Financial Institutions — Prepare now for GST/HST annual returns
FIs — Prepare now for GST/HST annual returns
Entities that are not typical FIs may also have to file annual returns by June 30
Many businesses must file annual GST/HST and QST returns by June 30, 2020. This article notes the June 30, 2020 deadline for the annual GST/HST and QST information return, applicable to entities with a December 31 year end that are financial institutions, such as listed financial institutions (LFI), selected listed financial institutions (SLFIs) and other entities deemed to be financial institutions under the GST/HST and QST rules. This article also addresses the similar June 30, 2020 deadline for annual GST/HST and QST final returns, which affects financial institutions that qualify as SLFIs and have a December 31 year-end.
Note that these deadlines are not deferred by the COVID-19 relief issued by the CRA and Revenu Quebec, which only applies to remittances for returns due between March 27, 2020 and before June 2020.
Affected entities will want to get a head start on filing their annual GST/HST and QST returns, to ensure accuracy and timeliness. As many employees are now working remotely, entities may need additional time to collect all the data from their staff and from their various systems and processes. Note that the CRA closely reviews these returns and cross-references them with other reports, including corporate income tax return schedules, to verify correctness. For the annual GST/HST information return, the CRA can assess a penalty of up to $1,000 for each qualifying line on the form for failure to file or for misreporting amounts. Similar rules apply for QST.
Annual GST/HST and QST information return
Who has to file the annual information return?
Affected entities must file this form no later than six months after their year-end if they are:
- Financial institutions, or businesses deemed to be financial institutions
- Are registered for GST/HST, and
- Have annual income of more than $1 million in the last taxation year.
A financial institution with a December 31 year-end must file the annual information return by June 30, 2020 for its 2019 fiscal year. Similar rules apply for QST. Note that certain investment plans that qualify as SLFIs are exempt from filing the annual information returns.
Deemed financial institutions
Corporations also face this filing requirement if they have filed section 150 elections, as they are considered financial institutions under the GST/HST and QST rules. Corporate groups should ensure that all closely related entities with section 150 elections in place have filed their GST/HST and/or QST annual information returns, as required.
Certain corporations, partnerships and trusts that are not typical financial institutions also have this filing obligation if they qualify as "de minimis financial institutions". Such businesses are deemed financial institutions under the GST/HST and QST rules if they have revenues related to qualifying financial services, including interest earned from receivables and certain guaranteed income certificates (GICs) that meet certain thresholds. Specifically, these businesses may have to file information returns where they have, for their taxation year prior to the particular year:
- "Financial revenue" that is greater than 10% of their total revenues and is more than $10 million
- More than $1 million of income from lending money.
The CRA generally considers interest from GICs and deposits to be interest from lending money that may cause a company to qualify as a "financial institution" under these de minimis rules. However, interest for demand deposits, term deposits and GICs with an original due date to maturity not exceeding 364 days, are excluded from calculations of the threshold of $1 million of income from lending money (but not the 10% or $10 million threshold).
For example, a construction company that has significant deposits invested in GICs for more than 364 days may qualify as a "de minimis financial institution" due to the interest generated from these deposits.
Corporate groups should review entities with significant financial revenues, to ensure all required annual GST/HST and/or QST information returns for the group are properly completed.
Entities required to file the annual information return with the CRA must file form GST111, "Financial Institution GST/HST Annual Information Return", or the combined form RC7291, "GST/HST and QST Annual Information Return for Selected Listed Financial Institutions". Entities that are required to file the return with Revenu Quebec must file form FP2111, "Financial GST/HST and QST Annual Information Return".
While these annual information returns are not related to any GST/HST and QST payments, reporting institutions could face significant penalties if they do not file this return correctly and on time.
