Consultation paper: Proposals for Consultation concerning the GST/HST Treatment of Certain Limited Partnerships and Investment Plans

Related Documents:

Closing date: November 30, 2016

Who may respond: The Department invites industry stakeholders and other interested parties to provide input into the proposals.

Comments on any of the proposals described in this consultation paper should be submitted by November 30, 2016 to fin.gsthst2016-tpstvh2016.fin@canada.ca or to:

Sales Tax Division
Tax Policy Branch
Department of Finance
90 Elgin Street
Ottawa, Ontario K1A 0G5

Once received by the Department of Finance, all submissions will be subject to the Access to Information Act and may be disclosed in accordance with its provisions. Should you express an intention that your submission be considered confidential; the Department will make all efforts to protect this information within the requirements of the law.


Table of Contents

Part 1. Expansion of the SLFI rules to include investment limited partnerships

Part 1. Expansion of the SLFI rules to include investment limited partnerships

a. Background

i. Exempt treatment of financial services

Under the Goods and Services Tax/Harmonized Sales Tax (GST/HST), supplies of financial services are generally exempt. As such, financial service providers do not charge GST/HST on their supplies of exempt financial services and are not eligible to claim input tax credits for GST/HST paid on property and services acquired for consumption, use or supply in the course of providing these services.

Like other businesses, financial service providers (e.g., banks, insurers, investment plans) pay GST/HST on their inputs based on the GST/HST place of supply rules. If, under the place of supply rules, a taxable supply of property or a service is made in an HST province to a provider of financial services, the financial service provider is required to pay HST in respect of the supply. If the supply is made in a non-HST province, the financial service provider is required to pay 5% GST.

ii. SLFI rules

Since financial service providers generally cannot claim input tax credits to recover the GST/HST paid on their inputs, they would, absent special rules, have an incentive to acquire property and services from outside the HST provinces so as to pay only the GST. To avoid this outcome, special HST rules (referred to as the “SLFI rules”) apply to certain financial service providers that operate in an HST province and in at least one other province (i.e., an HST province or a non-HST province). These entities are referred to as selected listed financial institutions (SLFIs).

In 2010, new SLFI rules were introduced for certain entities that are defined as investment plans under the Excise Tax Act (ETA), as well as segregated funds of an insurer1. Investment plans include such entities as unit trusts, mutual fund trusts and corporations, and registered pension plan trusts and corporations.

Under the SLFI rules, an SLFI determines its liability in respect of the provincial component of the HST based on where it provides financial services using a formula approach called the special attribution method (the SAM formula). The calculation involves allocating the SLFI’s unrecoverable GST amount to each HST province according to its provincial attribution percentage for the province. The provincial attribution percentage is a proxy that effectively reflects the extent to which the SLFI provides financial services in a particular province. Under the SLFI rules, an investment plan’s provincial attribution percentage for a province is generally based on the extent to which its units are held by, or for the benefit of, persons residing in the province. The unrecoverable GST amount allocated to the province is then grossed up by a factor to reflect the rate of the provincial component of the HST in the province. Other adjustments may also apply.

The SAM formula used to calculate the liability of an SLFI in respect of the provincial component of the HST in respect of each HST province for a reporting period is generally as follows:

[(A – B) x C x (D/E)] – F + G

where

(A – B) reflects the unrecoverable GST for the reporting period. In general terms, A is the GST paid or payable by the SLFI in that period, and B is the total of input tax credits claimed in that period by the SLFI in respect of its GST paid or payable;

C is the provincial attribution percentage determined in respect of the HST province. The rules for determining this percentage are based on the specific type of SLFI;

(D/E) is the ratio of the tax rate in the HST province to the GST rate (e.g., 8/5 for Ontario). D is the tax rate for the HST province, and E is the tax rate for the 5% GST;

F is, in general terms, the provincial component of the HST for the province paid or payable by the SLFI in the reporting period; and

G is used for adjustments specific to certain situations.

If the amount determined as a liability in respect of the provincial component of the HST for a reporting period of an SLFI under the SAM formula is less than the provincial component of the HST that is actually paid or payable by the SLFI in the reporting period (i.e., under the general place of supply rules), the SLFI would be entitled to deduct the amount in determining its net tax for the reporting period. Conversely, if the amount of the liability in respect of the provincial component of the HST determined under the SAM formula is more than the actual provincial component of the HST that is paid or payable by the SLFI in the period, the SLFI would be required to add the amount in determining its net tax for the reporting period.

