Two-tier taxation plans causing headaches

“Trusteed pension plans are facing significant new administrative and financial burdens as a consequence of the new GST/HST rules for RPPs, while plans funded through insurance contracts are excluded from the provisions,” says Greg Hurst of Greg Hurst & Associates Ltd.

New GST/HST rules targeted at RPPs that were passed into law July 12, 2010, currently affect only plans that are funded under a trust or a corporate entity such as a pension fund society. RPPs funded under insurance policies or contracts are not currently captured by the new rules.

Additional financial burdens will also impact affected RPPs that have members in an HST province. Such plans where a participating employer (e.g., a plan sponsor) has been performing aspects of plan administration in-house or paying for third-party administration directly will suffer the heaviest financial impacts consequent to the deemed supply provisions of the new rules. The supply provisions require RPP administrators to self-assess GST and, if applicable, HST (determined based on plan beneficiaries’ province of residence) in respect of services supplied by the employer on a fair market value basis.

Under the new rules, employers will not be able to claim input tax credits for such services that the employer supplies (such as management and oversight) to an RPP or in respect of third-party services invoiced to the employer, which are also deemed to be supplied to the plan. The RPP will be able to claim a 33% rebate in respect of GST/HST attributable to the plan, which may be assigned to a participating employer and may also be subject to fiduciary considerations.

“The potential negative impacts to the business of trust companies appear obvious,” says Hurst. “All other things being equal, plan sponsors will have a preference to move to an insurance contract to avoid the additional administrative burden and, from a fiduciary perspective, in respect of the additional tax burden.”