January 6, 2012
Many large corporations in industries such as construction, retailing and manufacturing may be surprised to learn that they are considered financial institutions (FI) under the GST/HST rules. As a result, they are required to file an annual information return or face significant penalties, among other things. As little as $1 million in interest income can result in a corporation being considered an FI under these rules.
Corporations that are not traditional financial service providers such as banks, investment dealers and insurance companies may be considered “de minimis” FIs if they have:
- “Financial revenue” such as interest, dividends or a separate fee for a financial service that is greater than $10 million and greater than 10% of the entity’s total revenue, or
- Revenue from the lending of money in excess of $1 million, for example, a retail corporation that has more than $1 million of interest income from investing excess funds.
For the purpose of these tests, certain types of financial revenue such as interest and dividends received from related corporations are excluded.
These rules do not apply to charities, municipalities, universities, public colleges, hospitals or qualifying non-profit organizations.
KPMG understands that the CRA attempts to identify de minimis FIs based solely on information included in their income tax returns. This initial identification results in the CRA sending correspondence to the corporation stating that it may qualify as an FI.
Corporations that receive these letters should keep in mind that the CRA may not know whether amounts reported in their income tax returns originate from related parties. As these amounts should be excluded from the de minimis tests, the corporation’s response to the CRA should include this information if it does not otherwise meet the requirements of a de minimis FI.
If a corporation is a de minimis FI, it may have to meet certain requirements in the GST/HST legislation. These requirements include:
- Annually filing form GST111 “Financial Institution GST/HST Annual Information Return” (for details, see KPMG’s TaxNewsFlash-Canada 2011-17, “June 30 GST/HST Deadline — Do You Have to File?”, dated May 12, 2011)
- Allocating tax paid between taxable and exempt activities in determining input tax credits (ITC) under rules for FIs
- Claiming ITCs based on the exact percentage
- Following change of use rules related to property acquired before becoming a de minimis FI
- Giving up the ability to claim ITCs on financial services that relate to making taxable supplies.
Entities that are de minimis FIs should be aware of the implications and ensure they comply with these rules, especially filing the GST/HST annual information return, due to the significant penalties for failing to file this return.
Your KPMG adviser can help you manage the impact of these and other federal or provincial indirect tax rules that may affect your business. We can help you manage your indirect tax compliance obligations in all relevant jurisdictions and also help you ensure that you are not missing refund opportunities. For details, contact your KPMG adviser.
Information is current to January 5, 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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