SLFIs are generally not entitled to claim input tax credits or rebates in respect of the provincial component of the HST, as the SAM formula takes into account these amounts.

b. Proposed expansion of SLFI rules

Currently, the ETA does not regard investment entities structured as limited partnerships as investment plans. As such, the SLFI rules do not apply to these entities despite the fact that their principal activity (e.g., the investing of funds on behalf of a group of investors) may be similar to other entities that are defined as investment plans for GST/HST purposes.

To address the uneven treatment between investment entities structured as limited partnerships and entities that are currently defined as investment plans, it is proposed that:

  1. An investment limited partnership, which would generally be defined to include a limited partnership whose principal activity is the investing of funds on behalf of a group of investors through the acquisition and disposition of financial instruments, be added to the definition of investment plan in subsection 149(5) of the ETA, resulting in investment limited partnerships becoming listed financial institutions for GST/HST purposes; and
  2. The SLFI rules applicable to entities defined as distributed investment plans2 in the Selected Listed Financial Institutions Attribution Method (GST/HST) Regulations (the “SLFI Regulations”) be adapted to apply to investment limited partnerships.

The Department of Finance invites industry stakeholders and other interested parties to provide input into the final legislative proposals, specifically for the purposes of determining which limited partnerships would be considered investment plans for GST/HST purposes and the specific SLFI rules that would apply to those entities.

The following is intended to provide a general overview of the SLFI rules that are currently applicable to distributed investment plans and proposes how those rules could apply to investment limited partnerships. As it is not intended to be a complete summary of the rules in the ETA and the SLFI Regulations, for additional details, interested parties should refer to the ETA and the SLFI Regulations, as well as applicable publications of the Canada Revenue Agency.

i. Determination of SLFI status – permanent establishment test

Under the current SLFI rules, a person that is an investment plan would generally be considered to be an SLFI throughout a reporting period in a fiscal year that ends in a taxation year if it has, at any time in the taxation year, a permanent establishment in an HST province and, at any time in the taxation year, a permanent establishment in any other province.

It is proposed that the same rules would apply to investment limited partnerships. For these purposes, it is proposed that an investment limited partnership would be deemed to have a permanent establishment in a province if a partner holding one or more of its units (i.e., an interest in the partnership) is resident3 in the province or if the investment limited partnership is able to sell or distribute its units in the province.4

In certain cases, however, satisfying the permanent establishment test does not make an investment plan an SLFI:

  • If an investment plan has created two or more series, each of which is a provincial series (generally a series that is only permitted to be sold or distributed in a single province), the investment plan is generally excluded from being an SLFI; and
  • If an investment plan is not divided into two or more series, but all the units of the investment plan are designed to be sold or distributed to investors in a single province, such a provincial investment plan is generally excluded from being an SLFI.

If an investment plan is excluded from being an SLFI and, therefore not required to use the SAM formula, the general rules in the ETA regarding liability in respect of the provincial component of the HST apply instead.

It is proposed that these exceptions would also apply to investment limited partnerships made up exclusively of provincial series and to investment limited partnerships available only to investors in one province.

ii. Provincial attribution percentage – element C of SAM formula

Under the SLFI rules, an SLFI’s provincial attribution percentage for a province determines the extent to which the SLFI is liable for the provincial component of the HST in respect of the province.

It is proposed that the rules for determining and applying an investment limited partnership’s provincial attribution percentages be consistent with those applicable to distributed investment plans. In general, this would mean that an investment limited partnership’s provincial attribution percentage for a province would be determined by reference to the value of units held by partners that reside in the province.

1. Determining and applying the provincial attribution percentages

A distributed investment plan is required to determine its provincial attribution percentage for each HST province at least once each fiscal year, generally as of September 30.

