Employer segregated funds: Who can claim ITCs?

  • March 01, 2024
  • Rob Kreklewetz and John Bassindale

In an April 2023 GST Interpretation (RITS 202403) CRA takes the view that employers with pension funds invested in an insurer’s segregated funds, are NOT eligible to claim ITCs for the GST/HST payable on the investment management fees (“IM fees”) paid directly out of those funds.

On one level of analysis, CRA has done an about-face and reversed a prior 2012 ruling1 in this area (which seemed to have addressed the same situation). While CRA may disagree, this does appear to be a potentially significant “reinterpretation.”

(a) Background: Irreconcilable differences?

Prior to RITS 202403, CRA had issued the 2012 ruling involving a defined benefit contribution plan and group insurance contracts, ruling that “the [employer] may claim ITCs for the GST/HST paid or payable on expenses incurred in connection with the administration of the pension Plan and Fund to the extent that the expenses were incurred in the course of the Company’s commercial activity.”

Although there was with no mention of segregated funds (“Seg Funds”) in that ruling, we understand that the fact that “investment” vehicles were involved (i.e., the ruling was focused on ITC eligibility for the GST/HST paid on expenses incurred in connection with the administration/management of the investments in the plan), Seg Funds were almost certainly to be involved.

Here is the problem. For many in the “know,” back in 2012, the ineluctable conclusion might have been that (1) Seg Funds were involved in the initial ruling and (2) CRA was approving employers claiming ITCs on any GST/HST paid on these IM fees.

One can thus imagine that some employers might have begun to claim ITCs on pension fund related IM fees, even where the payments were being made directly by the Seg Funds. The value of these ITCs could well have been very high!

(b) Bottom line

CRA’s April 2023 Interpretation seems to signal that where Seg Funds are involved, “no ITCs” are available to employers for GST/HST charged on the IM fees and paid directly from the Seg Funds themselves.

This may be unexpected news for many and, hence, the 10-Alarm fire alluded to above.

There are legal concerns with the CRA’s 2023 Interpretative position, including its conclusions that (1) the insurer supplied only an “insurance policy” to the Employer, (2) there was no “pension entity” involved,2 (3) the employer was not the recipient of any investment management services, and (4) paragraph 131(1)(c) may have been applied improperly.

Of course, no complete answer can be given without taking into account the actual pension, insurance documentation and relationships in place. While there is a great degree of commonality in these arrangements, the differences can be “the difference” when it comes to the availability of ITCs!

Rob Kreklewetz and John Bassindale are partners with Millar Kreklewetz LLP in Toronto.

End Notes

1 137345 -- GST/HST Ruling—Eligibility to claim input tax credits on pension related expenses.

2 We note that there was also no pension entity in the 2012 ruling.