Financial Institutions — Get Ready for GST/HST Obligations December 13, 2016 No. 2016-58

Your financial institution will soon face various GST/HST, QST and payroll deadlines. As the end of 2016 approaches, financial institutions can take proactive steps to manage their tax compliance obligations, risks and unrecoverable tax costs as they prepare for upcoming indirect tax deadlines and other compliance obligations. This is increasingly important as the rules get more complicated and tax authorities across Canada appear to be increasing their audit and enforcement activities.

As you start to review your upcoming indirect tax deadlines and obligations, consider how your deadlines and obligations may be affected by recent changes to your corporate structure as well as changes to tax laws and CRA administrative policies. As many financial institutions require a significant amount of data to complete certain returns due by June 30, this information should be gathered well in advance of any filing deadlines. These financial institutions should also determine whether their allocation method can be updated before filing their return, and ensure they properly update any spreadsheets they use to complete the returns.

Key obligations at a glance — Checklist To assist you in assessing your upcoming GST/HST and QST obligations, the following list of items may apply to many financial institutions with a December 31 year-end. Other obligations and deadlines may apply, particularly for financial institutions with other year-ends.

□ Are you an investment fund manager or an insurer?

• Calculate your 2017 blended tax rates, if applicable

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TaxNewsFlash – Canada December 13, 2016 Financial Institutions — Get Ready for GST/HST Obligations No. 2016-58

• Follow up with distributed investment plan unit holders to collect any missing data by December 31, 2016

□ Do you have closely related group elections in place?

• Determine whether a new test for closely related groups affects your current elections

□ Do you have any “de minimis” financial institution in your corporate strucutre?

• Consider whether the entity will still be a financial institution in 2017 under new rules

□ Have you previously been assessed GST on imported reinsurance services?

• Determine whether you should request a reassessment by June 22, 2017

□ Are you required to file GST/HST and/or QST annual returns?

• Get ready to file final returns and updated instalment amounts • Get ready to file annual information returns for financial institutions

□ Do you offer a registered pension plan to your employees?

• Remit taxes related to supplies made to a pension plan • Claim your pension entity rebates that can be transferred to the employers, if

available • Make an election to eliminate double taxation on supplies made to a master

trust by December 31, 2016 □ Are your CPP contributions and EI premiums in order?

• Claim overpaid contributions and premiums by December 31, 2016 □ Do you provide taxable benefits for your employees?

• Remit GST/HST and QST based on the value of your taxable benefits □ Does your business have insurance coverage with an unauthorized insurer outside of Canada?

• Pay a 10% federal tax on your cross-border premiums by April 30, 2017 □ Do you review your input tax credit allocation method annually?

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• Review your input tax credit allocation methods and correct errors, if eligible • File your annual request to use a particular input tax credit allocation method, if

applicable

Investment fund managers and insurers

Calculate your 2017 blended tax rates, if applicable

Managers of investment funds and insurers with segregated funds that use GST/HST and QST “blended rates” must ensure they have calculated their 2017 “blended rates” and have them running in their systems on January 1, 2017. Properly calculating the new blended rates by taking the effect of new and amalgamated funds into account, and incorporating these rates in to your systems by that date, is important to help limit errors that could result in assessments of uncollected tax and interest. In some cases, these uncollected tax amounts may not be recoverable from investment plan clients.

In general, managers that have tax adjustment transfer elections (TATE elections) in place with their investment plans collect the GST/HST and the QST from these funds based on rates known in the industry as the “blended rates”. The TATE election essentially helps manage the investment plans’ cash flow. The blended rates are intricate calculations that take into consideration the GST/HST and the QST that apply on the managers’ services, as well as the tax adjustment amounts transferred from the investment funds to the managers throughout the year.

Managers should remember that, while they may use blended rates to collect the taxes from their investment plans, they must account and report these amounts of GST/HST and QST separately.

Follow up with distributed investment plan unit holders to collect any missing data by December 31, 2016

Distributed investment plans should review the GST/HST and QST information collected from their investors and follow-up on any missing data to help them fulfill their GST/HST and QST compliance obligations by December 31, 2016. Some calculations relating to distributed investment plans’ GST/HST obligations are based in part on information collected from their investors.

While some investors are required every year to provide information under the GST/HST and QST rules to distributed investment plans, other investors must provide the required details only if they receive a written request from these plans.

Distributed investment plans should follow up to collect missing data to ensure they have all the required information by December 31, 2016. Similar rules apply for QST purposes.

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Closely related group elections

Determine whether a new test for closely related groups affects your current elections Businesses with GST/HST and QST closely related elections in place to generally treat certain taxable supplies as having been made for nil consideration or as financial services, depending on the particular election filed, must determine if their members meet a new condition of the closely related test. Where the test is not met, current elections may no longer be valid.

