Vol. 147, No. 24 — November 20, 2013

Registration SOR/2013-197 November 8, 2013

EXCISE TAX ACT

Regulations Amending Various GST/HST Regulations, No. 5

P.C. 2013-1150 November 7, 2013

His Excellency the Governor General in Council, on the recommendation of the Minister of Finance, pursuant to subsections 225.2(9) (see footnote a) and sections 236.01 (see footnote b), 277 (see footnote c) and 277.1 (see footnote d) of the Excise Tax Act (see footnote e), makes the annexed Regulations Amending Various GST/HST Regulations, No. 5.

REGULATIONS AMENDING VARIOUS GST/HST REGULATIONS, NO. 5

PART 1

SELECTED LISTED FINANCIAL INSTITUTIONS ATTRIBUTION METHOD (GST/HST) REGULATIONS

1. Section 40 of the Selected Listed Financial Institutions Attribution Method (GST/HST) Regulations (see footnote 1) is amended by striking out “and” at the end of paragraph (c), by adding “and” at the end of paragraph (d) and by adding the following after paragraph (d):

2. (1) The definition “qualifying energy” in subsection 42(1) of the Regulations is replaced by the following:

“qualifying energy”
« forme d’énergie admissible »

“qualifying energy” means specified energy, other than qualifying heating oil, that is a specified property or service.

(2) The definition “recapture rate” in subsection 42(1) of the Regulations is amended by striking out “and” at the end of paragraph (a), by adding “and” at the end of paragraph (b) and by adding the following after paragraph (b):

(3) The portion of the definition “specified extent” in subsection 42(1) of the Regulations before paragraph (a) is replaced by the following:

“specified extent”
« mesure déterminée »

“specified extent” of property or a service in respect of a specified class of specified property or service, for a province that is Ontario, British Columbia or Prince Edward Island and for a reporting period of a person, means the percentage that is equal to

(4) The portion of subparagraph (a)(ii) of the definition “specified extent” in subsection 42(1) of the Regulations before clause (A) is replaced by the following:

(5) Subsection 42(1) of the Regulations is amended by adding the following in alphabetical order:

“qualifying heating oil”
« huile de chauffage admissible »

“qualifying heating oil” has the same meaning as in section 1 of the Deduction for Provincial Rebate (GST/HST) Regulations.

(6) Subsection 42(2) of the Regulations is amended by adding the following after paragraph (c):

(7) Subsection 42(4) of the Regulations is amended by striking out “and” at the end of paragraph (a) and by adding the following after that paragraph:

3. (1) The portion of paragraph 46(d) of the Regulations before the first formula is replaced by the following:

(2) The description of C in subparagraph (i) of the description of G19 in paragraph 46(d) of the Regulations is amended by adding the following after clause (B):

(3) The portion of clause (C) of the description of C in subparagraph (i) of the description of G19 in paragraph 46(d) of the Regulations before the formula is replaced by the following:

(4) The portion of subparagraph (i) of the description of G23 in paragraph 46(d) of the Regulations before the formula is replaced by the following:

(5) The portion of subparagraph (ii) of the description of G23 in paragraph 46(d) of the Regulations before the formula is replaced by the following:

(6) The description of G23 in paragraph 46(d) of the Regulations is amended by striking out “or” at the end of subparagraph (i), by striking out “and” at the end of subparagraph (ii) and by adding the following after subparagraph (ii):

(7) Section 46 of the Regulations is amended by striking out “and” at the end of paragraph (e) and by adding the following after paragraph (f):

4. (1) The portion of subparagraph 59(d)(i) of the Regulations before clause (A) is replaced by the following:

(2) Subparagraph 59(d)(ii) of the Regulations is replaced by the following:

(3) Clauses (A) and (B) of the description of A in subparagraph 59(d)(iii) of the Regulations are replaced by the following:

5. The Regulations are amended by adding the following after section 60:

New non-stratified investment plan — percentage

60.1 If units of a non-stratified investment plan that is a selected listed financial institution and not an exchange-traded fund are issued, distributed or offered for sale in a particular fiscal year that ends in a particular taxation year of the investment plan, if immediately before the issuance, distribution or offering for sale no units of the investment plan are issued and outstanding, if no election is in effect under section 49 or 61 in respect of the investment plan throughout the particular fiscal year and if paragraph 59(d) does not apply to the investment plan, the following rules apply:

6. (1) The portion of subparagraph 62(d)(i) of the Regulations before clause (A) is replaced by the following:

(2) Subparagraph 62(d)(ii) of the Regulations is replaced by the following:

(3) Clauses (A) and (B) of the description of A in subparagraph 62(d)(iii) of the Regulations are replaced by the following:

