Citation: 2009 FCA 115
MEDICAL PROTECTIVE ASSOCIATION
appeal of a decision of Bowman C.J. of the Tax Court of Canada (the Tax Court
Judge) reported at 2008 TCC 33, was heard consecutively with appeal A-136-08, Her
Majesty the Queen v. General Motors of Canada Ltd., 2008 TCC 117, rendered
by Campbell J., also of the Tax Court of Canada. The appeal in the above case was
the first of the two appeals heard by this Court.
issues are related but since variations exist between the two cases, separate
reasons for judgment are rendered in each appeal.
issue in the case at bar is whether fees paid by the appellant, the Canadian
Medical Protective Association (the CMPA) to certain investment managers for
the periods ranging from October 15, 2001 to October 15, 2003 and from January
1, 2002 to March 31, 2004, are exempt from GST because they are “financial
services” under the definition found in subsection 123(1) of the Excise Tax
Act, R.S.C. 1985, c. E-15 (the Act).
facts are not in dispute and can be found in the reported decision. For the
purpose of this appeal, the salient facts follow.
is a not-for-profit body corporate that is engaged in, among other things,
providing professional liability protection to licensed medical practitioners
in Canada as a mutual
defence organization. The amounts received by CMPA from its member physicians
form part of its reserve for claims.
retains the services of investment managers who, on a fully discretionary
basis, invest these amounts in two types of accounts: segregated funds and
75% to 80% of the funds are segregated. Segregated funds are those that are not
commingled with the funds of other investors. The remaining funds are pooled
with those of other investors. A “segregated fund” does not refer to the
placement of monies by an investment manager in a separate legal entity such as
a trust fund/mutual fund, etc. On the other hand, the “pooled funds” consist of
certain mutual fund trusts in which the CMPA invests capital and receives units
of the mutual fund. The investment managers are either the trustee of the fund
or a management entity related to the trustee.
investment managers are afforded full discretion to manage the funds. They purchase
and sell securities on behalf of the CMPA, although they are guided by certain
prudential investment guidelines referred to as a Statement of Investments,
Policies and Goods (SIP&G). The SIP&G is a governance document which
addresses the manner in which the fund assets are to be invested and defines
the management structure and procedures to be adopted for the ongoing operation
of the fund.
execution of the trades is arranged through either the trading desks of the investment
managers or through brokers.
trading desk was thus described:
Q …Could you
explain to the Court what a trading desk is.
A trading desk, and here I will use the fixed income side; it is made up of
nine individuals who in fact trade the portfolios on various mandates and they
are responsible for, in their particular case, interestingly enough, both the
selection and execution function. So it is built into one individual.
of Anthony Gage, A.B., vol. 4, tab 9, pp. 221-222.
fees on the purchase and sale of securities are included as part of the cost of
acquiring the security or as a deduction from the proceeds of disposition of
fees earned by the investment managers are not based on the number or volume of
transactions. Fees are set by references to the size of the portfolio under
management and are payable even if fee transactions took place in a billing
period. For these services, investment managers’ fees and GST are charged and
effectively paid by the CIBC Mellon, as custodian trustee, with trust money, once
CMPA authorizes the payments.
to Ontario’s Securities
Act, R.S.O. 1990, c. S.5 (OSA), a discretionary investment
manager is required to register with the Ontario Securities Commission as an “adviser”,
a term defined in section 25 therein. By virtue of section 99 of Regulation
1015, R.R.O. 1990, “advisers” are classified into particular categories to
include (i) “investment counsel” and (ii) “portfolio manager”. The “investment
counsel” category is applicable for a person or company “engaged in giving
continuous advice as to the investment of funds on the basis of the particular
objectives of each client”. The “portfolio manager” category is applicable for
a person or company “registered for the purpose of managing the investment
portfolio of clients through discretionary authority granted by one or more
investment managers with whom the CMPA contracted were registered under the
“portfolio manager” category.
THE DECISION UNDER APPEAL
May 6, 2004, CMPA filed two rebate applications to recover GST on the fees
charged by the investment managers. The first claim covered the period from
October 15, 2001, to October 15, 2003. The second claim covered the period from
January 1, 2002, to March 31, 2004.
claims were disallowed by the Canada Revenue Agency (CRA). The CRA ruling held
is primarily one of providing professional investment advice and funds
management. […] The services provided by the investment service provider do not
fall within any of the paragraphs of the definition of ‘financial services’ in
subsection 123(1) of the Excise Tax Act. […] Accordingly, the registrant [CMPA]
was the recipient of a taxable supply and was correctly charged GST pursuant to
subsection 165(1) of the Excise Tax Act.” (J11)
issue before the Tax Court Judge was whether the fees paid by CMPA to investment
managers were exempt from GST because they are “financial services” under the
definition of subsection 123(1) of the Act.
