June 28, 2012
Managers of investment plans, like mutual funds, segregated funds, exchange traded funds (ETFs) and unit trusts, calculate the GST/HST on their management fees based on “blended rates” rather than charging the GST/HST rate applicable to the province where the funds are actually located. Fund managers will need to take into account upcoming GST/HST changes in several provinces when calculating their 2013 blended rates.
Fund managers should note that the return of British Columbia to GST and PST should reduce their blended rates for 2013. However, further GST-QST harmonization in Quebec and the introduction of HST in Prince Edward Island should increase these blended rates for 2013. For a handy one-page thumbnail of these changes, click here to see our table.
Fund managers need to take care when calculating their blended rates because undercharging GST/HST could result in an assessment of uncollected tax and interest that they may not be able to recover from the investment plans.
We expect the federal and provincial governments to release more details on the upcoming GST/HST and QST changes dealing with the blended rates in the coming months. Also, the QST changes may affect fund managers’ reporting requirements.
British Columbia will return to the GST and PST (from HST) on April 1, 2013. A recent government news release states that a fund with a taxation year that straddles April 1, 2013 will determine the provincial component of its HST liability (provincial value added tax, also known as PVAT) on a proportionate basis (i.e., number of days before and after April 1, 2013) based on transitional rules.
Because this calculation will be done on a proportionate basis for 2013, the managers will only have to do one provincial attribution percentage calculation for most of their investment plans. However, we anticipate that a transitional adjustment will be introduced to account for HST to apply for only three months in 2013. The adjustment will likely be included in the adjustment section of the special attribution method (SAM) formula. This adjustment may make an investment plan’s filing of the annual GST494 return for selected listed financial institutions (SLFIs) more complicated.
What is a SLFI?
An investment plan with unitholders in an HST province and a non-HST province will generally be considered a “selected listed financial institution” (SLFI). As a SLFI, an investment plan must calculate its liability for PVAT in each HST province by using a formula called the Special Attribution Method (SAM). The formula allows for the deduction of the actual PVAT paid by the investment plan during the reporting period.
The result of SAM, either an amount owing or a refund of PVAT, may be transferred from the investment plan to its investment manager, who will include the amount in its net tax.
Under an agreement between the federal government and Quebec, the CRA will administer the QST for SLFIs and will remit the QST collected to Quebec. Due to the harmonization of the QST rules with the GST rules, investment plans will likely have to track the QST.
Quebec will be treated as if it were an HST-participating province to determine whether an entity is a SLFI. We understand that an investment plan that has investors in Quebec will be treated as having a permanent establishment in Quebec. Therefore, an investment plan that has investors in Quebec and one other province would probably be considered a SLFI and be subject to the SAM formula.
We understand that fund managers of such investment plans should be required to include QST in the calculation of their blended rates starting in 2013. The provincial attribution percentage for Quebec will probably be based on the same method used for federal purposes.
We expect that a new key element for investment plans will be the need to track the QST components of the SAM formula separately.
Nova Scotia has announced that it will decrease its PVAT to 9% (from 10%) on July 1, 2014 and to 8% on July 1, 2015, which should affect the blended rates for 2014 and 2015.
P.E.I. plans to transition from a GST and PST system to a 14% HST on April 1, 2013. No transitional rules have been released at this time. However, we understand that upcoming transitional rules should use a proportionate method to allocate for the period before and after the implementation date to calculate an investment plan’s 2013 PVAT liability under the SAM formula. P.E.I.’s HST should also increase fund managers’ blended rates. We expect the transitional rules to be announced in the coming months.
Fund managers of investment plans will have to update the calculations of their blended rates to take into account provincial harmonization and deharmonization and ensure their systems make the appropriate changes before management fees are charged in 2013.
Further changes will be required when Nova Scotia decreases its PVAT rate on July 1, 2014 and July 1, 2015.
Investment plans will likely have to change the way they calculate and file their GST494 returns for SLFIs to take into account the harmonization of the QST rules, other upcoming changes and all the related transitional adjustments.
KPMG can help fund managers determine the effects of provincial harmonization and deharmonization on their blended rates. Also, KPMG can help investment plans file the upcoming new GST494 return that should take into account QST and other transitional adjustments. For details, contact your KPMG adviser.
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Information is current to June 25, 2012. The information contained in this TaxNewsFlash-Canada 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.
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