7. The portion of section 63 of the Regulations before paragraph (a) is replaced by the following:

New series — elected method

63. If units of a series of an investment plan that is a selected listed financial institution are issued, distributed or offered for sale in a particular fiscal year that ends in a particular taxation year of the investment plan, if immediately before the issuance, distribution or offering for sale no units of the series are issued and outstanding and if no election is in effect under section 49 or 64 in respect of the series and the particular fiscal year, the investment plan may elect in prescribed form containing prescribed information to have the following rules apply:

8. The Regulations are amended by adding the following after section 63:

New series — percentage

63.1 If units of a series (other than an exchange-traded series) of an investment plan that is a selected listed financial institution are issued, distributed or offered for sale in a particular fiscal year that ends in a particular taxation year of the investment plan, if immediately before the issuance, distribution or offering for sale no units of the series are issued and outstanding, if no election is in effect under section 49 or 64 in respect of the series throughout the particular fiscal year and if paragraph 62(d) does not apply to the series, the following rules apply:

PART 2

NEW HARMONIZED VALUE-ADDED TAX SYSTEM REGULATIONS

9. The New Harmonized Value-added Tax System Regulations (see footnote 2) are amended by adding the following after section 58.45:

Exception — election to use production proxy

58.46 Despite subsection 31(9) of the New Harmonized Value-added Tax System Regulations, No. 2, if a person produces tangible personal property for sale and if the production of tangible personal property carried on by the person in Canada during the last fiscal year of the person that is before April 1, 2013 is carried on primarily in Prince Edward Island, an election made by the person under subsection 31(8) of those Regulations that sets out July 1, 2012 as the day on which the election is to become effective shall be filed with the Minister on or before September 1, 2014.

PART 3

APPLICATION

10. (1) Sections 1 to 3 and 9 apply in respect of a reporting period of a person that ends on or after April 1, 2013.

(2) Sections 4 to 6 and 8 apply in respect of a reporting period of a person that ends on or after July 1, 2010.

REGULATORY IMPACT ANALYSIS STATEMENT

(This statement is not part of the Regulations.)

Issue

On April 18, 2012, the Government of Prince Edward Island (P.E.I.) announced its intention to adopt the Harmonized Sales Tax (HST) at a rate of 14%, to be composed of a 5% federal component and a 9% provincial component, with an effective date of April 1, 2013. This was confirmed when, on November 26, 2012, a Comprehensive Integrated Tax Coordination Agreement (Canada-P.E.I. CITCA) was signed between the Government of Canada and the Government of P.E.I., providing the necessary framework for the implementation of the HST in P.E.I.

In order to facilitate the transition to the HST, P.E.I. announced proposed transitional rules and input tax credit recapture rules on November 8, 2012. These rules generally specify the tax rate that should be applied for transactions that straddle the April 1, 2013, implementation date. With the passage of the Provincial Choice Tax Framework Act on December 15, 2009, Parliament approved mechanisms to facilitate the application of the harmonized value-added tax system by way of regulations. The bulk of the transitional rules have already been implemented in the Regulations Amending Various GST/HST Regulations (Prince Edward Island), but additional transitional rules mainly affecting certain financial institutions are also required to implement P.E.I.’s decision to adopt the HST.

A technical amendment, related to the implementation of the HST in P.E.I., and technical and housekeeping amendments to the Selected Listed Financial Institutions Attribution Method (GST/HST) Regulations (the SLFI Regulations) are also needed.

Objectives

Description

The SLFI Regulations, along with certain sections of the Excise Tax Act, set out special rules by which certain financial institutions are required to calculate the amount of the provincial component of the HST remittable by them, or refundable to them, for each of their reporting periods. These rules are collectively referred to as the “special attribution method” and the financial institutions to which these rules apply are referred to as “selected listed financial institutions” or “SLFIs.” The SLFI Regulations also prescribe which financial institutions are selected listed financial institutions (generally speaking, financial institutions operating in an HST province and in at least one other province).

Under the special attribution method, SLFIs make adjustments to their net tax otherwise determined under the general rules of the Excise Tax Act. The adjustments take into account the provincial component of the HST in respect of the SLFI’s purchases of goods and services for use in activities carried out within both the HST-participating provinces and the non-participating provinces. In the absence of the special attribution method, the SLFI would be required to track the actual extent to which goods and services purchased by it were for use in each of the HST-participating provinces and in the non-participating provinces. The net tax adjustments provided for under the special attribution method rules serve as a proxy for the amount of the HST that should be borne by an SLFI on property and services consumed by it in its activities undertaken in relation to the HST-participating provinces, while avoiding the complexity of detailed tracking.

