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August 25, 2021
Canada: Distributed Investment Plans required to request certain investor information by 15 October 2021
A Distributed Investment Plan (DIP), which as defined generally includes mutual fund trusts and certain partnerships, that is a selected listed financial institution (SLFI) is required to make a written request to obtain certain information from its investors by 15 October 2021. The information provided by the investors is used to calculate the DIP’s provincial attribution percentage (PAP) and the DIP’s Goods and Services Tax (GST)/Harmonized Sales Tax (HST)/Quebec Sales Tax (QST) net tax liability/refund. If a DIP does not request this information by 15 October 2021, certain investors may be deemed to be residents of the highest rate province (i.e., 15%) and, as a result, the DIP may have higher tax liabilities or lower refunds.
The GST/HST place of supply rules result in the vendors of a DIP generally charging GST/HST based on the place of consumption (such as the address of the trustee for a mutual fund trust). In the absence of any special rules, there would be an incentive for a DIP to locate its contracting addresses in lower GST/HST rate jurisdictions such as Alberta, where the GST/HST is imposed at a rate of 5%, as opposed to higher GST/HST rate jurisdictions such as Ontario, where GST/HST applies at a rate of 13%. In order to even the playing field, DIPs that are SLFIs must perform a special calculation to determine their effective rate of GST/HST in accordance with certain investor information, including the investor’s residency. DIPs are thereby required under the Selected Listed Financial Institutions Attribution Method (GST/HST) Regulations (SLFI Regulations) to obtain this information from their investors to properly calculate their GST/HST/QST liabilities.
If a DIP has not requested the required information from its investors by 15 October 2021 and does not have the required information by 31 December 2021, it may have to treat some or all of its investors as being resident of the highest rate province. This may lead to additional GST/HST/QST costs for the DIP. As such, it is recommended that a DIP send the information request to its investors by 15 October 2021. Investors are required to respond within 45 days of receiving the request. Pursuant to subsections 52(12) and (13) of the SLFI Regulations, an investor that fails to respond may be subject to a penalty equal to the lesser of:
The information required is dependent on the type of investor and the value of the holdings. In general, a DIP is required to request information from the following investors:
Type of investors
Under subsection 52(1) of the SLFI Regulations, a selected investor generally includes a person that:
This type of investor includes certain corporations, trusts, pension plans and partnerships. If the DIP sends a written request to a selected investor, the investor is required to provide the following information:
Subsection 52(1) of the SLFI Regulations defines a qualifying investor as a person that is an investment plan that:
This type of investor generally includes pension plans that are an SLFI. A DIP is not required to send an information request to qualifying investors; however, in accordance with subsections 52(9) and (10) of the SLFI Regulations, these investors must provide the required information voluntarily by 15 November 2021. Given that qualifying investors may not be aware of their obligations to provide this information voluntarily, a DIP should send an information request to qualifying investors requesting the following information for each investor: (i) its “investor percentage” and number of units held in each series as at 30 September 2021; and (ii) confirmation that it is a “qualifying investor.”
A securities dealer that sells or distributes units of the DIP must provide details on the units held by the investor and the residency of the investors in the participating provinces as at 30 September 2021.
Institutional investors with $10,000,000 or more invested in a particular series or unit
This type of investor is generally limited to investors that: (i) hold $10,000,000 or more in a particular series; and (ii) are not an individual, specified investor or a DIP. Institutional investors include corporations, banks, insurance companies and lending companies. A DIP that has institutional investors as its unitholders should obtain the investor percentage and the number of units held by the institutional investor as at 30 September 2021.
Distributed Investment Plans
Subsection 1(1) of the SLFI Regulations generally defines a DIP to include mutual fund trusts, mutual fund corporations, segregated funds of an insurer, unit trusts and investment limited partnerships. It should be noted that foreign partnerships with Canadian investors may be subject to the SLFI rules (including the obligation to request investor information and to self-assess GST/HST/QST). Regardless of the quantum of the investments held by DIP investors, it is recommended that DIPs obtain the following information for each investor: (i) its investor percentage as at 30 September 2021; and (ii) the number of units held at 30 September 2021.
For additional information with respect to this Alert, please contact the following:
Ernst & Young LLP (Canada), East
Ernst & Young LLP (Canada), West
Ernst & Young LLP (Canada), Central