At paragraph 42 of his reasons, the Tax Court Judge stated:
The question is where, if anywhere, the
services performed by the IMs for CMPA fall in the definition of financial
services in subsection 123(1) of the ETA. The
initial question is one of fact: what service the IMs perform to earn the fees?
Once that question is answered, the ultimate question becomes one of law: does
that activity fall within the definition?
Tax Court Judge concluded that the services performed were an exempt supply
because they came under the definition of ‘financial service’ of paragraphs
123(1)(d) and (l) of the Act, and under paragraphs 123(1)(c)
and (l) in the case of securities lending. He based his conclusion on a
finding that the investment management services were provided under full
discretionary powers, that no advice was sought by or given to under paragraphs
123(1) (p) of the definition of “financial services”, that the service
supplied by the investment managers was not the expertise and that the discretionary
purchase and sale of securities did not come under paragraph 123(1)(q)
or (t) of the definition of “financial services”.
Tax Court Judge distinguished the decision of Campbell J. in Her Majesty the
Queen v. General Motors of Canada Ltd. (the GMCL case) mentioned above, a
decision which had just been released prior to the delivery of his own
judgment. According to him, the GMCL case was “factually far more complex” and
there was a great deal of control exercised by General Motors of Canada Ltd. in
that case as opposed to the finding in the case at bar where investment
managers had full discretion to operate.
most relevant paragraphs of Bowman C.J.’s reasons for judgment are the
43 My factual
determination is this: the IMs are retained to buy and sell on behalf of the
appellant, in their unfettered discretion, a particular group of securities,
whether fixed income or Canadian or U.S.
equities. They are expected to do so with skill and expertise. The IMs are carefully chosen, taking into
account their experience, past performance and expertise. They are terminated
if their performance does not meet the appellant's expectations. They are given
full discretion within the limits of the group of securities comprising their
mandate and within the constraints of the appellant's SIP&G.
44 They are not paid to give advice and do not do
so except in the very limited circumstances
where they may suggest that the appellant's SIP&G be modified to permit a
greater flexibility in investment, for example to change the percentage of a
portfolio that can be held in provincial bonds. They report to the appellant on
a monthly basis with respect to purchases and sales they have made. They do not
seek the appellant's prior approval for purchases and sales that they make.
Their fees are based upon a percentage of the value of the securities in the
portfolio. They are not brokers. They execute the trades in securities by
instructing brokers to do so. The securities are held in the name of the
custodian whose role is essentially passive.
46 There are two
points that I think should be made at this juncture. I can see no justification
for drawing a distinction between the services performed by the IMs in respect
of segregated funds and those performed in respect of pooled funds. Segregated
funds are not commingled with the assets of other investors. They are kept
separate and the IMs buy and sell them in accordance with the discretionary
powers given them under the Investment Management Agreement. The pooled funds
were funds in which the IMs invested the appellant's funds that were pooled
with other investors' funds. The properties in which the appellant invested in
the pooled funds were of two types: interests in limited partnerships and units
of mutual fund trusts.
47 Second, I think it
is essential to distinguish between the quality of the service provided and the
nature of the service. Counsel for the respondent put great emphasis upon the
skill, expertise and experience of the IMs that the appellant retained. I do
not question that the IMs were skilful and expert. Nonetheless, it is
inaccurate to say that the appellant was buying and paying for skill and
expertise. One does not buy these qualities in the abstract, divorced from the
service that is being provided. When one retains the services of a physician, a
lawyer, an engineer, a stockbroker or an accountant, each of these
professionals provides a service that is defined by their particular area of
expertise -- medical services, financial services, legal services and so on.
The services may be provided skilfully and expertly or their supply may be made
incompetently. Whether they supply the particular professional service badly or
well the nature of the service remains the same.
48 I think the
services performed by the IMs for CMPA fall within the definition of financial
services by reason of paragraphs (d) and (l) of the definition because they
constitute "the arranging for ... the transfer of ownership ... of
a financial instrument". See Royal Bank v. R., 
G.S.T.C. 18 at paragraphs 9 and 12. There
was some evidence that the appellant also engaged in securities lending. To the
extent that it did the fees also fall within paragraphs (c) and (l).
49 Since I have concluded that
the services fall within paragraphs (c) or (d) and (l), I turn to the second
part of the analysis, the exclusion in paragraphs (p), (q) and (t).
