The Canadian Institute of Chartered Accountants L Institut Canadien des Comptables Agréés 277 Wellington Street West 277, rue Wellington Ouest Toronto, ON Canada M5V 3H2 Toronto (ON) Canada M5V 3H2 Tel: 416 977.3222 Fax: 416 977.8585 Tél. : 416 977.3222 Téléc. : 416 977.8585 www.cica.ca www.icca.ca April 6, 2011 Ms. Lise Potvin Director Sales Tax Division Tax Policy Branch Finance Canada 140 O'Connor St., Ottawa, Ontario K1A 0G5 Canada Dear Ms. Potvin: Re: January 28, 2011 Backgrounder - Modifications To The Proposed Financial Institution ( FI ) Rules For the Harmonized Sales Tax ( HST ) On behalf of the members of the CICA Commodity Tax Committee, we are pleased to provide comments and suggestions in respect to the above noted document ( Jan 28 Backgrounder ). Overview Comments The CICA applauds the efforts of The Department of Finance ( Finance ) in incorporating the feedback from stakeholders as the rules impacting FIs as it relates to HST are being finalized. Generally, the changes to the originally drafted rules as announced in the Jan 28 Backgrounder are welcomed. We urge Finance to continue its consultations with relevant stakeholders on matters of significance and offer an open invitation to consult with the CICA in this regard. In the meantime, we do offer the following comments which we believe will help in further streamlining the draft rules or in dealing with matters requiring further attention. Comments relating to Part One Proposed Changes Reflected In The Attached Draft Amendments To The Excise Tax Act And Regulations ( Draft Amendments ) 1. Relief from Selected Lists Financial Institution ( SLFI ) Rules for Non-Distributed Investment Plans with Substantially All of Its Members in Non-Participating Provinces. The Draft Amendments exempt private investment plans and pension entities from the SLFI rules where less than 10% of the members are resident in participating provinces and the pension assets/liabilities attributable to these members are less than $100,000,000. This is welcomed relief for those pension entities that have members in mostly in non-participating provinces and a few members in participating provinces. However, this proposed amendment does not assist those pension entities with most of its members in one participating province and a few members in non-participating provinces. It is recommended that Finance broaden the relief to pension entities with members mostly in one participating provinces or in participating provinces with the same HST rate. This would lessen the complexity for many plans that are effectively single province plans.
In addition, plans that meet this expanded threshold requirement should also have the ability to elect out of the rule giving them the ability to elect into the SLFI rules if they chose to do so. 2. The qualifying small investment plan test relating to unrecoverable GST should be increased for the proposed $10,000 level to some higher level to eliminate the requirement for a greater number of smaller pension entities from having to follow the SLFI rules unless they elect to do so. 3. Specified investors and qualifying investors. a) It is unclear as to the information sharing requirements of a person that qualifies as a specified investor under paragraph 17(1)(b) in the draft SLFI Attribution GST/HST Regulations ( Draft Regulations ). Section 55 in the Draft Regulations appears to be missing a provision for these persons. It appears that subsection 55(4) of the Draft Regulations could be amended to include specified investors along with selected investors, which are already captured in that provision. b) Pursuant to subsection 55(6) in the Draft Regulations, a qualifying investor has to report no later than November 15. However, by virtue of the definition of specified investor in paragraph 17(1)(b), if the investment plan in which the investor has invested knows as late as December 31 that the investor is a qualifying investor, then it appears that it is required to use that information for purposes of determining its provincial attribution percentage. This is too late if the investor did not notify the investment plan of its status as and when required per subsection 55(6). It is recommended that the December 31 reference to the definition of specified investor in paragraph 17(1)(b) be changed to November 15 to coincide with subsection 55(6). This will give SLFI investment plans the proper time needed to be able to determine its provincial attribution percentage as of September 30. 4. Expansion of scope for rebate for investment plans and segregated funds in respect of investors in nonparticipating provinces (proposed amendments to ETA section 261.31). The CICA is pleased with the changes made to this rebate provision. However, there is a concern related to the timing of the announcement for these proposed amendments and the interaction with subsection 262(2) in the ETA, which states that only one application may be made under this Division for a rebate with respect to any matter. This subsection applies to section 261.31. The proposed amendments to section 261.31 were announced on January 28, 2011 and applicable for tax that became payable or was paid without having become payable on or after July 1, 2010. The concern is with respect to any eligible claimant that filed a rebate under the current application of section 261.31 prior to January 28, 2011 and in respect of a period that includes July 1, 2010 and beyond. It would seem that subsection 262(2) would preclude a claimant from filing another rebate for matters related to the expanded scope as announced on January 28, 2011. CICA recommends that subsection 262(2) be amended to allow, in the appropriate circumstances, another rebate claim to be filed in respect of the expanded scope items for anyone that had already filed a claim and did not include those items. Page 2
