December 21, 2012
Fund Managers and Insurance Companies — Are You Ready for 2013 GST Changes?
Fund managers and insurance companies may soon need to change their systems and processes for upcoming GST/HST and QST changes. With these changes coming up in 2013, managers of investment plans, like mutual funds, segregated funds, exchange traded funds (ETFs) and unit trusts, face new challenges relating to indirect taxes.
Your business may have to adjust its systems and processes for the upcoming 2013 GST/HST and QST changes if it:
· Provides investment management services
· Is a mutual fund
· Is an exchange-traded fund (ETF)
· Is a segregated fund.
Quebec Sales Tax
Quebec will amend its Quebec Sales Tax (QST) effective January 1, 2013 to further harmonize the QST rules with the federal GST rules. The most significant change is the change to the tax status of financial services from zero-rated to QST-exempt. Financial institutions and other businesses that provide financial services will be affected by this change. Some of the effects of this change are:
· Most entities providing financial services will no longer be entitled to claim input tax refunds (ITRs) for QST paid on costs related to their financial services.
· Many entities will face new QST rules. Many of these new rules apply differently based on the type of financial institutions.
· Many entities will now qualify as Quebec selected listed financial institutions (SLFIs) and as such will be subject to the new Quebec special allocation method (SAM) formula.
· Many pension plans face new QST rules for rebates and new filing requirements.
· Some entities outside Quebec will have to register for QST purposes.
· Some entities in Quebec will either have to cancel their QST registration or apply for GST/HST registration, if applicable.
· The GST/HST and QST of SLFIs will be administered by the Canada Revenue Agency.
SAM formula for
As such, SLFIs registered for GST purposes will be required to register for QST purposes as of January 1, 2013 if they will have to allocate to Quebec an amount in the element “C” of the SAM formula. Similar to the federal rules for the provincial component of the HST, Quebec SLFIs will not be entitled to claim ITRs and will instead calculate QST liability or refunds with the Quebec SAM formula, which appears to be similar to the federal SAM formula.
Non-SLFI investment plans that only have investors in Quebec and in another province will also be Quebec SLFIs. As such, it appears that some entities could be Quebec SLFI and non-SLFI for GST purposes.
Investment managers’ GST/HST rates
Many managers of investment plans collect the GST/HST on their management fees based on “blended rates” rather than the rate of GST or HST applicable to the province where the funds are actually located. With the upcoming amended QST on January 1, 2013, the transition in British Columbia from the HST back to a GST and a new B.C. provincial sales tax (PST) system and the introduction of the new HST in Prince Edward Island on April 1, 2013, fund managers will have to carefully calculate their blended rates for most funds effective January 1, 2013 and April 1, 2013.
Understating blended rates could result in assessments of uncollected tax and interest that fund managers may not be able to recover from their investment plan clients. Also, overstating blended rates can lead to overstated management expense ratios (MERs).
Issues for investment plans
Investment managers also have to deal with several different indirect tax-related issues for their investment plans based on the type of their investment plans, the residency of their unit holders and the amount of information they receive from their unit holders, as well as whether they have new or merged plans.
Is the investment
plan a SLFI?
As a SLFI, an investment plan must calculate its liability for the provincial component of the HST (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 the SAM formula, either an amount owing or a refund of PVAT, may be transferred from the investment plan to its investment manager who will include that amount in its net tax to be remitted, subject to certain conditions.
If the investment plan does not qualify as a SLFI, the investment plan will have to apply other rules to determine the rebate or payment of tax for goods and services acquired in one province for use in another one.
provincial attribution percentages
Many SLFI investment plans require information from their unit holders to fulfill their GST/HST requirements for the upcoming year. Some investment plans are required to make a written request to certain unit holders. However, some other unit holders are required by law to submit some information without receiving a written request from the plans. The requirements differ based on the type of unit holders, and the amount and the total value of the units they hold.
holder information may increase tax liability
Should plans make a
non-resident investors election?
In general, when a SLFI investment plan calculates its provincial attribution percentage, units held by non-residents of Canada are deemed to be held by unit holders resident in Canada in a non-HST participating province. However, to determine input tax credit eligibility in respect of units held by non-residents of Canada, these units are considered to be held by residents of Canada, thus reducing potential input tax credits. Investment plans must establish whether making an election could help them maximize input tax credits.
Different rules for
First, a series of an ETF or an investment plan that is an ETF has a minimum of two attribution points. The attribution point is the date used to calculate the provincial attribution point.
Second, unlike mutual fund trusts, there is generally no “look through” rule for ETFs with regard to investors. The issue is that a significant portion of ETF units may be held by financial institutions. The residency of these corporations is based on their principal business location, which is used to determine the provincial attribution percentage of ETFs. By using a “residency” test and not a “look through” test that would look through to the specific provincial attribution percentage of these institutions, ETFs can end up with significantly high provincial attribution percentages for the province in which these financial institutions have their principal business location.
However, an ETF may apply to the CRA to use an alternative method to calculate its provincial attribution percentages for the fund or series of the fund where the results using the general method would provide inappropriate results.
New, merged or
wound-down investment plans
Based on a “reconciliation method”, a new investment plan or series would be allowed to estimate its provincial attribution percentages for a transitional period (i.e., 90 days) and would then be required to do a reconciliation after 90 days.
Other special rules apply for new investment plans or new series of an investment plan created by way of a merger.
Investment managers of new investment plans must ensure that the provincial attribution percentages are determined correctly and that any applicable elections are filed on time.
Some SLFI investment plans may benefit from being GST/HST registered. In many instances, investment plans may choose an annual reporting period instead of monthly or quarterly reporting periods, thus limiting their compliance requirements. Also, some elections are available to SLFI investment plans and their managers that will help alleviate some of their compliance burden by having the managers fulfill specific requirements on behalf of the plans.
However, where an investment plan is not a SLFI, being registered may create an additional annual filing requirement for some entities.
Investment plans should carefully review their obligations and their options to determine whether they are required to register or whether they should apply to voluntarily register.
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Information is current to December 19, 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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