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FIs and Large Businesses — File Forms or Face Penalties 

Canadian Tax Adviser

 

May 06, 2014

 

David Schlesinger and Christian Thibault
GTA, Indirect Tax

 

It's that time again when many large businesses and financial institutions (FI) across Canada must take the time to prepare the information required to file their GST/HST annual information return. This extensive form is due by June 30, 2014 for many entities. This year, some entities may also have to file similar information for QST purposes. While these returns are generally aimed at financial institutions, many large businesses that have made a particular election with an FI or that meet certain financial revenue thresholds will be treated as FIs for GST/HST and QST purposes and will be required to file these returns no later than six months after their year-end. These large businesses and FIs that fail to provide the appropriate information on the return by the required deadline could be exposed to hefty penalties which can be as much as $100,000 per return.

Update - CRA releases new combined form
The CRA recently released a new GST/HST and QST combined annual information return. For 2013, many entities will have to carefully review the rules related to the annual information returns in light of the new and updated forms, the new QST rules, the return to GST and PST (from HST) in B.C. and the new HST in P.E.I. The 2013 changes may affect reporting on the annual information returns.

 

Do you have to file the GST/HST and QST annual information return?
FIs and many large businesses that are treated as FIs are generally required to file the updated Form GST111, "Financial Institution GST/HST Annual Information Return", or one of the combined forms for GST/HST and QST. Generally, an entity, unless otherwise excluded, must file the annual information return if it meets the following three tests:

 

  • The entity is an FI or is treated as an "FI"
  • The entity is a registrant (a person who is registered or a person that is required to be registered)
  • The entity has more than $1 million of annual income.

 

Currently, only certain qualifying investment plans are excluded from this obligation.

 

While many large businesses may not recognize themselves as FIs, the GST/HST law (and now the QST law) have very broad definitions of an "FI". Generally, a large business may be treated as an FI under the extended GST/HST and QST definitions of an FI if it has either:

 

  • Made a particular election with an FI that deems certain supplies made between the two entities to be financial services (i.e., no tax is charged on eligible taxable supplies)
  • Financial revenue of more than $10 million and greater than 10% of its total revenues
  • More than $1 million of interest, fees, or charges with respect to credits cards, charge cards issued by the business, or with respect to making advances, lending money or granting credit.

 

Financial revenue - Interest

To determine whether they meet either of the threshold tests, businesses will have to carefully determine the source of their financial revenues, particularly interest revenues. For purposes of the calculations of the financial revenue thresholds, certain types of financial revenue may be excluded from the calculation of one or both of the threshold tests. For example, businesses may exclude interest and dividends received from a related corporation.

 

However, interest income received from a related partnership would have to be included in the calculations. The CRA has noted that businesses should include interest earned from bonds purchased from the bond issuer or interest earned from guaranteed investment certificates purchased from the issuer who is not a related corporation. However it appears that businesses may be entitled to exclude interest earned from bonds purchased on the secondary market from the $1 million threshold calculation, as this type of transaction may not be considered to be "in respect to lending money.

 

In light of the exclusions and CRA's administration policy, businesses that receive interest income from various sources should carefully scrutinize these amounts and determine what should be included in their various calculations to see if they meet either one of the two thresholds. Holding companies should carefully scrutinize whether they are caught by these rules.

 

A penalty that hurts
Businesses that fail to recognize their filing requirements for the GST/HST and QST annual information returns face significant penalties. Penalties of up to $1,000 can apply to each misstated amount of the lengthy GST/HST return and may add up to as much as $100,000 per return. A similar severe penalty also applies for QST purposes.

 

For more information, contact your KPMG adviser.

 


 

Information is current to May 06, 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