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Financial Institutions — Reduce GST Risks Now

Financial Institutions — Reduce GST Risks Now

A chance to get an early start on annual GST/HST returns

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Financial institutions may want to take action now by getting a head start on their annual GST/HST returns. This additional time may help listed financial institutions (LFIs) and selected listed financial institutions (SLFIs) obtain all the required information to complete these returns from their many systems and processes, which is often the most difficult task in preparing GST/HST and QST returns. In addition, LFIs and SLFIs may benefit from the early identification of compliance issues or potential opportunities to help reduce their tax costs.

It's important for financial institutions to ensure that they complete their GST/HST and QST returns accurately and on time. The CRA is closely examining financial institutions' returns and cross-referencing them with other reports, including corporate income tax return schedules. As such, financial institutions should allocate proper resources and time to prepare and review their GST/HST and QST returns to identify any inconsistencies when there's still time to adjust them. Specifically, financial institutions may want to get an early start so they can:

  • Review allocation methods
  • Review self-assessment obligations
  • Consider new investment limited partnership rules for 2018 and 2019, if applicable
  • Review specific items in annual GST/HST and QST returns.

Review allocation methods
Financial institutions should review all their input tax credit (ITC) allocation methods as early possible, and ensure they claim all the ITCs they are eligible to receive. SLFIs and LFIs that are not qualifying financial institutions (QFI) can still develop improved allocation methods for their fiscal year 2018. However, a QFI can generally only review its allocation method prospectively. As such, a QFI has until July 5, 2019 to incorporate changes to their allocation method for their fiscal year 2020, long before the beginning of their fiscal year.

In addition, some SLFIs may be mistakenly using their income tax allocation to calculate their GST/HST special attribution method (SAM) adjustments under the complicated SLFI rules. However, for many SLFIs, the required allocation method set out in the GST/HST and QST SLFI regulations differs from the allocation method they use for income tax purposes. Where this is the case, SLFIs that switch over to the correct method may see a benefit that may also apply to prior reporting periods.

Review self-assessment obligations
As they prepare their annual return, financial institutions should ensure they are properly applying all the GST/HST and QST self-assessment rules. These rules are complicated and can vary based on the operations of the financial institutions. The CRA is focused on these obligations and looks to various sources, including transfer pricing, other income tax filings and GST/HST and QST annual information returns, to identify any deficiencies. Starting to prepare GST/HST and QST returns early can help financial institutions confirm that they are fulfilling all their self-assessment requirements or possibly identify GST/HST and QST self-assessed in error.

Consider new ILP rules for 2018 and 2019
Like any new SLFIs, investment limited partnerships (ILPs) that elected to become SLFIs as of January 1, 2018, should start to prepare their GST/HST returns now to ensure they obtain the information necessary to file their first return on June 30, 2019. Those ILPs that did not make this election and instead became SLFIs on January 1, 2019, should review their systems and processes and make any required adjustments to ensure they are able to easily compile the necessary information to file their first SLFI GST/HST and QST final return by June 30, 2020. For more information on recent changes for general partners and ILPs, see TaxNewsFlash-Canada 2018-07, "2018 Federal Budget - Focus on FIs" and TaxNewsFlash-Canada 2018-17, "General Partners of ILPs - Remit GST by March 31".

Review specific items in annual GST/HST and QST returns
SLFIs must consider various factors when they calculate the tax adjustments for their GST/HST and QST final returns such as their specific type of entity and activities. In particular, SLFIs may wish to review the following key considerations:

  • Do your systems track separately the GST, the federal component of the HST and QST paid or payable?
  • Do you have any missed eligible ITCs for years 2016, 2017 and 2018?
  • Do you have any new operations or new service lines that may affect your ITC allocation methods?
  • Did you review your current ITC allocation methods to determine if adjustments are required?
  • Did you make any significant business acquisition this year that may affect your GST/HST and QST filings?
  • Do you have any new actual or deemed permanent establishments in any provinces this year?
  • What information was difficult to obtain last year to complete your returns and what processes can you implement this year to improve the information-gathering process?
  • Did you carefully review the transactions between closely related entities, the cost/benefit of elections in place, and how these types of transactions affect your SAM calculations?
  • Did you adjust the recapture rate for ITCs and ITRs Ontario, P.E.I. and Quebec?
  • Do you have a process to exclude prescribed amounts (e.g., insurance claims related costs) from the GST/HST and QST SAM calculations?
  • Do your processes capture any eligible notional ITCs and ITRs related to repossessed property/salvage, as well as change of use or sale of assets?
  • Do you have processes in place to review cross-border transactions to ensure you properly calculate self-assessed tax amounts?
  • Before filing your returns, do you cross-check all the information against details you provided to the taxation and regulatory authorities in other filings?

Some of these considerations may also affect LFIs, as many of these entities also start preparing their GST/HST and QST returns, as well as their GST/HST and QST annual information returns.

We can help
KPMG can assist you with your indirect tax compliance obligations, including the preparation or review of your 2018 GST/HST and QST final return and annual information return. We can use data analytics to help you identify issues, opportunities and simplify the preparation of your returns. We can also help financial institutions determine if they have missed eligible ITCs, ITRs, and other deductions and adjustments as well as provide assistance to manage GST/HST and QST risks. We can also help identify areas where LFIs and SLFIs may be able to proactively reduce GST/HST and QST costs as well as compliance risks on an ongoing basis.

KPMG's Financial Institutions Indirect Tax Compliance Centre has a team of multi-disciplinary professionals who specialize in indirect tax compliance requirements for the financial services sector. These professionals use sophisticated proprietary compliance software, developed specifically for financial institutions with partially exempt activities, to help extract the required data from systems, fulfill filing requirements and perform checks to help manage compliance indirect tax risks.

For more information, please contact your KPMG adviser or one of the following Indirect Tax professionals:

Walter Sisti
National Leader - Indirect Tax Services
T: 416-777-3920
E: wsisti@kpmg.ca

Annette Beshwaty
T: 514-840-2349
E: abeshwaty@kpmg.ca

Simon Proulx
T: 647-777-5318
E: sproulx@kpmg.ca

Christian Thibault
T: 416-777-3927
E: cthibault@kpmg.ca

Yakoob Vayani
T: 416-777-3933
E: yvayani@kpmg.ca

Information is current to April 09, 2019. The information contained in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's National Tax Centre at 416.777.8500

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