The Regulations Amending Various GST/HST Regulations, No. 5 (the Regulations) amend the SLFI Regulations in order to provide transitional rules applicable to SLFIs for the adoption of the HST in P.E.I., effective April 1, 2013. Generally, as announced by P.E.I. on November 8, 2012, these transitional rules provide that if a reporting period of an SLFI straddles April 1, 2013, the SLFI’s liability for the provincial component of the HST for P.E.I. is determined on an apportionment basis based on the number of days in the reporting period before and after April 1, 2013. However, for investment plans that distribute or sell their units to the public (e.g. mutual funds, exchange-traded funds, mortgage investment corporations or segregated funds of insurers), the prorating factor is instead the ratio of the amount of the Goods and Services Tax and the federal component of the HST that becomes payable, or that is paid without having become payable, during the reporting period before April 1, 2013, to the total amount of that tax that becomes payable, or that is paid without having become payable, during the reporting period.

In addition, the Regulations amend the SLFI Regulations in order to implement in P.E.I. the input tax credit recapture rules for SLFIs, as announced by P.E.I. on November 8, 2012, and as provided for under the Canada-P.E.I. CITCA. These rules apply to SLFIs making annual taxable supplies in Canada worth more than $10 million and those that are prescribed by regulations. SLFIs that are prescribed for this purpose include an SLFI such as a bank, a credit union, an insurer or an investment plan, or an SLFI related to such entities.

The Canada-P.E.I. CITCA provides for P.E.I. temporarily requiring large businesses, including the SLFIs described above, to repay or “recapture” input tax credits otherwise available to them in respect of the provincial component of the HST payable on certain property and services acquired by those businesses. P.E.I. has announced that, between April 1, 2013, and March 31, 2021, any such SLFI will be required to make an adjustment to its net tax that has the effect of recapturing the provincial portion of the SLFI’s input tax credits that are attributable to P.E.I. and that are in respect of the following property and services:

After the first five years, during which time these input tax credits would be fully recaptured, the proportion of input tax credits that must be recaptured will be decreased over the following three years, after which the input tax credits could be fully claimed without a requirement to repay (except for meals and entertainment, where only 50% will continue to be claimable as input tax credits under the general GST/HST rules).

The Regulations also make technical and housekeeping amendments to the SLFI Regulations, including technical amendments that were announced in the backgrounder to a Department of Finance news release dated January 28, 2011, concerning the HST rules relating to newly created investment plans. Pursuant to the rules, as announced in the backgrounder, an investment plan, or a series of an investment plan, created by way of an initial distribution of units is entitled to use a simplified method to determine its “provincial attribution percentages” for its first fiscal year. These percentages determine its HST liability for each of the participating provinces for that year, unless the investment plan opts to use the default method in the SLFI Regulations to determine its provincial attribution percentages. Under the SLFI Regulations, an investment plan or a series of an investment plan is normally required to ascertain the provincial attribution percentages of its unit holders that are “institutional investors” (i.e. generally other investment plans) in order to determine its own provincial attribution percentages. However, under the simplified rules available to a newly created plan or series, the plan or series is only required to know the province of residency of its institutional investors in order to determine its provincial attribution percentages. The amendments to the SLFI Regulations in the Regulations implement this simplified method for newly created investment plans and series and make other minor editorial corrections to the SLFI Regulations.

The Regulations also amend the New Harmonized Value-Added Tax System Regulations in order to expand the availability of the election to use a production proxy in respect of the recapture of input tax credits in P.E.I. Input tax credits in respect of energy acquired by a large business for use in P.E.I. are generally subject to recapture. However, input tax credits in respect of energy used in qualifying production activities (i.e. generally energy that is used directly in the production of tangible personal property for sale) are not subject to recapture. As a simplification measure, qualifying large businesses can elect to use a proxy to determine what percentage of their energy use in P.E.I. is attributable to qualifying production activities. Currently, most large businesses in P.E.I. cannot elect to use the proxy in respect of the period from April 1, 2013, to June 30, 2013, because the deadline to file this election for that period predates the announcement by P.E.I. of the recapture of input tax credits in P.E.I. An amendment is therefore made to extend the deadline to September 1, 2014, for filing the election to use the proxy in respect of the period from April 1, 2013, to June 30, 2013.

“One-for-One” Rule

The Regulations may have an impact on administrative costs for businesses. As the Regulations address tax or tax administration, they are carved out from the “One-for-One” Rule.

Small business lens

The small business lens does not apply to the Regulations as no disproportionate impact on small businesses is expected.

Consultation

The Regulations were developed in consultation with the Government of P.E.I. The Regulations are designed to reflect previous announcements, including HST announcements of proposed rules by P.E.I. on November 8, 2012.

Rationale

The Regulations are required to support the adoption of the HST in P.E.I., effective April 1, 2013, and to make technical and housekeeping amendments. The Regulations formalize and give legal effect to previously announced amendments.

Contacts

Yuki Bourdeau
Sales Tax Division
Department of Finance
140 O’Connor Street
Ottawa, Ontario
K1A 0G5
Telephone: 613-996-4222

Dawn Weisberg
Excise and GST/HST Rulings Directorate
Canada Revenue Agency
320 Queen Street
Ottawa, Ontario
K1A 0L5
Telephone: 613-952-9210