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In today’s world, credit unions are evolving their traditional business models and structures, finding new ways to deliver services in the competitive financial services space. Whether they are announcing their intention to become a federal credit union, or forming bank subsidiaries, credit unions are starting to cross traditional provincial borders. Because of these changes, the Department of Finance has evolved its business model around how the GST / HST application will apply to credit unions and has reviewed its concept of a selected listed financial institution for purposes of these rules.
One consideration all financial institutions must contend with is whether they are considered to be a selected listed financial institution (SFLI). A SLFI is a concise way of indicating a financial institution has a presence in both an HST province and any other province. The first step is establishing which province(s) the entity is considered to reside, followed by establishing which rules must be applied based on this determination.
The SLFI concept is to force an expected amount of provincial HST that should be paid based on where the activity takes place less what provincial HST has been paid, plus or minus a gazillion adjustments. This requires careful tracking of the 5% federal GST and all of the provincial portions of the HST paid, along with the activity being measured.
This makes sense for those that are familiar with the SLFI filing. If you pay HST but have more activity in the non-HST provinces, a refund of a portion of the provincial HST paid should result. The opposite holds true that if you pay little HST but have activity tied to HST provinces, you will be required to fund a provincial HST liability tied to that portion of HST provincial activity.
Most credit unions would not have been considered a SLFI when they were provincially bound to where they could carry on their business. The measurement was based on where the revenues and salaries were allocated for income tax purposes to those business locations. The amendments in the GST / HST legislation now account for expansion across provincial borders, but also takes into account movement of members inter-provincially even if the credit union has not expanded across borders.
These amendments to the GST/HST legislation happened in July, 2016 and credit unions must change the approach to how they will determine where they are considered to have a presence. In fact, the determination will now be the same as how a bank looks at the SLFI rules. In essence, they have to consider where the deposit account holder resides, and in the case of outstanding loans, the location of the land if it is held as security or the person’s residence in the case of unsecured loans.
This shift means the new rules focus less on where the credit union physically carries out the business, to where the members reside. This is a similar concept in dealing with many investment plans as well. It is a far reaching rule and will more than likely result in many credit unions now being captured into the SLFI rules and requiring changes to their systems and processes surrounding GST / HST to ensure compliance.
Considering this small change was buried within almost 100 pages of legislative changes with little fanfare, it is unlikely to see any further communication by the Department of Finance or the Canada Revenue Agency (CRA).
Whether registered for GST / HST or not, a credit union may find itself meeting the definition of a SLFI given these changes. A credit union that is a SLFI, but not registered, files monthly GST / HST returns and an annual SLFI return. This means monthly allocations need to be calculated, filed on a monthly GST / HST return, and all reconciled into the annual return at year end. Previously if a credit union was not registered for GST / HST there were no filing requirements.
A credit union that is a SLFI and registered for GST/HST, files an annual SLFI return unless they have elected to file more frequently. An annual SLFI return is a specific form for SLFIs to be used and cannot be filed electronically. The return itself is complex but the actual calculations are much more challenging. In addition, an Annual Information Return is still required to be filed for the credit unions that are registered. As you can tell, the filing requirements have become more onerous as the rules evolve. It is important to stay up to speed on the rules, so processes can be put in place to ensure accurate and timely filings are made.
The ‘when’ question becomes top of mind now. The change is in effect for the first reporting period after the July 22, 2016 announcement date. This impacts the credit unions who are not registered for GST / HST the earliest. For example, a non-GST registered credit union with a December 31 year-end considered to be a SLFI had their first monthly return due on September 30, 2016. Take the same credit union but which is both registered and a SLFI; under the new rules it would not fall into the reporting obligations until the start of the 2017 fiscal year. Monthly and quarterly returns have a one month due date. Annual returns, for a SLFI, have six months after the fiscal year to file, so for a credit union with a September 30, 2016 year-end you would need to file your SLFI annual return no later than March 31, 2017.
While many credit unions will not have to report the change until sometime in 2018, some may require reporting as early as late-2016. The SLFI determination and any changes to adopt these rules need to be put in motion as soon as possible.
MNP will be presenting a webinar on these new changes later this fall through Canadian Credit Union Association.
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; Canada Revenue Agency
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