A distributed investment plan (other than an exchange-traded fund – a description of the rules that apply to these funds is provided below) may choose between the following three methods for the purposes of determining and applying its provincial attribution percentages in respect of a fiscal year.5

Method 1: Preceding-year method

Under this method, a distributed investment plan’s provincial attribution percentage for a province, used to determine the investment plan’s liability in respect of the provincial component of the HST for a reporting period in a fiscal year under the SAM formula, is based on the value of units held by investors in the province as of September 30 of the preceding fiscal year.

The investment plan may make an election to determine its provincial attribution percentage for each province using the average provincial attribution percentage for the province calculated for the 12-month period ending on September 30 of that preceding fiscal year based on the value of units held by investors at quarterly, monthly, weekly or daily points in time.

Method 2: Current-year method

Distributed investment plans may alternatively elect to use the provincial attribution percentage for a province calculated with preceding year values to estimate interim net tax/instalments in respect of the provincial component of the HST for the current fiscal year, with a reconciliation on the final SLFI return based on the provincial attribution percentage for a province calculated using current year values (e.g., as of September 30 of the current fiscal year).

An investment plan that elects to use this method may make a second election to determine its provincial attribution percentage for each province using the average provincial attribution percentage for the province calculated for the 12-month period ending on September 30 of the current fiscal year based on the value of units held by investors at quarterly, monthly, weekly or daily points in time.

Method 3: Real-time method

If at least 90% of the value of units of a distributed investment plan is held by individuals or specified investors6, the investment plan may alternatively elect to apply this method for a fiscal year of the investment plan to determine its provincial attribution percentages either on a daily, weekly, monthly or quarterly basis.

Under this method, the provincial attribution percentages are to be calculated either daily or as of the first day of the week, month or quarter, and are applied to determine the investment plan’s liability in respect of the provincial component of the HST in relation to unrecoverable GST that became payable or was paid without having become payable on that day or during that week, month or quarter, as the case may be.

Under the real-time method, no look-through rules apply and the provincial distribution of the individuals and specified investors determines the provincial attribution percentages in respect of 100% of the value of the units.

It is proposed that the three methods described above would apply in respect of investment limited partnerships for the calculation and application of their provincial attribution percentages for each HST province. The Department would welcome feedback as to whether additional methods should be available to investment limited partnerships.

Exchange-traded investment plans

Under the SLFI rules, an exchange-traded fund is a distributed investment plan, any unit of which is listed or traded on a stock exchange or other public market.

Distributed investment plans that are exchange-traded funds are required to use either the preceding-year method or the current-year method to determine its provincial attribution percentages (or, in the case of investment plans whose units are issued in two or more series, to determine the provincial attribution percentages of any exchange-traded series of the plan), subject to several differences:

  • An exchange-traded fund is not required to look through its institutional investors (i.e., persons that are neither individuals nor specified investors).
  • An exchange-traded fund is required to use the average provincial attribution percentage for each province based on provincial attribution percentages determined for each province as of two or more points in time. It may either:
    • Establish an average provincial attribution percentage for each province by using its provincial attribution percentage for the province as of September 30 and one or more of March 31, June 30 or December 31; or
    • Elect to determine the average provincial attribution percentage for the province calculated for the 12-month period ending on September 30 based on the value of units held by investors at quarterly, monthly, weekly or daily points in time.

Alternatively, an exchange-traded fund may apply to the Canada Revenue Agency to seek pre-approval of its own methods for the calculation of its provincial attribution percentages.

The Department would welcome feedback as to whether the above rules for exchange-traded investment plans would have any application for investment limited partnerships.

2. Investment plans with more than one series of units

Under the SLFI rules, SLFIs with more than one series of units are required to determine their provincial attribution percentages for each series and apply the SAM formula to each series.

It is proposed that investment limited partnerships with more than one series of units would also be required to determine their provincial attribution percentages for each series and apply the SAM formula to each series of the partnership.

3. Look-through rules

Under the SLFI rules, to determine its provincial attribution percentages, a distributed investment plan needs to know the province of residence and value of holdings of its ultimate investors. Since the province of residence of an institutional investor may not reflect the location of the institutional investor’s own investors, distributed investment plans are required to look-through certain institutional investors, generally to the persons holding units of the institutional investor. In this regard, the distributed investment plan determines its provincial attribution percentages using both the investor information of its institutional investors (other than specified investors) and the province of residency of its investors that are individuals or specified investors.

