The New GST/HST Regime for Registered Pension Plans – An Update on the Deemed Supply and Master Trust Issues

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[author: Marlene Legare]

The sales tax compliance associated with a registered employee pension plan funded through a trust (RPP Trust) has become significantly more complex since certain new GST/HST rules took effect, beginning with the 2010 fiscal year in most cases. The changes (comprised of measures announced in September 2009 and May and June of 2010)1 brought new potential benefits, in terms of rebate or refund entitlements, and new potential liabilities. In all cases, the changes entail significantly greater compliance requirements,2 which have been made more challenging by the fact that the legislative provisions are extremely complex. In addition, some fundamental policy issues have arisen or been magnified under the new rules. For all of these reasons, the Department of Finance (Finance) has received numerous representations (calling for ameliorating amendments) from the tax professional community as well as industry associations such as the Tax Executives Institute Inc. (TEI). In response, in March 2012, senior officials from Finance and the Canada Revenue Agency (CRA) convened a meeting in Toronto (the Consultation Meeting) with a group of tax practitioners who have been involved with this issue, including the author, to discuss the various problems and proposed solutions that have been brought forward. The following is a summary of two of the most significant issues concerning the 2009 measures that Finance is examining, and Finance’s apparent leanings on those issues at this stage of its review, based on the Consultation Meeting.

Deemed Supplies and Actual Supplies – The Double Counting Issue  

A key element of the 2009 measures relating to RPP Trusts generally imposes a GST/HST liability on GST/HST-registered participating employers of a pension plan who enter into contracts with third-party suppliers for certain property or services, or use certain of their own in-house resources, in relation to the management or administration of the plan or the plan assets.3  More particularly, the said GST/HST liability is in respect of supplies deemed to be made by such employer of most taxable property and services that are acquired by the employer, and in-house resources of the employer that are consumed or used, for purposes relating to the pension plan.4  In turn, the related RPP Trust is deemed to pay the GST/HST on such deemed supplies and is then generally entitled to claim a 33% rebate of that tax.5  In many, if not most, of these circumstances, the CRA’s official position is that the employer in this case also makes actual supplies to the RPP Trust (under the general rules of the GST/HST legislation) in respect of the same property or service. To redress the resulting double taxation, a special tax-adjustment note (TAN) mechanism permits such employer to claim a net tax deduction for the lesser of the tax on the actual supply and the tax on the deemed supply. However, the TAN rules are complex and cumbersome to apply. Counter-intuitively, they generally trigger a liability on the RPP Trust as a “recapture” of 33% of the amount of the net tax adjustment of the employer, even if no 33% rebate in respect of the amount was ever actually claimed.

Sympathetic to the above concerns, Finance is now considering a proposal for an election that would have the effect of removing the need to account for both the deemed supply and an actual supply in respect of the same property or service. In addition, it is expected that Finance will concurrently propose amendments to address certain technical deficiencies with the TAN mechanism, including the recapture anomaly noted above, for those cases where the parties might choose to continue to account for both actual and deemed supplies and to rely on the TAN rules. Further, the Finance officials at the Consultation Meeting indicated that they are considering a proposal to add one or more de minimis rules in respect of the requirement to account for deemed supplies in certain circumstances. This could possibly include a new de minimis test in respect of participating employers whereby an employer below the threshold might be exempted from the application of all or some of the deemed supply rules.

From a timing perspective, it appears that Finance officials are giving as much priority to these particular simplifying proposals as they can; however, it seems that the days are gone when they could reasonably predict the timing of official announcements, even on the most mundane of technical tax matters. Especially given that reality, it is troubling that the officials seemed reluctant to commit to recommending that these relieving changes – particularly the proposed election provision – be made on a retrospective basis, as has been requested. Ostensibly, their concern is with interfering with past transactions. However, there are ample examples of other, not dissimilar, GST/HST election provisions that, on introduction, were allowed to apply retrospectively, subject to the reasonable condition that the parties must have dealt with matters consistent with the elected treatment as of and from the chosen effective date of the election. One cannot help but observe that the extent of Finance’s concern in this case over unduly influencing past transactions or decisions seems out of proportion relative to such concerns Finance has shown in the past in the case of “clarifying” GST/HST amendments of a non-relieving or revenue-protecting nature.

Master Trust Issues

Many pension plan arrangements involve the use of a “master trust” as a vehicle for the investment of the assets of a pension plan or, more commonly, of multiple pension plans sponsored by the same employer or group of related employers. Typically, all of the master trust units are held by one or more separate RPP Trusts. Under the current GST/HST rules, such a master trust structure is treated differently from non-tiered trust structures. The technical reason for the distinction is because the above-noted deemed supply and rebate rules all apply in respect of a “pension entity,” which the Act defines, in the case of a trust, as a trust governed by a registered pension plan.  The CRA has said that a master trust does not fit within that definition because the master trust is not itself governed by the pension plan.

