Retirement programs need to prepare for the HST party

Consequent to changes in “place of supply” rules and proposed changes to financial institution rules for HST, RPPs and DPSPs with members (including retirees and deferred vested members) in 2 or more provinces, at least one of which is an HST province, will face new HST registration and reporting requirements. Such requirements will apply regardless of where the plan sponsor is located, as GST/HST due as of July 1, 2010 will be determined based on province of residency of the plan members.

At the time of writing, it remains difficult to detail what the administrative requirements are, as the federal government has not yet finalized them. The federal Department of Finance (Finance) published a Backgrounder on May 19, 2010 that deals with the topic. A critical component of these requirements is a series of election forms relating to reporting requirements, which are proposed to apply for reporting periods after June 2010, but which have yet to be published by the Canada Revenue Agency. The Backgrounder can be accessed here: http://www.fin.gc.ca/n10/data/10-050_1-eng.asp#toc260997777.

Additional revisions to the Backgrounder were published by Finance on June 30 along with draft regulations, with another deadline for commentary set for July 31. These can be accessed here: http://www.fin.gc.ca/n10/10-062-eng.asp. Stay tuned to your CRA and HST sources for more details after July 31.

The HST rule changes create a broader governance issue for capital accumulation plans (CAPs) in addition to the new registration and reporting requirements. The manner in how HST is collected in respect of individual member accounts could become an issue for some investors/plan members, particularly those who reside in non-HST provinces, as the Excise Tax Act and the draft regulations do not address the question of how tax collected should be allocated to investors. It seems reasonable to expect that GST/HST would be allocated in accordance with province of residence of the individual member, as this is in fact how GST/HST will be calculated and the basis on which it is collected and then shared between the federal government and the participating HST provinces.

However, based on media reports and an informal survey of financial service providers, this does not seem to be the direction in which investment funds are headed as there are a number of administrative and systems challenges in achieving allocation to member accounts by province of residence. The root problem lies in how investment funds are unitized. The default approach emerging is that unit values will be net of the “blended” GST/HST calculated for the investment fund. This means that investors in non-HST provinces (e.g. Albertans et al) will in effect pay a portion of HST while investors in HST provinces (e.g. Ontarians et al) will benefit from the subsidy provided by the non-HST investors.

Solutions
One possible solution to this problem, which has been discussed in the industry, is to create separate series of units that reflect GST or HST payable by each jurisdiction where differing rates will apply. The industry has generally rejected this approach on the basis that the administrative costs would exceed the additional tax costs to adversely affected unitholders. There could also be adverse income tax consequences for non-registered investors who move between HST and non-HST provinces and thus may be required to trade units of one series for another series of the investment fund.