GST/HST and QST filing obligations for financial institutions
June 30 deadline approaches for FIs with December 31 year-ends
TAX ALERT |
Financial institutions who are required to file annual information returns and selected listed financial institutions (SLFIs) who are required to file SLFI returns are required to file those returns six months after their fiscal year-end. Accordingly, financial institutions and SLFIs with December 31 year-ends are generally required to file these returns by June 30, 2020.
Financial institutions who fail to file these returns on time could face significant financial penalties. Therefore, it is imperative that organizations determine if they have filing obligations. This article will help you determine if you may have a requirement to file these returns.
Although the deadlines to file certain returns were extended due to the COVID-19 pandemic, as of June 9, 2020, neither the Department of Finance nor the Canada Revenue Agency (CRA) have announced extensions for GST/HST returns due on June 30, 2020. Similarly, Revenue Quebec has not announced an extension for QST returns due on June 30, 2020.
The definition of “financial institution” for GST/HST and QST purposes is broad and could include organizations who are not typically considered part of the financial services sector. Additionally, for taxation years beginning on or after January 1, 2019, certain limited partnerships who meet the definition of “investment limited partnership” are also considered listed financial institutions and may be required to file an annual information return or SLFI return by June 30, 2020.
Organizations with December 31, 2019 year-ends should undertake the following steps to determine if they have any filing deadlines approaching:
- determine if the organization is a financial institution;
- determine if the organization is required to file an annual information return;
- determine if the organization is required to file an SLFI return;
- determine the jurisdictions in which filings are required; and
- determine if the organization has outstanding returns due.
Financial institutions for GST/HST and QST purposes
A person is a financial institution for GST/HST and QST purposes if the person meets the definition of a “listed financial institution” or if the person earns significant amounts from interest, dividends, or revenues from financial services, such that the person would be meet certain thresholds for financial institutions set out in the Excise Tax Act (the ETA) or the Act respecting the Québec sales tax (the QST Act).
A person would be a “listed financial institution” for GST/HST and QST purposes if they are listed in paragraph 149(1)(a) of the ETA or in the definition of “listed financial institution” in section 1 of the QST Act, respectively. These definitions include organizations such as banks, credit unions, securities dealers, insurers, trust and loan corporations, and investment plans. Additionally, corporations who have entered into an election under section 150 of the ETA are also deemed to be listed financial institutions.
Moreover, a person could be considered a de minimis financial institution under one of two tests that require a review of the person’s revenues for the preceding tax year, pursuant to paragraphs 149(1)(b) and 149(1)(c) of the ETA.1 If a person is a financial institution under the ETA by virtue of meeting one of these tests, the person will also be a financial institution under the QST Act.
First de minimis threshold test
The first test looks to the amounts earned by the taxpayer from interest, dividends, and separate fees or charges for financial services (collectively, Financial Revenues) that are included in computing the person’s income under the Income Tax Act in the preceding taxation year.
If the Financial Revenues are more than 10% of the person’s total revenues in the preceding taxation year and if the Financial Revenues exceed $10 million, the person would be a financial institution under the first threshold test. If the preceding taxation year was less than 365 days, the $10 million amount will be prorated.
For the purpose of this test, in-kind dividends, patronage dividends, and interest and dividends earned from related corporations are to be excluded from the calculations. Furthermore, zero-rated supplies of precious metals that would otherwise be considered financial services are also excluded from the calculation.
Second de minimis threshold test
The second threshold test would be met if in the preceding taxation year a person’s income calculated under the Income Tax Act included at least $1 million (prorated for taxation years that are less than 365 days) of interest, or separate fees or charges, in respect of:
- a credit card or charge card issued by the person; or
- the making of an advance, the lending of money, or the granting of credit.
Interest from related corporations, and interest earned in respect of demand deposits, and term deposits and guaranteed investment certificates with an original date to maturity not exceeding 364 days is not to be included in the calculation.
Annual information returns
The ETA requires GST/HST registrants who are financial institutions with annual revenues of $1 million or more to file form GST111 - Financial Institution GST/HST Annual Information Return (GST111). This return is due six months after the financial institution’s fiscal year-end.
Similarly, the QST Act requires QST registrants who are financial institutions with annual revenues of $1 million or more to file form FP-2111 Financial Institution GST/HST and QST Annual Information Return (FP-2111).
SLFIs who are GST/HST or QST registrants with annual revenues exceeding $1 million or more should not file forms GST111 or FP-2111; rather, these organizations should file form RC7291 - GST/HST and QST Annual Information Return for Selected Listed Financial Institutions (RC7291). This form should be filed with the CRA.