Under the SLFI rules, specific information sharing requirements facilitate compliance:

  • Upon request, an investor in an investment plan (other than an individual or a specified investor) may be obligated to provide to the investment plan its investor percentage for each HST province and the number of units it holds as of September 30 of the year in respect of which the request is made. The method used to calculate the investor percentage depends on the type of unitholder. For a distributed investment plan that is not divided into series, its investor percentage for a province is generally equal to its provincial attribution percentage for the province.
  • If an investor in an investment plan is both a “selected investor”7 and a “qualifying investor”8 for a calendar year, the investor is required to provide to the investment plan notice of its qualifying investor status, the number of units it holds as of September 30 of the year and its investor percentage as of September 30 of the year.
  • If an investor in an investment plan is a selected investor but not a qualifying investor for a calendar year, it may, upon request, be required to provide to the investment plan its address and the number of units it holds as of September 30 of the year.
  • Special rules also require a person that sells or distributes an investment plan’s units (e.g., brokers, dealers, salespersons or other intermediaries) to provide, upon request of the investment plan, information on the number of units of the investment plan held by its clients in each HST province and non-HST province as of September 30 of the year.
  • The above information is generally required to be provided by November 15 of the year in which the request is made.
  • A penalty of up to $10,000 per failure is applicable if required information is not provided on or before the deadline.

To facilitate information sharing, investment plans are required to use the calendar year as their fiscal year for GST/HST purposes.

It is proposed that these rules would apply in respect of investment limited partnerships.

4. Attribution of unitholders

If an investment plan obtains the requisite investor information (e.g., addresses, investor percentages, number of units) for 90% or more of the value of the units of the investment plan (or of a series of the investment plan in the case of an investment plan issued in two or more series), then the provincial distribution of the value of those units is considered as representative of the provincial distribution of 100% of the value of the units in the plan (or series).

If the investment plan is not able to obtain investor information in respect of 90% or more of the value of the units of the plan (or a series of the plan), then the value of the units held in Canada for which information is not available is allocated to the HST province having the highest provincial tax rate. If, however, the investment plan obtains investor information for more than 50% of the value of the units of the plan (or in a series of the plan), the investor information for those units can be applied to a group of units, representing 10% of the total value of the units in the plan (or series), for which investor information has not been obtained. The remaining units of the series are allocated to the HST province having the highest provincial tax rate.

Despite the above, any unit of an investment plan (or of a series of an investment plan) for which an investment plan does not have investor information as of a particular day in a particular fiscal year and in respect of which the investment plan has not requested investor information in respect of the unit on or before October 15 of the calendar year that precedes the calendar year in which the particular fiscal year ends, is always allocated to the HST province having the highest provincial tax rate, even if the investment plan has investor information for 90% or more of the value of the units of the plan (or series).

It is proposed that these rules would apply in respect of investment limited partnerships.

5. Treatment of non-residents

In determining an investment plan’s provincial attribution percentages, any units that are held by non-residents are treated as units held by individuals that are resident in Canada but not in an HST province.

An election may be made to opt out of this rule. If the election is made, only units held by residents of Canada are taken into account under the SAM formula.

It is proposed that this rule would apply in respect of investment limited partnerships, including the option for the investment limited partnership to opt out of this rule.

iii. General registration and reporting requirements

Generally an investment plan that is an SLFI that is engaged exclusively in making supplies of exempt financial services is not required to register for GST/HST purposes (subject to the registration requirements discussed in section iv below). An investment plan that is resident in Canada may, however, voluntarily register regardless of whether the investment plan is engaged in commercial activities or making taxable supplies.

If the SLFI investment plan is a registrant that has not made an election under the ETA for monthly or quarterly reporting periods, its reporting period is its fiscal year. An annual filer that is an SLFI is required to file the SLFI return9 within six months after the end of its fiscal year. It may also have to make quarterly instalments.

If the SLFI investment plan is a registrant and has made an election to be a monthly or quarterly filer, it is required to file an interim GST/HST return for each reporting period, and make an interim net tax payment or claim an interim net tax refund for each period. The interim GST/HST return must be filed within one month after the end of the reporting period along with an interim net tax payment, where required. To reconcile the interim net tax with the actual net tax, the SLFI investment plan is also required to complete and file the SLFI return, and either remit any additional amount owing or claim a refund of any excess amount previously remitted. The SLFI return must be filed within six months after the end of the investment plan’s fiscal year.

