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With tax time rapidly approaching, credit unions need to have a clear understanding of how new sales tax rules impact them.
As you likely know, the federal government introduced a series of technical amendments to the GST / HST legislation in mid-2016 that saw credit unions included in the same definition as banks for indirect taxes. Click here to view.
Where credit unions have to be clear is whether they are now considered a selected listed financial institution (SLFI) or not when addressing their 2017 tax filing (or possibly their 2016 returns).
It is expected few credit unions will be able to escape the new rules, despite not having been considered an SLFI before the tax amendments. Assuming a credit union is an SLFI, it would be required to file and report the taxes according to special allocation rules. These rules are in effect for any reporting period beginning after July 22, 2016.
How the New Rules Apply
The simplest way to describe a SLFI is any financial institution that is considered to have a presence in an HST province and any other province or, in the case of QST, a presence in Quebec and any other province. As a SLFI, there is a requirement to determine expected HST payable on taxable purchases.
Therefore, a financial institution (credit union) could be a SLFI for GST / HST and QST purposes. Being registered for GST / HST and / or QST is not a requirement.
Based on discussions we have had with credit unions, part of the challenge is why the amendments were made. While the SLFI rules are not new, they are new to the credit union sector. Credit unions understood they paid GST / HST or QST based on the taxable purchases, and recovered very little if any of these taxes. They operate predominantly supplying exempt financial services and within their home province. Having to pay additional tax on supplies already acquired quickly becomes a foreign concept.
The objective is to connect the amount of HST or QST payable based on the activity of where the members are located, not the physical location of the credit union. For example, if a credit union based only in Manitoba has members with deposits or loans and they reside in Ontario, the credit union is also viewed as having a presence or activity in Ontario. Expenses are incurred to serve those Ontario resident members. Therefore, the expenses tied to those Ontario members need to be at a 13 percent HST rate the same as if the same expenses were acquired directly in Ontario.
The intent of these type of rules is to not allow the financial institution to skew its purchases to acquire at a lower rate of tax, or to up and move to a lower rate GST / HST province. The net effect would be that comparable financial institutions should bear the same amount of GST / HST or QST operating costs. Conceptually, this makes sense. Practically, it’s a lot of work and often for little tax.
SLFI Determination / Allocation Percentages
As credit unions predominantly operate in a single jurisdiction, they are not structured to consider where they do business in the way GST / HST / QST now requires them look at themselves. They are not focused on the location of the customer or where land is held in relation to a loan they issued. However, this is now what must be considered instead of just their physical operating locations.
Under the new rules, a credit union would be deemed to have a permanent establishment in a particular province where:
A credit union will need to extract this information from their systems to determine whether they are a SLFI or not. As well, they need to see if they are an SLFI to use the allocation percentages and determine the provincial portion of the HST and of the QST that must be paid.
The allocation formula calculates adjustments related to the provincial component of the HST, or of the QST. This requires the credit union that is an SLFI to have calculated or tracked the amount of GST / HST and QST that has been paid and how much of the provincial component of the HST that has been paid. It must determine, through a complex formula, numerous adjustments that must be made in relation to the actual taxes it was considered to have paid.
Many errors can result when making these calculations of both missed liabilities and missed recoveries. One of the key components of the allocation is being able to establish the actual amount of five percent GST paid. This is the base component of the formula to establish how much additional provincial HST is payable (or refundable in some cases).
Non-registered credit unions will have been impacted shortly after the July 22, 2016 budget date, as the rule change begins in the first reporting period that begins after this date. This will be monthly filing if they are a SLFI. In addition, an annual return must still be filed to reconcile the interim monthly reporting to the actual annual amount.
Credit unions that were already registered should just be starting these new rules. Many credit unions have an annual filing frequency. The annual returns are due within six months of the end of the reporting period. Monthly returns are due within one month following the end of the particular reporting period.
To learn more about indirect taxes and how these changes may impact your credit union, contact Jeff Harrison, CPA, CMA, at 306.751.7998 or [email protected] or contact your local MNP Tax Advisor.
Related Topics:Indirect Tax
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