SLFIs — Annual GST/HST and QST final returns
Financial institutions that qualify as SLFIs and have a December 31 year-end must file the annual GST/HST and QST final return by June 30, 2020 for their 2019 fiscal year. In general, a financial institution qualifies as a SLFI if it has a permanent establishment in an HST province and in another province for GST/HST purposes, or in Quebec and in another province for QST purposes. Ahead of filing, SLFIs must consider various factors when calculating tax adjustments for these returns, such as their specific type of entity and activities. Several key considerations can affect SLFIs GST/HST and QST filings, and they may want to:
- Determine whether their systems separately track GST, the federal component of the HST and QST paid or payable
- Review allocation methods under the GST/HST and QST SLFI rules
- Identify any missed eligible input tax credits (ITCs) for years 2017, 2018 and 2019
- Determine whether they have any new operations or service lines that may affect ITC allocation methods
- Identify any significant business acquisitions over the past year
- Determine whether they have any new actual or deemed permanent establishments in any provinces over the past year
- Review transactions between related entities and the cost/benefit of any elections in place
- Adjust the recapture rate for ITCs and input tax refunds (ITRs) for P.E.I. and Quebec
- Cross-check all the information against details provided to the tax and regulatory authorities in other filings, before filing returns.
Also, special adjustments can apply for certain industries (e.g., insurance). Some of these considerations may also affect LFIs, as many of these entities also start preparing their regular GST/HST and QST returns, as well as their GST/HST and QST annual information returns.
Entities that must file the annual final return for SLFIs with the CRA must file the combined form RC7294, "Goods and Services Tax/Harmonized Sales Tax (GST/HST) and Quebec Sales Tax (QST) Final Return for Selected Listed Financial Institutions", or the form GST494, "Goods and Services Tax/Harmonized Sales Tax (GST/HST) Final Return for Selected Listed Financial Institutions".
Investment Limited Partnerships — New SLFIs
Investment limited partnerships (ILPs) that elected to become SLFIs as of January 1, 2018 and ILPs that became SLFIs on January 1, 2019 should start early to prepare their 2019 annual GST/HST and QST final returns to ensure they can compile all the data required to file their returns by June 30, 2020.
SLFIs should carefully review all their allocation methods under the special attribution method (SAM). In general, SAM is a complicated formula SLFIs must use to calculate an adjustment to their net tax, which then must be included in their annual SLFI GST/HST final return. Similar rules apply for QST purposes. In some cases, an error in the allocation methods may translate into a tax recovery for current and prior reporting periods.
Filing one or both annual GST/HST returns
Affected entities that are preparing to file one or both annual GST/HST and QST returns should also take time to review their self-assessment obligations and allocation methods.
Review self-assessment obligations
Financial institutions and deemed financial institutions should ensure they properly apply all the GST/HST and QST self-assessment rules. Early preparation of GST/HST and QST annual returns can help these entities confirm they are fulfilling their self-assessment obligations. These rules are complicated and can vary based on the various types of operations of the entity. The CRA also focuses on these obligations during their audits and looks to various sources to determine the accuracy of the details, such as transfer pricing, other income tax filings and GST/HST and QST annual information returns.
Review ITC allocation
For certain entities that meet the definition of "qualifying financial institutions" (QFIs), July 5, 2020 is the last day to elect to change their input tax credit (ITC) allocation method for 2021 to help reduce unrecoverable GST/HST and QST costs. This deadline applies to QFIs with a December 31 year-end. Some financial institutions that are not QFIs may still be able to develop improved allocation methods for their fiscal year 2019.
In general, all financial institutions and other entities that are not typical financial institutions should review their ITC allocation methods early, and ensure they claim all their eligible ITCs. Entities must remember that they must calculated various allocations for different tax purposes.
We can help
KPMG's Financial Institutions Indirect Tax Compliance Team, composed of multi-disciplinary professionals who specialize in indirect tax compliance, can assist you with your indirect tax compliance obligations, including the preparation or review of your 2019 GST/HST and QST final return and annual information return.
We can also help you:
Identify issues and opportunities through data analytics
Simplify the preparation of your returns
Determine whether you have missed eligible ITCs, ITRs, and other deductions and adjustments
Provide assistance to manage GST/HST and QST risks
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.
For more information, please contact your KPMG adviser or one of the following Indirect Tax professionals:
Walter Sisti, National Leader - Indirect Tax Services
Information is current to April 28, 2020. 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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