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GST/HST Developments in the Financial Sector


The year 2010 contained significant GST/HST developments that affected the financial services sector. Complex legislation dealing with imported taxable supplies and input tax credits (ITCs) were put into force. The legislation was originally announced in 2005 and 2007 and underwent numerous changes before it was finally passed as law in its present form. It provides detailed rules for financial institutions regarding self assessing on imported taxable supplies, including valuation methods where the transactions are not arms length. It also provides detailed rules for classifying and allocating expenses and purchases for input tax credit purposes.

There are four classes of input tax credits defined along with detailed allocation rules for each. Although the legislation has retroactive effect to 2005 and 2007, many in the industry are unaware of the changes or have simply ignored them. Since the Canada Revenue Agency (CRA) cannot assess based on proposed legislation, there have been no significant consequences to date. However, it is anticipated that the CRA will move quickly to enforce these new rules and will be monitoring the financial sector to ensure compliance over the short-term.

The year also found the CRA on the losing end of two significant court cases. One involved the ITC entitlements of pension funds and employers associated with the pension plans. The second case, dealt with the tax status of services provided by investment managers. The Department of Finance responded quickly to these unfavourable decisions by introducing legislation to halt what it perceived to be significant revenue losses. The end result is that pension plan funds and the plan operators are subject to new rules and rebate provisions. Also, the definition of financial services was amended along with the services of investment managers. Now, certain services in the financial sector that were previously exempt are subject to GST/HST.

Most financial institutions have been required to file Form GST111 Financial Institution GST/HST Annual Information Return for fiscal years commencing after 2006. Previously this form was required to be filed as a schedule to the regular GST/HST return. It is now required to be filed pursuant to a separate section of the legislation and significant penalties for failing to file the return and/or providing incorrect information in the return have been introduced.

Last, but not least the introduction of HST in British Columbia and Ontario has further complicated the GST/HST administration for financial institutions. Financial institutions that operate in both non-harmonized (GST) jurisdictions and harmonized (HST) jurisdictions are required to file Special Attribution Method (SAM) returns. Harmonization in British Columbia and Ontario will undoubtedly require many more financial institutions to file SAM returns. These complex returns intend to ensure that financial institutions incur GST and HST on their expenses and purchases in accordance with their operations and revenues in the non-harmonized and harmonized jurisdictions. Depending on the distribution of their operations and the amount of GST vs. HST incurred, the returns may result in the payment or recovery of tax. Since most financial institutions are subject to significant ITC restrictions, operating costs will inevitably go up wherever HST is imposed.

The scope and magnitude of the changes outlined above will likely affect all financial institutions in some manner. So, in order to avoid potentially expensive surprises in the future it is critical to review your operation and ensure that your business complies with these new rules.