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The Honourable Jim Flaherty, Minister of Finance, today released draft legislation, explanatory notes and a backgrounder for several measures aimed at improving and streamlining the application of the Goods and Services Tax (GST) to the financial services sector.

"Our strong financial system, supported by Canada's Economic Action Plan, has helped to protect our economy and Canadians during the global economic recession," said Minister Flaherty. "The changes proposed today will support the economy by ensuring that the tax system is fair and functions smoothly."

The draft legislation released today improves on draft legislation that was released in January 2007. That draft legislation addressed GST (and, where applicable, the Harmonized Sales Tax) advantages that currently exist in favour of imported financial services over comparable domestic services and streamlined the application of the GST input tax credit rules to financial institutions. Following extensive consultations with the financial services sector, several improvements are now being proposed. These include provisions to:

  • Allow Canadian financial institutions to elect to use a simpler alternative approach to self-assess tax on services provided by their foreign branches to Canadian branches.
  • Allow financial institutions to exclude certain financial derivative transactions from the self-assessment rules that apply to imported services.
  • Allow large banks, insurance companies and securities dealers to use their own proposed methods to allocate input tax credits in certain circumstances.
  • Provide financial institutions and the Canada Revenue Agency with more flexibility in the use of the process for pre-approving an input tax credit allocation method.

The draft legislation released today would also implement measures that were previously announced in January 2007 to:

  • Replace the complex system of legislative and administrative rules that currently apply to different employer-sponsored registered pension plan trust structures with a new, uniform GST rebate system that will apply fairly and equitably to all such structures.
  • Introduce a new GST annual information return for financial institutions to improve GST reporting in the financial services sector.

For financial institutions that file a regular GST return (GST34) annually or that are required to provide a special GST return (GST494) annually, the proposed amendments extend the due date for filing these returns from three months to six months after year-end. The due date for filing these returns will therefore coincide with the due date for filing the financial institution's annual income tax returns.