Availability of GST input tax credits on pension plan expenses.

On June 26, 1992, Tax Executives Institute filed the following comments with the Canadian Department on Finance on the eligibility of certain employers to claim input tax credits for the Goods and Services Tax paid to suppliers of services associated with their pensions plans. The submission, which took the form of a letter from TEI President Reginald W. Kowalchuk to the Canadian Minister of Finance, was prepared under the aegis of the Canadian Commodity Tax Committee, whose 1991-1992 chair is D. John Nichol of Petro-Canada Inc. Also participating in the development of the comments were Andrew G. Kenyon of the Canadian Imperial Bank of Commerce, TEI's Vice President-Region I, and Paul J. deWinter of Imperial Oil Limited, the 1992-1993 chair of the Canadian Commodity Tax Committee.

On behalf of Tax Executives Institute, I am pleased to submit the following comments on the eligibility of employers engaged in commercial activities to claim Input Tax Credits with respect to Goods and Services Tax paid to suppliers of services necessary to administer employer-sponsored pension plans.

Background

Tax Executives Institute is an international organization of approximately 4,800 professionals who are responsible -- in an executive, administrative, or managerial capacity -- for the tax affairs of the corporations and other businesses by which they are employed. TEI's members represent almost 2,000 of the leading corporations in Canada and the United States.

Canadians make up approximately 10 percent of TEI's membership, with our Canadian members belonging to chapters in Calgary, Montreal, Toronto, and Vancouver, which together make up one of our nine geographic regions. In addition, a substantial number of our U.S. members work for companies with significant Canadian operations. In sum, TEI's membership includes representatives from most major industries, including manufacturing, distributing, wholesaling, and retailing; real estate; transportation; financial; and resource (including timber and integrated oil companies). The comments set forth in this submission reflect the views of the Institute as a whole but more particularly those of our Canadian constituency.

Discussion

Tax Executives Institute has been advised by officials of the Department of Finance that the Department is reviewing the eligibility of employers engaged in commercial activities to claim input tax credits (ITCs) with respect to Goods and Services Tax (GST) paid to suppliers of service to employer-sponsored pension plans. The Institute strongly recommends that the ITC eligibility with respect to services related to pension plans, as it is now administered by Revenue Canada, be maintained. TEI further recommends that the legislation be amended to confirm recovery of the ITC on service costs incurred directly by pension plans where such costs are ultimately borne by an employer engaged in commercial activities.

As you know, the present policy of Revenue Canada is to allow employers engaged in commercial activities to claim ITCs for tax paid directly by the employer to the supplier of services to these pension plans, but only where the employer is legally obligated to pay those expenses. In our view, this policy is not fully consistent with the provisions of the Excise Tax Act and with the core principle of the GST that businesses should be relieved of GST on all costs incurred in their commercial activities. Although Revenue Canada's administrative position recognizes the employer's right to ITCs where there is a legal obligation to pay the costs, it does not extend to an employer that -- even in the absence of a formal legal obligation -- sponsors an employee pension plan as part of its overall business activities. Since subsection 141(5) of the Excise Tax Act provides that ". . . anything done by a person ... in furtherance of a commercial activity ... shall be deemed to be part of the commercial activity," however, an employer engaged in commercial activities is clearly entitled to ITCs on plan costs that, while incurred directly by the pension plan, are reimbursed or otherwise borne by the employer.

Concededly, a pension plan is a legal entity separate from its employer sponsor. This, however, should not cloud the issue. The pension plan is legally separate not because the operation of a pension plan is outside an employer's commercial activities, but because of regulatory requirements designed to protect employee pensions. TEI believes the principles underlying the GST would be frustrated if externally imposed requirements were used to deny the employer's eligibility for ITCs. Again, the employer sponsors a pension plan to further its commercial activity and, hence, its costs clearly fall within the scope of the Excise Tax Act's provisions relating to ITCs.

During discussions of this issue with Finance officials, we were told that according ITC availability for pension costs to employers engaged in commercial activities would create an inequity relative to employers whose activities do not constitute commercial activities (with respect to which the Excise Tax Act does not permit ITCs). This argument ignores the basic structure of the GST, which distinguishes between businesses engaged in commercial activities and other businesses. Having chosen to distinguish between the two types of businesses, the Government should not now invoke the distinction to deny ITCs on costs clearly within the ambit of subsection 141(5). In other words, employers engaged in commercial activity should be permitted to claim ITCs for all costs associated with administering a pension plan -- whether incurred directly by or paid on behalf of the employer by the plan.

For the foregoing reasons, TEI recommends that the legislation be amended to confirm full or partial ITC recovery for pension plan costs to the extent these costs are ultimately borne by an employer engaged in commercial activities. We believe section 169 can be amended to give effect to this recommendation.

Conclusion

Tax Executives Institute appreciates this opportunity to present its comments. If you should have any questions, please do not hesitate to call either Andrew G. Kenyon, TEI's Vice President for Canadian Affairs, at [phone] or Paul J. deWinter of the Institute's Canadian Commodity Tax Committee, at [phone].