In addition to satisfying the current tests requiring 90% of the value and number of the issued and outstanding shares having full voting rights, members of a closely related group now have to meet a new voting control test introduced by the 2016 federal budget. This new condition generally applies as of March 22, 2017.

For more information, see TaxNewsFlash-Canada 2016-13, “Financial Services Industry - Prepare for 2016 Budget Measures”.

De minimis financial institutions

Consider whether the entity will still be a financial institution in 2017 under new rules

Certain businesses with a December 31 year-end that are considered to be “de minimis” financial institutions in 2016 may will no longer be considered a financial institution in 2017. This is because interest income from certain short-term deposits will no longer be included in the calculation of the $1 million interest income threshold for de minimis financial institutions, as announced in the 2016 federal budget. Businesses that lose this designation should ensure they have determined how they may be affected.

For more information, see TaxNewsFlash-Canada 2016-13, “Financial Services Industry --Real Estate Industry — Prepare for 2016 Federal Budget Measures”.

Imported reinsurance services

Determine whether you should request a reassessment by June 22, 2017

Financial institutions may request a reassessment of previously assessed GST related to certain reinsurance premiums for cross-border reinsurance services acquired from a non-arm’s length entity no later than June 22, 2017. Note that ceding commissions and the margin risk transfer, two specific components of imported reinsurance services, are not considered part of the tax base subject to the self-assessment rules under the GST/HST imported supply rules for financial institutions. This was clarified in the 2016 federal budget.

For more information, see TaxNewsFlash-Canada 2016-13, “Financial Services Industry --Real Estate Industry — Prepare for 2016 Federal Budget Measures”.

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Your GST/HST and QST annual returns

Get ready to file final returns and updated instalment amounts

A financial institution that qualifies as a GST/HST and QST selected listed financial institution (SLFI) with a December 31 year-end must file a GST/HST and QST final return for SLFIs by June 30, 2017 regardless of whether the entity is registered for GST/HST and QST purposes. These final returns must be filed within six months after their fiscal year-end.

A SLFI is generally a listed financial institution that has a permanent establishment in an HST-participating province and one in another province for GST/HST purposes, and in Quebec and in another province for QST purposes. The meaning of “permanent establishment” varies by type of financial institution.

Many SLFIs with a December 31 year-end are GST/HST and QST annual filers and, as such, are required to pay quarterly GST/HST and QST instalments within one month after the end of each of their fiscal quarters. It is important to update these calculations each year. As a reminder, the calculations of the amounts of instalment for GST/HST purposes and for QST purposes must be done separately.

Get ready to file annual information returns for financial institutions

Many financial institutions, including most SLFIs, with a December 31 year-end are required to file a GST/HST (and QST) annual information return by June 30, 2017. In general, a financial institution, including an entity deemed to be a financial institution, that is registered for GST/HST purposes and has more than $1 million of annual income must file a GST111 or RC7291 annual information return within six months after its fiscal year-end. Similar rules apply for QST purposes.

However, some eligible investment plans that qualify as SLFIs, including eligible pension entities, do not have to file.

Because the annual information return requires a significant amount of information, including details on sales, purchases and imports, you should prepare well in advance of your filing deadline. The information included on annual information returns should also be linked to the information on the entity’s GST/HST and QST returns, income tax returns and transfer pricing information, if applicable. Failing to file this return or misreporting amounts could lead to penalties and to have eligible rebates withheld.

Revenue Quebec also has a specific GST/HST and QST annual information return for financial institutions under its jurisdiction.

You should also ensure you have a process in place to cross-reference final returns, annual information returns as well as your income tax returns.

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For more information, see TaxNewsFlash-Canada 2016-42, “SLFIs - Identify Efficiencies and HST Savings Now”.

Registered pension plan for employees

Remit taxes related to supplies made to a pension plan

Many employers with a December 31 year-end that offer pension plans to their employees are deemed to have made taxable supplies to the pension entities of the registered pension plans on December 31, 2016 (i.e., the last day of their fiscal year). Under the GST/HST and QST pension plan rules, these employers must calculate and remit taxes related to these supplies in their GST/HST and QST reporting period that includes December 2016. For example, a SLFI with a December 31 year-end and an annual reporting period must file its annual GST/HST annual return no later than June 30 (i.e., no later than six months after its fiscal year). Certain tax calculations for 2016 may also be affected by proposed GST/HST changes announced on July 22, 2016.

Claim your pension entity rebates that can be transferred to the employers, if available

Qualifying pension entities that have a December 31 year-end and are not registered for GST/HST and QST purposes have until December 31, 2016 to file their rebate application to claim their pension entity rebate for the claim period of July 1, 2014 to December 31, 2014. Note that this rebate must be transferred to the financial institutions.

The GST/HST pension plan rules are complex and can vary based on the facts and circumstances of the entities, including claim periods and filing deadlines. In general, the pension entity rebate is equal to 33% of the GST/HST paid to suppliers and the GST/HST deemed paid under the pension plan rules. In some cases, eligible pension entities can transfer the rebate to the employers. Pension entities should try to limit any calculation errors as only one rebate application may be filed for any particular claim period.