Comments relating to Part Three - Issues for Consultation The Jan 28 Backgrounder indicates that Finance is proposing consultations in respect of whether SLFI rules should apply to entities that currently do not fall within the SLFI rules but that are similar to investment entities that are subject to them, and if so, what specific rules should apply for purposes of determining the provincial attribution percentages of these entities (for purposes of the special attribution formula). Examples of such entities include: Certain investment trusts and partnerships with investors in more than one province; Trusts holding assets of pension entities that are SLFIs; De minimis FIs (as described in paragraphs 149(1)(b) or (c) of the ETA) with a significant level of investment activity; and Trusts governed by a registered retirement saving plan, a registered retirement income fund or a registered education savings plan administered on a group rather than individual basis. We understand that Finance is in discussions with specific industry sector groups as it relates to these consultations. To this end, other than the comment below related to de minimis FIs, the CICA will not, at this time, offer comments. However, the CICA would be pleased to provide input on any specific proposed rule changes resulting from these consultations once proposals are published or in advance thereof. With respect to de minimis FIs, the CICA suggests that Finance consider carefully which FIs should be scoped into the SLFI rules so as to only capture those persons that have significant FI-related activities and are in competition to those persons currently caught by the rules in relation to those activities. Significant could be in terms of volume of business, dedicated resources, the active versus passive nature of the activities, etc. One example where a de minimis FI should be scoped into the SLFI rules is in respect of equipment financing entities that provide financing in the form of loans and leases. Where such entities have less than 50% of their business in the form of loans, they are not listed financial institutions since they are not principally engaged in the lending of money. As such, under the current rules, they are not SLFIs, notwithstanding they could have customers/collateral located in multiple provinces. These types of entities compete directly with many entities that are SLFIs (e.g., banks and persons whose principal activities involve the lending of money). Other This matter deals with the coming into force for the rules in determining a permanent establishment ( PE ) and the provincial attribution percentage ( PAP ) for trust and loan corporations (subsection 4(c) and section 27, respectively, in the Draft Regulations). These changes come into effect in respect of a reporting period in a fiscal year of a person that begins on or after July 1, 2010. The similar changes for banks for PE and PAP determinations (subsection 4(a) and section 26 in the Draft Regulations) comes into effect in respect of a reporting period that ends on or after July 1, 2010. To put this nuance with the coming into force in context, a bank that only had a PE in one province under the old rules and that became a SLFI on July 1, 2010 based on the new rules in the Draft Regulations is required to use the special attribution method ( SAM ) pursuant to subsection 225.2(2) in the ETA from July 1, 2010. In contrast, a loan corporation with customers in both participating and non-participating provinces and only has a PE in one province under the old rules, does not become a SLFI until January 1, 2011 if it has a calendar year end for example. Therefore, compared to the bank, the loan corporation does not get the same treatment for that stub period in 2010. Considering Page 3
the bank and the loan corporation are competing in respect of their lending businesses, we do not see the policy rationale for the difference in the coming into force for the respective PE and PAP determinations, as noted. Finance should consider changing the coming into force for subsection 4(c) and section 27 in the Draft Regulations to be the same as that for subsection 4(a) and section 26. We trust that Finance finds our feedback helpful. We would be pleased to discuss this feedback if Finance would find it useful to do so. Yours truly, Danny Cisterna Chair, Commodity Tax Committee Canadian Institute of Chartered Accountants Page 4
The Canadian Institute of Chartered Accountants L Institut Canadien des Comptables Agréés 277 Wellington Street West 277, rue Wellington Ouest Toronto, ON Canada M5V 3H2 Toronto (ON) Canada M5V 3H2 Tel: 416 977.3222 Fax: 416 977.8585 Tél. : 416 977.3222 Téléc. : 416 977.8585 www.cica.ca www.icca.ca Commodity Tax Committee The Commodity Tax Committee of the Canadian Institute of Chartered Accountants works to provide input into existing and proposed government activities with respect to federal commodity taxation and issues involving commodity taxation matters. Commodity taxation matters include taxes and other government levies on goods and services such as duties and taxes imposed on imported goods, value added and other sales taxes on goods and services and any excise taxes. The Committee also provides consultation on draft Canadian and relevant international trade policies and other policy issues related to the importation of goods into Canada, as well as other customs programs which fall under the purview of the Canada Border Services Agency and the Department of Finance. In addition, the Committee will provide consultation on draft value added and other sales taxes policies, whether legislative or administrative, which fall under the purview of the Canada Revenue Agency and the Department of Finance. Members of the committee: Chair: Danny Cisterna, CA. Partner Indirect Tax Deloitte & Touche LLP Rosemary Anderson, CA. Thorsteinssons LLP John Bain, Senior Principal, Indirect Tax, KPMG Rino Bellavia, Partner, BDO Canada LLP Jean-Hugues Chabot, Partner, Ernst & Young Cathy Kuhrt, CA. Partner Tax Services, Grant Thornton LLP Mario Seyer, CA. Tax Services Leader, PricewaterhouseCoopers November 2010