If the SLFI investment plan is not a GST/HST registrant, it is required to file an interim GST/HST return for each calendar month, and make an interim net tax payment or claim an interim net tax refund for each period. The interim GST/HST return must be filed within one month after the end of the month along with an interim net tax payment, where required. To reconcile the interim net tax with the actual net tax, the investment plan would complete and file the SLFI return, and either remit any additional amount owing or claim a refund of any excess amount previously remitted. The SLFI return must be filed within six months after the end of the investment plan’s fiscal year.

It is proposed that the same general registration and reporting requirements would apply to investment limited partnerships that would become SLFIs.

iv. Reporting elections

Several elections are available to reduce the compliance burden of the SLFI rules on investment plans. These elections may be made jointly between the manager of an investment plan and the investment plan, with both parties being jointly and severally liable for any tax amounts assessed in connection with the election and any related obligations.

The Department would welcome feedback as to whether the following reporting elections would have any application for investment limited partnerships or whether they would require modification.

1. Reporting entity election

The reporting entity election is a joint election between an investment plan that is an SLFI and its manager that allows the manager to file the investment plan’s SLFI return on its behalf.

An investment plan that makes the reporting entity election is required to register for GST/HST purposes.

Both the manager and the investment plan that have made a reporting entity election are required to maintain records of the investment plan’s net tax in their books and records.

2. Consolidated filing election

A manager and two or more investment plans that are SLFIs that have made a reporting entity election with the manager may jointly make a consolidated filing election. The consolidated filing election allows the manager to file a single consolidated SLFI return in respect of those investment plans.

The investment plans that make the consolidated filing election are required to be registered for the GST/HST as a group and will be assigned a single GST/HST registration number, which must be used by the manager in filing the group’s GST/HST return.

Under consolidated filing, the manager is required to determine all the elements of the SAM formula and the liability in respect of the provincial component of the HST for the fiscal year for each investment plan, aggregated on a single SLFI return.

The manager is required to maintain records of the net tax, including SAM formula calculations, for all investment plans in a group filing on a consolidated basis in its books and records. As well, each investment plan in the group is required to maintain records of their net tax, including their SAM formula calculations, in their books and records.

3. Tax adjustment transfer election

The tax adjustment transfer election is a joint election between an investment plan that is an SLFI and its manager that allows the investment plan to avoid cash flow issues that may arise as a result of the application of the place of supply rules (which may lead to a liability in respect of the provincial component of the HST that is different than under the SAM formula).

The effects of the tax adjustment transfer election between an investment plan and a manager depend on whether or not the investment plan and the manager also have a reporting entity election in effect at the same time or not.

If both a tax adjustment transfer election and a reporting entity election are in effect between an investment plan and a manager and if there is a positive net tax adjustment (i.e., an amount owed by the plan), the manager is required to remit the liability in respect of the provincial component of the HST of the investment plan upon filing its GST/HST return. The investment plan then has no liability to remit this amount to the Canada Revenue Agency. If there is a negative net tax adjustment (i.e., the investment plan would be eligible for a refund or credit), the manager may deduct the negative net tax adjustment in calculating its own net tax provided the manager has paid or credited this amount to the investment plan. The investment plan is not entitled to deduct this amount from its net tax.

If a tax adjustment transfer election, but not a reporting entity election, is in effect between an investment plan and a manager, the amount of the provincial component of the HST that can be credited/refunded or assumed as liability would be limited to amounts related to the management fees charged by the manager to the investment plan (i.e., the tax adjustment transfer cannot be made in respect of third party charges).

As with the reporting entity election, an investment plan making the tax adjustment transfer election would also be required to register for GST/HST. If the investment plan has a consolidated filing election in effect with other investment plans and their manager, the investment plan would be registered under the group registration number and cannot register independently.

v. New investment plans and new series of investment plans

Because provincial attribution percentages for a new investment plan or series of an investment plan would not be determinable until after its initial distribution date, several methods are available to determine and apply the provincial attribution percentages of a new investment plan or new series of an investment plan that is created by merger or otherwise (e.g., by a way of an initial distribution of units).

