OTTAWA - The Harper government says an internal review of how much GST Canada's banks and other financial institutions should pay will not be a tax grab.
"The expectation is that any changes made as a result of the examination should be broadly revenue neutral," said Stephanie Rubec, spokeswoman for the Finance Department.
"It is done as part of the department's routine examination of the tax system to ensure it is operating efficiently and to identify areas for potential improvement."
The department quietly launched the wide-ranging review last summer to examine GST rules from 1991 that have failed to keep pace with the galloping complexity of new financial services in Canada and abroad.
The finance sector is generally exempt from the GST or HST, but certain associated services — called "supplies" in tax argot — may be taxable.
And as the sector evolves rapidly, there's deepening confusion about just what is owed to the Canada Revenue Agency, and on what services, for the value-added tax that is often harmonized with provincial tax as the HST.
Canada's insurance industry, for example, faces a $1-billion bill for back taxes by the end of this month, a GST liability critics say has been largely obscured for the last seven years.
"The GST/HST, along with other value-added tax regimes worldwide, has struggled to keep up with the pace of change in the financial sector," says one recent study commissioned by the Finance Department, obtained under the Access to Information Act.
"While the exemption of financial services from GST/HST may have been politically and administratively expedient at first ... ambiguity about the scope of the exemption and about its application to new products and cross-border transactions have lead to extraordinary complexity and compliance challenges."
The department created a six-member team last year that has ordered a series of in-depth studies, and has made several dozen presentations to finance industry stakeholders.
KPMG was also hired to create a $170,000 database describing the myriad of "supplies" in the banking and investment sectors, for use in analyzing potential GST or HST payable.
Another $73,500 report commissioned from Deloitte provides an in-depth look at value-added taxes for the financial sector in Singapore, South Africa and Japan.
Yet other detailed studies look at Australia, New Zealand and the United Kingdom, and at Canada's insurance industry.
Rubec says the review "is being conducted on a first-principles basis, with no pre-conceived outcome," and that the team has not been given a deadline.
"This is a long-term analytical exercise, and no public output is anticipated in the near future."
A University of Calgary economist, who advises the finance minister as part of an economic council, says an overhaul of the GST rule book is long overdue.
"The GST is not as well-designed as it could be," Jack Mintz said in an interview. "There's a lot of exemptions.
"All the special credits and preferences in the system (mean) the base is actually a lot narrower than it should be, and that actually creates some of the difficulties."
Mintz says the Finance Department has started the overhaul by focusing on the financial sector because "it's the area that has gotten the most pressure from the business community."
A tax partner at PricewaterhouseCoopers Canada, who has sounded alarms about revamped GST rules affecting the insurance industry, criticizes the "revenue neutral" goal.
"To impose a condition that a bundle of changes for a policy upgrade be neutral is unfortunate, and precludes a best-for-Canada outcome, in my view," Michael Firth said in an interview.
"It's like saying you can go white-water rafting, but only in the lounge."
The review team is thus prevented from tossing out recent GST legislative changes that hit the insurance sector with back taxes, which would be revenue negative, he said.
But Mintz said he supports the goal of revenue neutrality, noting that an exercise that broadens the base of goods and services taxed by the GST could allow the government to lower the current rate while maintaining existing revenues.
"Let's fix problems but not try to raise revenues," he said.
The Finance Department rejects any claim that its tax amendments in 2010 were a change in GST policy, saying the revisions merely restored the original intent of the 1991 regime after the government lost a 2003 tax court case because of fuzzy wording.
A KPMG report for the review team says one of many complexities surrounding the GST problem is determining just where a financial transaction takes place.
Consider, for example, the fictional example of a "Canadian resident ... electronically accessing his 'French' bank account balance, opened at the Paris branch of a Swiss-based bank that keeps its servers in India, from a cellphone while travelling in London."
Other taxing conundrums arise with reward points on credit cards or with the services of discount brokers, neither of which were fully contemplated in 1991, when the GST was introduced.
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