Another solution is to minimize fees deducted at the investment fund level and instead deduct fees directly from member accounts by redeeming units to the extent of the fees, with GST/HST added based on province of residence. The provider’s account administration system would have to be capable of differentiating members and fees by province. This may not be a perfect solution, however, as some expenses loaded for HST may still be applied to the investment fund, but at least the problem would be minimized. Some CAP providers are moving towards this solution, which has the added advantage of improving fee transparency for plan members.
A third option—which has not seen much in the way of publicly reported discussion—is for investment funds to net a maximum amount for GST/HST from unit values (e.g. the 15% rate applicable to Nova Scotia), and then rebate excess HST to unitholders based on province of residence in the form of additional units. From an administrative and systems perspective this should be easy to implement as it parallels the manner in which most investment funds distribute income and dividends of the fund. Again, this solution is not perfect—there would likely be timing issues relative to any lag between netting GST/HST from fund unit values and crediting of any HST rebate, and there may be other logistical issues faced by fund managers.
The investment funds industry may be forced from its default approach if a non-HST province were to pass legislation prohibiting investment funds from picking the pockets of their residents to pay HST of another province. Failing that, given some time for the aggregate of HST paid by residents of a non-HST province to add up to a significant amount, class action lawsuits might be launched. No doubt the target of any such suits will be the plan administrator and their fund managers and other service providers—the federal government would likely escape accountability in such context as there is clear intent in the new rules to collect tax based on the province of residence of the investment fund unitholders. The English common-law principle of “no taxation without representation” has a longstanding tradition in democratic societies and might serve as a strong foundation to any such claims if it were to be extendable to fiduciaries.
Affected CAP sponsors may wish to be proactive with their investment fund and services providers around the GST/HST issue. Some patience would be indicated though as the financial services industry has had precious little time to adjust to the new reality, given the very late rule changes and the fact that the government has yet to actually finalize its administrative requirements.
Greg Hurst is a Principal with Morneau Sobeco in Vancouver, and is the firm’s National Specialist for capital accumulation plans.
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