1. Rules for new plans/series created otherwise than by merger

Method 1: Reconciliation method

A new investment plan or new series of an investment plan may estimate its provincial attribution percentage for each province and use those estimates to calculate its interim net tax/instalments for a transitional period of that investment plan or series, which would generally run from the initial distribution date of the investment plan or series up until its choice of possible attribution dates (the “transitional attribution date”). The possible transitional attribution dates are:

  • The particular day that is 91 days after the first day (the “issuance date”) on which units of the investment plan or series are issued and before which no units of the investment plan or series are issued and outstanding;
  • The particular day that is 91 days after the earlier of: the first day after the issuance date on which units of the investment plan or series are distributed or offered for sale, and the day that is 60 days after the issuance date; and
  • The last business day of the calendar month that includes either of those particular days.

The new investment plan or series is required to determine its provincial attribution percentage for each province as of its transitional attribution date and use those percentages to calculate its actual net tax for the transitional period. Generally, it would then reconcile the actual and interim amounts, and the resulting discrepancy is added to (if positive), or deducted from (if negative), its net tax for the reporting period that includes the “reconciliation day” (i.e., the day that is 30 days after the transitional attribution date of the investment plan or series).

Different rules apply depending on whether the transitional attribution date of the plan or series was on or before, or after, September 30 of the fiscal year in which the units of the new plan or series were first issued (the “transitional fiscal year”):

  • If the transitional attribution date for a new investment plan or series falls on or before September 30 of the transitional fiscal year and the investment plan uses the preceding-year method for the transitional fiscal year, the provincial attribution percentages calculated on the transitional attribution date only apply until the end of that transitional fiscal year. If the investment plan uses the preceding-year method for its subsequent fiscal year, the provincial attribution percentages for that fiscal year would be determined as of September 30 of the transitional fiscal year; and
  • If the transitional attribution date for a new investment plan or series falls after September 30 of the transitional fiscal year, the provincial attribution percentages calculated on the transitional attribution date apply until the end of the transitional fiscal year as well as for the subsequent fiscal year if the investment plan uses the preceding-year method for that subsequent fiscal year.

Method 2: Elected method

Under this method, which an investment plan may alternatively elect to use, a new investment plan or new series of an investment plan would not be liable for the provincial component of the HST in respect of the transitional period of that investment plan or series, which would generally run from the initial distribution date of the investment plan or series up until its transitional attribution date (as described above). However, any GST that became payable by the investment plan on or before the transitional attribution date is taken into account in the reporting periods in the fiscal year that end after the transitional attribution date and in the reporting periods in the subsequent fiscal year.

Method 3: Modified real-time method

This method, which an investment plan may alternatively elect to use in respect of its first fiscal year, is similar to the real-time method (discussed in section ii.1 above). However, the requirement under the real-time method that all or substantially all of the value of units in the investment plan or series must be held by individuals or specified investors does not apply. As well, unlike under the real-time method, the units held by institutional investors are not ignored in the determination of the provincial attribution percentages. The investment plan or series using the modified real-time method is required to account for units held by institutional investors in determining these percentages. In the case of an institutional investor, the location of the institutional investor is the location of the institution unless the investment plan or series opts to “look through” for all or substantially all of the institutional investors, as described in section ii.3 above.

Method 4: Real-time method

An investment plan may alternatively elect to use the real-time method (discussed in section ii.1 above) in respect of its first fiscal year.

2. Rules for new plans/series created by merger

If a merger10 of two or more investment plans or two or more series of an investment plan occurs, the provincial attribution percentage for the new investment plan or series for a particular province is determined as of the date of the merger. These provincial attribution percentages apply to the new investment plan or series for the remainder of the fiscal year in which the merger occurred (referred to as the “transitional fiscal year” of the new investment plan or series).

For an investment plan that, after the merger, uses the preceding-year method, different rules would apply depending on whether the merger occurred on or before, or after, September 30 of a particular fiscal year:

  • If the merger occurs on or before September 30 of a particular year to form a new investment plan or series, the provincial attribution percentages determined as of the day of the merger would be used beginning on the day of the merger up until the end of the transitional fiscal year (i.e., until December 31 of that year). The provincial attribution percentages for the subsequent fiscal year for the new investment plan or series would be determined as of September 30 of the transitional fiscal year.
  • If the merger occurs after September 30 of a particular fiscal year, the provincial attribution percentages determined for the new investment plan or series as of the day of the merger would be used beginning on the day of the merger for the rest of the transitional fiscal year and for the subsequent fiscal year.

