Your bank may face GST, HST, QST and PST challenges, tax audit queries and possibly even additional tax costs if you:
- Are required to use the special attribution method (the "SAM" formula, as explained below)
Have borrowers or mortgages on property in British Columbia, Quebec, and Prince Edward Island and have not accounted for related changes to tax costs
- Are subject to new compliance rules under the new QST rules for financial institutions, which includes a new QST annual information return and the transfer of the administration of the QST accounts of some financial institutions to the CRA (from Revenu Quebec)
- Have not set up systems and processes to deal with the return to the PST in British Columbia
- Import services or intangibles into Canada, including financial services from related entities
- Are a branch and has deductible expenses in Canada for charges from your head office located outside Canada
- Do not pay GST/HST or QST to certain people who sell your products and are not regulated to sell these products
- Have taxable (or zero-rated) supplies as well as exempt supplies and you have not reviewed your allocation methodology
- Sell mutual funds
- Offer a rewards program
- Have an employees' pension plan
- Are required to collect provincial sales tax on mortgage or credit insurance policies.
If you are a bank you must carefully review and understand how the complicated GST/HST rules apply to your business, how the new QST rules affect your operations, and whether you have fulfilled all of your compliance obligations. If you do not fully comply with these rules or make filing mistakes, you could be subject to additional taxes, interest or non-compliance penalties or you may have overpaid taxes.
Many financial institutions across Canada, including banks, are subject to complicated GST/HST rules known as the SAM formula. This formula applies to a financial institution that has a "permanent establishment" in an HST-participating province and in another province, and is used to calculate the amount of provincial component of the HST (PVAT) payable by the financial institution for all the HST provinces. For banks, a permanent establishment is based on whether the bank has borrowers or mortgages on property in a province. If banks have borrowers or mortgages on property both in a harmonized province and another province, it will be subject to the complicated SAM formula. Quebec has generally incorporated in the QST rules similar SAM rules effective January 1, 2013.
GST/HST and QST checklist - Action items
Here are some important considerations that you should review to determine how they may affect your business:
- SAM formula - The SAM formula requires many financial institutions to track all the GST, PVAT and QST paid, and includes many adjustments for specific items including transitional rules and recaptured input tax credits (ITCs). More than 100 pages of related GST/HST regulations effective back to 2010 were passed in 2013, and these calculations have become more complex in 2013 due to the new QST SAM formula, B.C.'s return to the GST and PST and P.E.I.'s new HST. Also, some banks have not dealt with all the applicable adjustments effective since 2010, and could have overpaid or underpaid PVAT or be subject to audit by the CRA.
- Increased QST costs - The new 2013 QST rules for financial institutions will increase operating costs. It is important for banks to understand the effect of these new rules on their tax costs and what they can do to help mitigate them.
- New QST compliance obligations - Banks should determine their filing obligations for Quebec's new QST annual information return, which is similar to the GST/HST annual information return. The information on these returns should correspond to other GST/HST, QST and income tax returns. Banks should determine whether they have to file both returns (or a combined return, if applicable). These annual returns can come with significant penalties if they are not filed as required and on time. It appears that the CRA has begun assessing these new penalties.
- B.C.'s return to GST and PST - Many banks must now pay B.C. PST on certain purchases and self-assess PST on taxable items brought in the province as a result of B.C.'s elimination of the HST and return to GST and PST in 2013.
- Self-assessment rules - Under the self-assessment rules for imports, banks must self-assess on both taxable imported supplies (i.e., services and intangibles) under the general rules as well as on financial services from related entities and charges from head office under special rules. These special rules require self-assessment for a component of the financial services known as "loading".
- Intercompany transactions - Banks must properly account for GST/HST and QST related to intercompany transactions which can raise many related issues, including fair market value rules, section 150 and other FI related elections, SAM adjustment calculations, allocation between taxable and exempt activities and agency.
- Exempt "arranging for" services - Banks and some of their service providers that rely on the GST/HST exempting provision "arranging for" services should review their agreements to ensure that they meet the exemption provision and that none of the exclusions apply. The GST/HST amendments and a related CRA's administrative bulletin have raised many questions and interpretative issues.
- Remittance of taxes on premiums - Banks are generally required to remit taxes collectable and payable on taxable insurance premiums, such as mortgage or credit insurance, to the proper tax authority. Your business' processes and systems should be reviewed and tested for accuracy and also to ensure they meet recent changes, such as collecting PST on taxable insurance premiums in Manitoba.
- Services to mutual funds - Banks must properly calculate the GST/HST and QST on their services to mutual funds, and remit these taxes to the proper tax authority (the CRA or Revenu Quebec). In their calculations, these companies will also have to consider the new QST rules as well as B.C.'s return to the GST and PST on April 1, 2013 and P.E.I.'s new HST.
- GST/HST and QST pension plan rules - Many banks have to apply the complex GST/HST and QST pension plan rules. However, the 2013 federal budget included a new relieving measure that could reduce the complexity for some companies.
- Allocation between taxable and exempt sales - The CRA continues to review banks' input allocation between their taxable and zero rated activities, and exempt activities.
- Rewards programs - There are many issues that affect a bank's ability to claim ITCs and input tax refunds (ITRs) on rewards costs as well as the collection of GST/HST and QST on rewards.
We can help
The final GST/HST selected listed financial institution (SLFI) regulations released in 2013 are one of the most significant legislative update for the industry since the introduction of the GST in the early 1990s. With more than 100 pages of regulations, the GST/HST SLFI rules include significant penalties, complicated calculations, new compliance rules and several transitional rules for various circumstances. The new QST rules and related compliance issues only add to the complexity of indirect taxes for banks. We can help you carefully navigate this maze of complicated rules and help you meet your requirements and reduce related compliance and overall tax costs.
Information is current to February 25, 2014. The information contained in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's National Tax Centre at 416.777.8500