New tax rules for pension plans explained

The amendments include a proposed rebate system that will replace the current GST/HST input tax credit (ITC) mechanism for many pension plans.

Due to the complexity of the legislation, its interpretation depends on the government’s view of the governing tax policy, which may not always be shared by the courts, explains Mercer. The firm encourages employers to take this opportunity to review their current GST/HST filing positions and assess the financial impact of the new legislation.

Also, employers will need to determine whether they can—given their pension documents and the current state of the law on expenses—use the rebate sharing and “adjustment note” procedures.

The proposed rebate system will apply to all employer-sponsored pension trusts and certain pension corporations, regardless of whether they are currently GST/HST registrants or not. Pension entities sponsored by listed financial institutions (such as banks and insurers) will not be eligible for the rebate.

Expenses
Expenses relating to pension activities will qualify, while those relating to excluded activities will not, although employers may generate ITCs in accordance with the general rules. Pension activities are defined as those that “relate to the establishment, management or administration of a plan or associated pension entity.”

The communiqué explains that excluded activities are those undertaken exclusively for any of the following reasons:

• complying with the employer’s obligations under securities legislation;
• evaluating the feasibility or financial impact on the employer of establishing, altering or winding up a pension plan, except the preparation of a statutorily required actuarial report;
• evaluating the financial impact of the pension plan on the assets and liabilities of the employer; and
• negotiating changes to the benefits under the pension plan with a collective bargaining agent.

Features
The main features of the proposed rebate system are as follows.

• Expenses relating to pension activities will not be eligible for ITCs, regardless of who pays the expenses. This rule would not apply where the pension entity is a GST registrant or to expenses incurred by the entity in the course of its commercial activities.

• A rebate of 33% will be provided for expenses relating to pension activities. The rebate may be taken by the pension entity, may be shared with the employer or may be transferred in its entirety to the employer.

• An employer that uses internal resources for the benefit of a pension entity will be deemed to have made a taxable supply to the entity and to have collected GST/HST from the entity. The employer will be required to remit the GST/HST and the value of the supply will be eligible for the rebate.

• Special rules will apply where the employer invoices the pension entity, either for plan expenses that the employer paid directly or for employer resources used to benefit the plan. Those rules would effectively allow the employer to transfer GST/HST liability to the plan entity by means of an adjustment note procedure.

The changes will apply for fiscal years of organizations beginning after Sept. 22, 2009. For pension entities that are GST/HST registrants, the new regime applies to reporting periods commencing after that date.

For other pension entities, the changes will apply to the earlier of the following two periods that begin after Sept. 22, 2009:

• the first two quarters of a fiscal year; and
• the last two quarters of a fiscal year.

“The new rebate system is intended to replace and simplify the existing regime,” says the communiqué. “Unfortunately, there is considerable confusion about precisely which rules apply under the existing regime, given the recent decisions of the Federal Court of Appeal in General Motors and CMPA and their effect upon the Canada Revenue Agency’s assessing policy as set out in its Technical Information Bulletin B-032R. The financial impact of the new system may depend on the filing positions adopted by plan sponsors under the existing regime.”

Mercer uses the example of an employer that paid all pension plan expenses and could have relied on the General Motors case to claim ITCs in respect of all GST/HST paid on those expenses. This employer would see the new rebate mechanism as an increase in GST/HST, since its GST/HST recovery rate would, in effect, be reduced from 100% to 33%.

“The first bone of contention for plan sponsors is likely the carving out of excluded activities from pension activities,” says the communiqué. “Instead of adopting the less precise but more accurate concept of an activity for the benefit of plan beneficiaries, the legislation has opted for a specific listing of activities that will permit ITC claims with no rebate, and those that will not permit ITC claims but with a rebate. Most GST/HST registrants will prefer characterization of an expense as one relating to an excluded activity, but that category is very limited.”

The second issue for plan sponsors is the 33% rebate rate. To the extent that ITCs are currently sheltering GST/HST at a greater percentage, explains Mercer, the rebate mechanism will result in increased taxation for plan sponsors.

The legislation is neutral regarding the propriety of sharing the GST/HST refund, leaving the decision to the discretion of the parties. “It is the parties that must determine, based on the general law of pensions, what principles govern the sharing of the refund,” Mercer states. “Similarly, the legislation leaves it to the parties to determine whether the employer can validly transfer GST/HST liability to the pension entity by means of the adjustment note procedure.”

Both these questions involve the application—in common law provinces—of the principles set out in the Supreme Court of Canada’s decision in Kerry.

Québec
While the Québec Ministry of Finance is studying the federal amendments, Mercer explains that the Québec government has not announced any measure to change its sales tax system at this time.

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