The Department welcomes feedback on how newly created/established investment limited partnerships and new series of investment limited partnerships should be treated under the SLFI rules.

Part 2. Imported supplies rules for financial institutions

Certain financial institutions (referred to as “qualifying taxpayers” in the ETA) are required to self-assess GST on certain cross-border transactions. In addition, if the qualifying taxpayer is not an SLFI and is resident in an HST province, the qualifying taxpayer would be required to self-assess the provincial component of the HST on these cross-border transactions, to the extent the transaction relates to the province.

A person is generally a qualifying taxpayer throughout the person’s specified year (generally its taxation year) if it is a financial institution throughout the specified year and, at any time in the specified year: (1) it is resident in Canada; (2) it has a permanent establishment in Canada; (3) a majority of persons having beneficial interest of the person’s property are resident in Canada; or (4) it is a prescribed person or a person of a prescribed class.

Under the rules, a non-resident trust is a prescribed person if the total value of the assets of the trust in which one or more persons resident in Canada have a beneficial interest is equal to or exceeds $10 million and is equal to or exceeds 10% of the total value of the assets of the trust. This is intended to ensure that GST/HST is self-assessed on inputs that are consumed or used with respect to the Canadian interest in the trust property as would be the case were the trust resident in Canada.

It is proposed that the imported supplies rules for financial institutions be amended to ensure that non-resident limited partnerships in which Canadians have an interest are required to self-assess GST/HST in respect of their Canadian activities. Consistent with the rule applicable to non-resident trusts, a non-resident limited partnership would be a prescribed person for the purposes of the qualifying taxpayer rules if the total value of the assets of the partnership in which one or more persons has an interest is equal to or exceeds $10 million and is equal to or exceeds 10% of the total value of the assets of the partnership.

Part 3. GST rebate for investment plans having non-resident investors

The GST/HST generally applies to taxable supplies of property and services made in Canada. To ensure that the tax is generally based on the place of consumption, Canadian-made goods and services destined for export (i.e., for consumption outside Canada) may have the tax removed through zero-rating. When a supply is zero-rated, the supplier is not required to charge GST/HST on the supply, but may claim input tax credits for any GST/HST paid on property and services used in making the supply.

The Government is proposing to introduce a new GST rebate, which would be available to investment plans (including investment limited partnerships that would become investment plans under the proposals discussed in Part 1 of this consultation paper) having non-resident unitholders. The objective of the rebate would be to improve the cross-border treatment of such entities by better ensuring that the application of GST/HST is consistent with the principle of applying tax based on the place of consumption, thereby ensuring more consistent tax treatment between Canadian-managed investment plans (including investment limited partnerships) that do business (i.e., sell units) outside Canada and their non-resident-managed competitors.

The following would be the general parameters of the proposed rebate:

  • The rebate would be claimable for a reporting period in a fiscal year of an investment plan and would be equal to a percentage (referred to as the “non-resident investor percentage”) of the otherwise unrecoverable GST that became payable by the investment plan during the reporting period or that was paid by the investment plan during the reporting period without having become payable.
  • The non-resident investor percentage for a fiscal year would be based on the value of the units ultimately held by non-residents (i.e., persons that are not resident in Canada for GST/HST purposes) as of a particular point in time.
  • Special rules would apply in respect of certain institutional investors that have non-resident unitholders for the purpose of the calculation of an investment plan’s non-resident investor percentage.
  • An investment plan would be required to maintain records relating to the residency of its unitholders and the non-resident investor percentages of its institutional investors in support of each rebate claim.
  • An investment plan would not be eligible to claim the rebate if it is a selected listed financial institution that has an election under subsection 225.4(6) or (7) of the ETA that is in effect.
  • An investment plan that is not a selected listed financial institution and that chooses to claim the rebate would be subject to the following rules:
    • For the purposes of determining an input tax credit, any supply made during the fiscal year by the investment plan in respect of the units of the investment plan that are held by non-resident investors would be deemed to have been made to a person resident in Canada;
    • For purposes of the definitions “external charge” and “qualifying consideration” in section 217 of the ETA, any outlay made, or expense incurred, by the investment plan during the fiscal year in respect of the units of the investment plan that are held by non-resident investors would be deemed to be in respect of a Canadian activity of the investment plan (and therefore potentially subject to tax under section 218.01 of the ETA where the investment plan is otherwise a “qualifying taxpayer” under subsection 217.1(1) of the ETA at the time the outlay is made or expense incurred); and
    • No input tax credits would be claimable by the investment plan in respect of tax of the investment plan that became payable, or that was paid without having become payable, in respect of a business input if the business input is not an exclusive input of the investment plan (i.e., property or a service that is acquired, imported or brought into a participating province by the investment plan for consumption or use directly and exclusively for the purpose of making taxable supplies for consideration).11
  • An investment plan would not need to be registered for GST/HST purposes to claim the rebate.

