 2010 in British Columbia, the maximum retail price of cigars that will be subject to tax has been increased from $5 to $6.
- Saskatchewan tobacco taxes have been increased effective midnight, March 24, 2010 from 18.3 cents to 20 cents per cigarette or tobacco stick.
- The federal air travellers security charge (ASTC) rates have increased effective April 1, 2010 as follows:
- For domestic air travel acquired in Canada, where the GST/HST applies at the rate of 5% or 13% for the air transportation service, the ATSC will be $7.12 for each chargeable emplanement, to a maximum of $14.25. Where the GST/HST does not apply, the ATSC will be $7.48 for each chargeable emplanement, to a maximum of $14.96.
- For air travel to a destination outside Canada but within the continental zone, where the GST/HST applies at the rate of 5% or 13%, the ATSC will be $12.10 for each chargeable emplanement, to a maximum of $24.21. Where the GST/HST does not apply, the ATSC will be $12.71 for each chargeable emplanement, to a maximum of $25.42.
- For air travel to a destination outside the continental zone, the ATSC will be $25.91 where there is a chargeable emplanement. This applies to air transportation that is acquired in or outside Canada.
This publication is produced by Deloitte & Touche LLP as an information service to clients and friends of the firm, and is not intended to substitute for competent professional advice. No action should be initiated without consulting your professional advisors. Your use of this document is at your own risk.