One effect of the master trust not qualifying as a “pension entity” is that there is no 33% rebate for any property or services acquired directly by the master trust by way of the trustee contracting, on behalf of the trust, for the purchase of the property and services from third-party suppliers. Even more importantly (since often the trustee does not do such contracting, but acts strictly in a custodial capacity), Finance officials further confirmed that the existing rules also were not intended to provide for any 33% rebate in respect of employer-acquired property or services, or in-house resources of the employer that are consumed or used, for a purpose related to the activities of the master trust. One of Finance’s key concerns seems to be that extending the rebate to master trusts could, at least conceptually, create an inequity in favour of that investment vehicle over other vehicles not eligible for such a rebate, such as publicly-traded mutual funds, in which RPP Trusts also can be invested, but which are not restricted to RPP Trust investors. The policy concern on the other side of this issue is that the different tax treatment of pension plans depending on whether a master trust is used potentially has a more real and significant distortive effect in terms of influencing structuring decisions. For now, Finance’s response is that it is willing to continue to look at the question of whether master trusts should, to any extent, be treated as pension entities.  However, as Finance considers this to be a significant policy issue, the officials hasten to add that it will take some time to review. Accordingly, at this time, persons involved with making decisions regarding pension plan arrangements are well advised to not count on the 33% rebate being extended to master trusts any time soon.

While the above policy debate lingers on, there are a number of technical difficulties and contentious interpretative issues relating to master trusts with which to contend under the GST/HST rules as they currently stand. As in the case of RPP Trusts, the CRA considers that in certain circumstances there is an actual supply made to the master trust by a participating employer who acquires property or services, or uses its own in-house resources, for plan-related activities.  Finance does not disagree, but apparently it did not intend that there would ever also be a related deemed supply by the employer to the master trust, and so the TAN rules do not apply in respect of a master trust. At the Consultation Meeting, however, the Finance officials acknowledged that the legislation is not clear in this regard and that, technically, in the case of employer-acquired property or services, or in-house resources of the employer, which the employer itself consumes or uses in the course of “pension activities” (as currently defined), there may, indeed, be a deemed supply of the property or service by the employer. This actually is beneficial in that, as with all such deemed supplies, it is the RPP Trust (and not the master trust) which is deemed to pay the tax on the deemed supplies and which should thereby be able to claim the 33% rebate in respect of that tax. The problem is that, if there also is an actual related supply made by the employer to the master trust, then the deemed supply results in double taxation, without the relief of the TAN adjustment in this case. Since neither the claiming of a rebate in respect of expenses related to the master trust, nor the double taxation of such expenses, was intended, Finance signalled that it is looking at technical amendments to preclude both of those results. In contrast to the broader policy matters concerning master trusts, these technical issues apparently are being given more immediate attention by Finance, and so it is probable that an announcement of amendments to address these technical issues will be made in the foreseeable future.

The above anticipated technical amendments are unlikely to resolve all of the existing uncertainties surrounding the treatment of master trusts under the current regime. In particular, in circumstances where it may be considered that there are actual supplies (or re-supplies) made by a participating employer to the master trust, there may remain questions as to whether it is possible to structure transactions such that the RPP Trust ultimately becomes liable for the related tax and is thus put in a position to claim the corresponding 33% rebate. More fundamentally, the question of whether, or in what circumstances, a participating employer does, in fact, make actual supplies (or re-supplies) to the master trust (or to any RPP Trust, for that matter) is very much open to interpretation currently, and will likely remain so until we have some jurisprudence on that point. There already is at least one, as yet unheard, Tax Court of Canada case that has been filed involving the question of whether a pension plan administrator made supplies to the related RPP Trusts.6

While we await further legislative and case law developments in this area, there unfortunately will remain some uncertainty as to the full GST/HST consequences associated with different pension plan arrangements, particularly in the case of those arrangements involving the use of a master trust.

A version of this article will be published in an upcoming issue of the Tax Executives Institute, Inc. – Toronto Chapter – Newsletter.


1  The referenced measures are mainly contained in sections 172.1, 232.01 and 261.01 of the Excise Tax Act (Act), as amended to date, in the case of the 2009 measures, and in section 225.2 of the Act and the regulations made thereunder, especially the draft Selected Listed Financial Institutions Attribution Method (GST/HST) Regulations issued on January 28, 2011, in the case of the 2010 measures.

2  A checklist of the new compliance requirements was provided in our Osler Update dated December 22, 2010 entitled “Recent GST/HST Changes – What They Mean for Pension Plan Trustees, Administrators and Sponsoring Employers.”

3  Normally in these circumstances, the participating employer in question is the plan administrator, but these measures are not limited to plan administrators.

4  Certain pension-plan related activities are excluded.  It should also be noted that a participating employer could face this GST/HST liability in respect of property or services acquired from third-parties, or in-house resources consumed or used, by the employer, even if the employer is not reimbursed or compensated in any manner out of the plan assets.      

5  A notable exception is in the case of certain pension plans where listed financial institutions (as defined in the Act) make 10% or more of the total annual contributions to the pension plan.     

6  Osler, Hoskin & Harcourt LLP is acting as the appellant’s counsel in this case.