Additionally, as part of this proposal, if the non-resident investor percentage of an investment plan is 95% or more for a fiscal year of the investment plan, the investment plan would be deemed to be a non-resident for GST/HST purposes for the fiscal year. As a non-resident, the investment plan may be able to benefit from the zero-rating rules in Part V of Schedule VI of the ETA.


1 References to “investment plan” throughout this consultation paper include a “segregated fund of an insurer” unless a contrary intention is suggested.

2 Distributed investment plans are a subset of investment plans and generally are investment plans that do not limit investment to members of a specific group of persons (e.g., employees or family members). Specific examples of distributed investment plans are investment corporations, mortgage investment corporations, mutual fund trusts, mutual fund corporations, non-resident-owned investment corporations, segregated funds of insurers and unit trusts, as those terms are defined in the Income Tax Act, as well as certain pension plan corporations (i.e., certain corporations that do not qualify as “pension entities” for GST/HST purposes).

3 Under the SLFI rules, an individual or trust that is resident in Canada for GST/HST purposes is generally considered to reside in the province in which the individual’s or trust’s principal mailing address is situated, while a person that is a corporation or partnership that is resident in Canada is generally considered to reside in the province in which its principal business in Canada is located.

4 It would generally be the intention that investment limited partnerships in tiered structures would become SLFIs if the ultimate investors are located in one HST province and one or more other provinces.

5 The descriptions of the methods are based on investment plans not issued in series. An investment plan with two or more series is required to calculate its provincial attribution percentages for each series and apply the SAM formula to each of those series.

6 A person is generally a specified investor in a distributed investment plan if: (1) the person is neither an individual nor a distributed investment plan; (2) the person holds units of the plan having a total value of less than $10 million; (3) the person has not notified the investment plan that it is a “qualifying investor” (generally a person that is an SLFI or that is part of an affiliated group of investors that together holds units of the plan having a total value of $10 million or more in the investment plan); and (4) the investment plan neither knows nor ought to know that the person is a qualifying investor in the investment plan.

7 Generally, a selected investor in an investment plan is a person that is neither an individual nor a distributed investment plan and that holds units of the plan having a total value of less than $10 million.

8 See footnote 6.

9 GST494 Goods and Services Tax/Harmonized Sales Tax (GST/HST) Final Return for Selected Listed Financial Institutions.

10 Merger is defined as a merger or combination of two or more trusts or corporations, each of which was, immediately before the merger or combination, a distributed investment plan and each of which is referred to in this definition as a “predecessor”, to form one trust or corporation (referred to in this definition as the “continuing plan”) in such a manner that: (a) the continuing plan is a predecessor and is, immediately after the merger or combination, a distributed investment plan; (b) for each predecessor other than the continuing plan, all or substantially all of the outstanding units of the predecessor are converted, by any means, into units of the continuing plan or are cancelled; and (c) the merger or combination is otherwise than as a result of the acquisition of property of one trust or corporation by another trust or corporation, pursuant to the purchase of that property by the other trust or corporation or as a result of the distribution of that property to the other trust or corporation on the winding-up of the trust or corporation.

11 These rules are similar to those in paragraphs 225.4(3)(b) to (d) and 225.4(4)(b) to (d) of the ETA.