24 September 2004 GST/HST Interpretation 47437 - GST/HST Treatment of Interchange Fee

Please note that the following document, although correct at the time of issue, may not represent the current position of the Agency. / Veuillez prendre note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'agence.

Dear XXXXX:

Thank you for your letter XXXXX concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to your operations.

Statement of Facts

XXXXX

Interpretation Requested

In a XXXXX transaction, when a client of a financial institution (debit card Issuer) uses the ABM of another financial institution or a non-bank ABM to withdraw money, the financial institution Issuer must pay an interchange fee. You requested CRA's interpretation as to the GST/HST treatment of the interchange fee paid by Issuers to Acquirers for XXXXX Services.

Interpretation Given

Based on the information provided, and our review of the relevant legislation and documentation respecting the XXXXX Services, XXXXX, our interpretation is as follows:

1. The service provided by an Acquirer in respect of the dispensing of cash to a Cardholder is included in one or more of paragraphs (a) to (m) of the definition of "financial service" in subsection 123(1) of the Excise Tax Act (ETA);

(a) paragraphs (a) and/or (l) of the definition of "financial service" where the Acquirer is also the Card Acceptor, since the Acquirer is directly dispensing money to the Cardholder, and

(b) paragraph (l) of the definition of "financial service" where the Acquirer is not the Card Acceptor, since the Acquirer is "agreeing to provide" the payment of money (paragraph (a) of the definition) to the Cardholder.

2. Paragraph (t) of the definition of "financial service" excludes a prescribed service from the definition and section 4 of the Financial Services (GST/HST) Regulations (Regulations) prescribes services for the purpose of paragraph (t). Generally, in these instances, the prescribed services include the collection and processing of information and any administrative service unless the services are supplied with respect to an instrument by a person at risk. The terms "instrument" and "person at risk" are defined in subsection 4(1) of the Regulations.

3. The CRA considers that the Acquirer:

(a) is a "person at risk" in respect of the dispensing of cash to Cardholders pursuant to paragraph 4(3)(a) of the Regulations, where the Acquirer is also the Card Acceptor, since pursuant to the definition of "person at risk" the Acquirer is financially at risk with respect to an instrument (i.e. money) by virtue of ownership or issuance by the Acquirer of the instrument. The Acquirer is making a supply of a service that is not excluded as a prescribed service under paragraph (t) of the definition of "financial service" because the Acquirer is at risk. Therefore, the payment of the interchange fee is exempt in these circumstances.

(b) is not a "person at risk" in respect of the dispensing of cash to Cardholders pursuant to paragraph 4(3)(a) of the Regulations, where the Acquirer is not the Card Acceptor, since pursuant to the definition of "person at risk" the Acquirer is not financially at risk with respect to an instrument (i.e. money) by virtue of either acquisition, ownership or issuance by the Acquirer of the instrument or by virtue of a guarantee, an acceptance or an indemnity in respect of the instrument. The Acquirer is making a supply of an administrative service, however, the service is excluded as a prescribed service by paragraph (t) because the Acquirer is not at risk. Therefore, the payment of the interchange fee is taxable in these circumstances.

The tax status of payments that may be derived from the interchange fee paid by the Issuer to the Acquirer will depend on the terms of the agreement under which the payment is made. The payment made by an Acquirer to an ISO or to a merchant as part of their agreement (derived from the interchange fee paid by the Issuer to the Acquirer), is generally considered to be payment for a taxable supply (i.e. in return for deploying the ABM). Also, a payment made by the ISO to a merchant as part of their agreement (derived from the interchange fee paid by the Issuer to the Acquirer) is generally considered to be payment for a taxable supply (i.e. in return for deploying the ABM).

In order to allow the industry sufficient time to make the necessary systems changes, to collect and account for the GST/HST on the supplies for which the consideration is the interchange fee and/or a payment derived from the interchange fee, the application of the GST/HST to these supplies, as outlined in this letter, will be effective as of January 1st, 2005. For transactions prior to January 1st, 2005, registrants who treated these supplies as exempt and did not claim ITCs on inputs relating to supplies for which the consideration is the interchange fee and/or a payment derived from the interchange fee will not be required to make adjustments.

For your information, we include a copy of our latest publication GST/HST Info Sheet - ABM Services. This publication is also available on the CRA Web site under Technical Information - GST/HST at http://www.cra-arc.gc.ca/tax/technical/gsthst-e.html.

The foregoing comments represent our general views with respect to the subject matter of your letter. Proposed amendments to the Excise Tax Act, if enacted, could have an effect on the interpretation provided herein. These comments are not rulings and, in accordance with the guidelines set out in section 1.4 of Chapter 1 of the GST/HST Memoranda Series, do not bind the Canada Revenue Agency with respect to a particular situation.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact Manjula Vethanayagam, Rulings Officer, at (613) 957-8222.

Yours truly,

Ivan Bastasic
Director
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate

2004/09/14 — RITS 48049 — Place of Supply of Services