Make an election to eliminate double taxation on supplies made to a master trust by December 31, 2016

Based on proposed changes, eligible employers with a December 31 year-end that have a master trust in their employees’ pension plan structure may in some circumstances, along with the master trust, file an election by January 1, 2017 to essentially eliminate double taxation for actual and deemed supplies made to the master trust.

Under the proposed changes, employers with a December 31 year-end will be deemed to make taxable supplies to their master trusts starting in 2017, and will be required to calculate and remit GST/HST and QST on those deemed supplies. However, eligible employers and master trusts can file an election to eliminate any double taxation resulting from the actual supplies and deemed supplies. The election must generally be filed on or before the first day of the employer’s fiscal year. Note that a pension plan may be able to include in its 2016 rebate calculations the tax on supplies that the master trust was legally

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liable to pay, and that a financial institution’s determination of whether it should make a similar election for supplies made to a pension plan may be affected by other changes to the pension rules.

Similar pension plan rules apply for QST purposes.

For more information on the pension plan rules and the proposed changes related to master trusts, see TaxNewsFlash-Canada 2016-32, “Pension Plans — GST/HST Filing Deadlines Fast Approaching” and TaxNewsFlash-Canada 2016-57, "Employers and Pension Plans —Upcoming GST/HST Deadlines".

CPP contributions and EI premiums

Claim overpaid contributions and premiums by December 31, 2016

Employers that overpaid contributions of Canada Pension Plan (CPP) or of Employment Insurance (EI) may be eligible to apply for a refund by December 31, 2016 where the overpayment is in excess of the maximum amount required, other than within the current year. For CPP contributions, qualifying employers must file the refund application no later than four years from the end of the year in which it made the overpayments. For example, for eligible overpaid CPP contributions in the year 2012, an employer’s last chance to file a refund application is December 31, 2016. For EI premiums, the deadline is three years from the end of the year in which the overpayment occurred.

Your employees’ taxable benefits

Remit GST/HST and QST based on the value of your taxable benefits Employers that provide taxable benefits to employees should ensure they update their GST/HST calculations related to these benefits to reflect the 2016 HST rate increases in New Brunswick, Prince Edward Island and Newfoundland and Labrador. These amounts of tax must be remitted in the employer’s GST/HST reporting period that include the last day of February. For example, these amounts should be included in the February GST/HST return which is due no later than March 31 if the employer has monthly GST/HST reporting periods. Similar rules and deadline apply for QST purposes.

Insurance coverage with an insurer outside of Canada

Pay a 10% federal tax on your cross-border premiums by April 30, 2017

Businesses that acquire insurance coverage for certain risks in Canada with an insurer that is not legally authorized to write insurance in Canada must self-assess and pay a 10% excise tax on taxable insurance premiums by April 30, 2017.

Certain provinces also levy tax on insurance premiums. In addition, businesses may be required to remit tax directly to these provincial governments where an insurer is not

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registered to collect the provincial tax on these insurance premiums. However, the taxes and rules on insurance premiums, including deadlines and penalties for non-compliance, vary by province.

For more information, see Canadian Tax Adviser, “Cross-Border Insurance Coverage - Don't Miss April 30 Deadline for 10% Excise Tax” (April 12, 2016).

Your input tax credit allocation methods

Review your input tax credit allocation methods and correct errors, if eligible

Certain financial institutions are eligible to review their allocation method for input tax credits and input tax refunds for a particular fiscal year and correct errors before filing their first GST/HST and QST returns for that particular year. An eligible financial institution with a December 31 year-end and an annual reporting period would generally have until it files its 2016 final return to review or substitute its 2016 input tax credit allocation methods. However, due to the time required to assess these allocation methods, eligible financial institutions should complete these reviews well in advance of preparing and filing their 2016 GST/HST and QST returns.

File your annual request to use a particular input tax credit allocation method, if applicable

Certain qualifying financial institutions with a December 31 year-end are required to file by July 5 an annual request to the CRA to use particular input tax credit allocation methods (i.e., the request must be filed no later than 180 before the first day of the fiscal year to which the application applies). Under the GST/HST and QST rules, while certain SLFIs are required to use particular input tax credit allocation methods, the rules also allow qualifying institutions to apply to be authorized to use particular methods to determine their ITCs for a particular fiscal year.

We can help

Your KPMG adviser can provide assistance in managing the impact of these and other indirect tax deadlines that may affect your business. We can also help you determine how indirect tax rules in other jurisdictions apply to your business, help you manage your related compliance obligations and help you ensure that you are not missing refund opportunities. For details, contact your KPMG adviser.

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Information is current to December 6, 2016. The information contained in this TaxNewsFlash-Canada is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. © 2016 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International.

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