HST a dark horse for plan sponsors

Although there may be positive effects for Ontario businesses, there is a very good chance the HST could result in higher costs, higher premiums and, in some cases, plans may be asking sponsors for even more money to make up deficits. It all depends on the murky world of tax accounting, input tax credits and rebates, as well as the outcome of conflicting court decisions that have not yet made it all the way through the appeals process.

HST accounting, explained
Overall, experts say the harmonized tax will be good for businesses in Ontario. Businesses currently pay GST on nearly all day-to-day business expenses, and recoup these costs by filing for input tax credits (ITCs), before charging GST to consumers. In Ontario, provincial sales taxes are not recouped in this way, although it is believed that once the harmonized tax is in place, businesses will then be able to recoup this cost as well.

Unfortunately for many businesses in the financial services industry, the products offered are tax exempt, meaning customers do not pay GST on the end product and companies are unable to claim input credits for their own costs.

“If a company is selling you a life insurance policy, it has paid tax on heat and light and office equipment and computers and all those good things that actually go into producing the product, but it can’t get an ITC, an input tax credit,” points out Ron Sanderson, director of policyholder taxation and pensions at the Canadian Life and Health Insurance Association.

In these cases, the extra cost will likely be passed on to consumers and plan sponsors by way of higher premiums. Similarly, the cost of certain health services, depending on their tax exempt status, and the costs companies incur to administer these plans will need to be accounted for at some stage, which could result in higher premiums.

What’s more, a discussion paper released in 2007 by Finance Canada proposes a new legislative framework for GST/HST input tax credit allocation. Dave Schlesinger, indirect tax partner at KPMG, says this too could further reduce the amount plan multi-employer plans would be able to recover.

“Under this discussion paper, only one-third of the cost would be recoverable,” he says. “We don’t know how that’s going to tie into the harmonized sales tax, but this discussion paper could cause increased costs. Any dollar that is not recoverable is going to be an additional cost to the pension plan; deficits that are required to be funded by the sponsors.”

Going forward, Sanderson says the new HST—or the Ontario value-added tax—will presumably be structured in the same way the GST is administered. “Currently, if you are an exempt service, you will presumably continue to be an exempt service for the composite OVAT.”

There is one complication for national pension plans with members in Ontario and other provinces: In this case, services provided to Ontario plan members could be subject to OVAT while services in other provinces may not incur the tax. “How do you equitably charge that tax against those individuals or against the plan as a whole?” asks Sanderson. “What do you do if you’re an Alberta-based plan using an Ontario investment manager? If the service is provided in Ontario is there now an OVAT liability?”

He says when services are provided on a national basis, the GST costs to rebate are determined, in this case, on life insurance premiums paid. “Most life insurance companies are based in Ontario, Quebec and Manitoba,” he says. “They incur most of their sales input costs in those jurisdictions. We buy our computers in Ontario, not Newfoundland. Yet the allocation of the input tax credits assumes that we buy a pro rata portion of all those inputs in those jurisdictions. That tends to muddy ITC recoveries.”

Unfortunately, most planning for HST implementation can only be based on the experiences of other provinces (which have few, if any resident pension plans), and yet to be released draft legislation and legal cases which are still working their way through the courts. Despite this, the issue does require consideration. Once the details fall into place, companies could find themselves working with very short timelines for implementation. The industry expects final legislation will be unveiled in March 2010, just four months before companies need to implement changes on July 1. Draft legislation is due out this fall.

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