SLFIs who meet the definition of “investment plan” are generally not required to file any of the aforementioned information returns. There are certain exceptions to this rule, such as when a QST-registered investment plan is a SLFI for GST/HST purposes but not for QST purposes, so organizations should be cognizant of this.
Penalties for failure to file annual information returns
The penalty for failing to file the annual information returns can be substantial. For example, the ETA imposes a penalty of up to $1,000 for each amount that is unreported or misstated on the GST111. As the GST111 contains over 100 boxes where an amount could be reported, a non-compliant financial institution could face penalties of over $100,000 for failing to file the GST111 on time.
A person will generally be considered a SLFI for GST/HST purposes if the person is a listed financial institution (other than a corporation who is only a listed financial institution because it has made an election under section 150 of the ETA) and if the person has a permanent establishment (PE) in:
- a participating province (i.e., an HST province); and
- any other province.
For the purpose of determining if a listed financial institution has a PE in a province, the rules for SLFIs include certain deemed PEs set out in the Selected Listed Financial Institutions Attribution Method (GST/HST) Regulations under the ETA. For example, certain investment plans could be deemed to have a PE in any province in which unitholders reside, or in any province the plan is qualified to sell or distribute units.
Similarly, persons who are listed financial institutions could be a SLFI for QST purposes if the person has a PE in Quebec and in another province (including deemed PEs).
SLFIs are required to file SLFI returns in order to adjust their net tax using the special attribution method (SAM) formula. The SAM formula is a complex formula that is used to determine a blended tax rate for the organization. In many cases, this calculation could result in a significant tax recovery for the SLFI.
SLFIs who are only SLFIs for GST/HST purposes are generally required to file form GST494 Goods and Services Tax/Harmonized Sales Tax (GST/HST) Final Return for Selected Listed Financial Institutions. SLFIs who are SLFIs only for GST/HST purposes but who are QST registrants with an annual filing frequency should instead file form RC7294 Goods and Services Tax/Harmonized Sales Tax (GST/HST) and Quebec Sales Tax (QST) Final Return for Selected Listed Financial Institutions (RC7294).
SLFIs who are only a SLFI for QST purposes, or who are SLFIs for GST/HST and QST purposes, are also required to file form RC7294.
These returns are generally due no later than six months after the SLFI’s fiscal year-end.
New Rules for Investment Limited Partnerships
Due to recent changes to the ETA and harmonization measures announced by Revenue Quebec, certain limited partnerships will meet the definition of “investment limited partnership” (ILP), and thus would be listed financial institutions, for taxation years beginning after December 31, 2018.
ILPs could have also made an election to be ILPs for taxation years that began in 2018. However, for those ILPs which did not make this election, 2019 is the first year in which they would be listed financial institutions.
A person would be an ILP for GST/HST and QST purposes if the person is a limited partnership, the primary purpose of which is to invest in property consisting primarily of “financial instruments” (as that term is defined in the legislation), and:
- the limited partnership is, or forms part of an arrangement or structure that is promoted or represented as:
- a hedge fund;
- an ILP;
- a mutual fund;
- private equity fund;
- venture capital fund; or
- similar collective investment vehicle; or
- listed financial institutions hold 50% of more of the total value of all interests in the limited partnership.
Therefore, limited partnerships should first determine if they meet the definition of an ILP. Those limited partnerships who meet the definition of an ILP should then determine if they are also SLFIs and if they are required to file SLFI returns for the first time.
Note that ILPs who are SLFIs are generally not required to file annual information returns, subject to certain limited exceptions.
In order to ensure they are compliant with their GST/HST and QST obligations, organizations should determine if they are listed financial institutions. While this determination is often clear, organizations who have elections under section 150 of the ETA in place within the corporate group should take particular care to determine which entities are in fact listed financial institutions. Additionally, as this is the first year in which most ILPs are required to file SLFI returns, limited partnerships should determine if they are subject to these rules.
Organizations who are not listed financial institutions should still determine if they would be considered a de minimis financial institution because they earned a significant amount of revenues from interest, dividends, or fees from financial services, as set out in the aforementioned threshold tests.
Organizations who are financial institutions should review which returns they are required to file. Additionally, these organizations should review past periods to ensure that all outstanding returns are filed. If returns due in prior periods have not been filed, organizations should consider their options to file these returns, including filing these returns under the Voluntary Disclosure Program, in order to limit the assessment of penalties.
Indirect tax laws and administrative guidelines for financial institutions are complex and evolving. Working with an advisor to understand changing legislation, new CRA and Revenue Quebec guidelines, and new court decisions can help your organization to reduce compliance risk.