Canadian government responds to TEI submission on GST credits for pension plan sponsors - Tax Executives Institute, Goods and Services Tax

Tax Executive, The, Jan-Feb, 1993 by Donald Mazankowski

On June 26, 1992, Tax Executives Institute submitted a letter to Donald Mazankowski, Canadian Minister of Finance, regarding the eligibility of employers to claim input tax credits for Goods and Services Tax (GST) paid to suppliers of services necessary to administer employer-sponsored pension plans. The Institute's comments were reprinted in the July-August 1992 issue of The Tax Executive. On November 12, 1992, the Minister of Finance responded to the Institute's submission, and his response (which took the form of a letter to J. Lawrence Martin, TEI's Vice President for Canadian Affairs) is reprinted below:

I am writing in response to Mr. Reginald W. Kowalchuk's letter of June 26, 1992, concerning the eligibility of pension plan sponsors to claim input tax credits for GST paid on services used in the course of administering employer-sponsored pension plans. Mr. Kowalchuk requested that we reply to your predecessor Mr. Andrew G. Kenyon.

Mr. Kowalchuk states in his letter that a "core principle of the GST [is] that businesses should be relieved of GST on all costs incurred in their commercial activities." This statement provides a general summary of policy underlying the GST. However, a more precise statement of the government's policy is that a core principle of the GST is that, in general, businesses should be relieved of GST on inputs to the extent that inputs are used in making taxable supplies. As a result, mixed suppliers -- i.e., persons who make both exempt and taxable supplies -- are required to attribute input tax to three baskets: a basket for inputs used exclusively in making exempt supplies which will be ineligible for ITCs, a basket used in making exclusively taxable supplies which will be eligible for ITCs, and a basket for mixed-use inputs which will be eligible for ITCs to the extent of use in commercial activities.

Mr. Kowalchuk suggests in his letter that all inputs in respect of a company's employee pension plan are "in furtherance of" its commercial activities and, are therefore, eligible for input tax credits by virtue of paragraph 141(5)(a) of the Excise Tax Act. An extension of this argument suggests that where a mixed supplier makes exempt supplies which are "in furtherance" of making taxable supplies, the supplier would be eligible for input tax credits in respect of costs incurred in making those supplies. Clearly, this would be an unintended policy result.

For greater certainty, this paragraph has been repealed in the draft legislation released on September 30, 1992.

As a result, input tax credits for pension costs will be permitted only to the extent that the inputs are used in making taxable supplies by the plan sponsor or the pension trust. For input tax that is attributable to providing financial services that are incidental to commercial activities, relief is provided to non-financial institutions under sections 185 and 198.

As you are aware, Revenue Canada has reviewed its current administrative practice -- described in Technical Information Bulletin B-032, entitled Registered Pension Plans and Registered Retirement Savings Plans -- and has undertaken to develop a revised administrative practice. They circulated a discussion paper entitled Registered Pension Plans, dated January 3, 1992, which explains its proposed administrative policy on pensions.

I will consider corrective measures in the future if Revenue Canada's administrative policy or the legislation do not accurately reflect the policy intent of the GST. However, I will not take any action prior to Revenue Canada finalizing its administrative policy in respect of GST paid on services used in the course of administering employer-sponsored pension plans.

Thank you for taking the time to provide me with your views on this area of the GST.