Tax Court Judge, at paragraph 48 of his reasons, did not indicate what
definition of the words “arranging for” he adopted. He simply relied on a
decision of this Court in Royal Bank v. R.,  G.S.T.C. 18, a
decision I will comment on in my analysis.
THE LEGISLATIVE SCHEME
165 of the Act imposes GST on a “taxable supply”. A “taxable supply” is defined
in subsection 123(1) of the Act to be a supply made in the course of commercial
activity. “Commercial activity of a person” in turn is defined in subsection
123(1) to exclude the making of exempt supplies by the person.
supplies are set out in Schedule V of the Act. Section I of Part VII of
Schedule V exempts from taxation “A supply of a financial service…”.
“financial service” is defined, in part, in subsection 123(1) of the Act as
the exchange, payment, issue, receipt or transfer of money, whether effected
by the exchange of currency, by crediting or debiting accounts or otherwise,
the operation or maintenance of a savings, chequing, deposit, loan, charge or
the lending or borrowing of a financial instrument,
the issue, granting, allotment, acceptance, endorsement, renewal, processing,
variation, transfer of ownership or repayment of a financial
the provision, variation, release or receipt of a guarantee, an acceptance or
an indemnity in respect of a financial instrument,
the payment or receipt of money as dividends (other than patronage
dividends), interest, principal, benefits or any similar payment or receipt
of money in respect of a financial instrument,
the agreeing to provide, or the arranging for, a service referred to
in any of paragraphs (a) to (i), or
does not include
the service of providing advice …
the provision, to an investment plan (as defined in subsection 149(5))
or any corporation, partnership or trust whose principal activity is the
investing of funds …
a prescribed service;
L’échange, le paiement, l’émission, la réception ou le transfert d’argent,
réalisé au moyen d’échange de monnaie, d’opération de crédit ou de débit d’un
compte ou autrement;
la tenue d’un compte d’épargne, de chèques, de dépôt, de prêts, d’achats à
crédit ou autre;
le prêt ou l’emprunt d’un effet financier;
l’émission, l’octroi, l’attribution, l’acceptation, l’endossement, le
renouvellement, le traitement, la modification, le transfert de propriété
ou le remboursement d’un effet financier;
l’offre, la modification, la remise ou la réception d’une garantie, d’une
acceptation ou d’une indemnité visant un effet financier;
le paiement ou la réception d’argent à titre de dividendes, sauf les
ristournes, d’intérêts, de principal ou d’avantages, ou tout paiement ou
réception d’argent semblable, relativement à un effet financier;
le fait de consentir à effectuer un service visé à l’un des alinéas a) à i)
ou de prendre les mesures en vue de l’effectuer;
présente définition exclut :
les services de conseil …
l’un des services suivants rendus soit à un régime de placement, au
sens du paragraphe 149(5), soit à une personne morale, à une société de
personnes ou à une fiducie dont l’activité principale consiste à investir
des fonds …
les services visés par règlement.
relevant regulatory provisions of the Financial Services (GST/HST) Regulations, SOR/91-26, for
the purposes of paragraph (t) of the definition of “financial service”
in subsection 123(1) of the Act, are as follows:
Subject to subsection (3), the following services, other than a service
described in section 3, are prescribed for the purposes of paragraph (t) of
the definition "financial service" in subsection 123(1) of the Act:
the transfer, collection or processing of information, and
any administrative service, including an administrative service in relation
to the payment or receipt of dividends, interest, principal, claims, benefits
or other amounts, other than solely the making of the payment or the taking
of the receipt.
A service referred to in subsection (2) is not a prescribed service for the
purposes of paragraph (t) of the definition "financial service" in
subsection 123(1) of the Act where the service is supplied with respect to an
a person at risk,
a person that is closely related to a person at risk, where the recipient of
the service is not the person at risk or another person closely related to
the person at risk, or
an agent, salesperson or broker who arranges for the issuance, renewal or
variation, or the transfer of ownership, of the instrument for a person at
risk or a person closely related to the person at risk.
Sous réserve du paragraphe (3), pour l'application de l'alinéa t) de la
définition de «service financier», au paragraphe 123(1) de la Loi, sont visés
les services suivants, sauf ceux mentionnés à l'article 3 :
la communication, la collecte ou le traitement de renseignements;
les services administratifs, y compris ceux reliés au paiement ou au
recouvrement de dividendes, d'intérêts, de capital, de créances, d'avantages
ou d'autres montants, à l'exclusion des services ne portant que sur le
paiement ou le recouvrement.
Pour l'application de l'alinéa t) de la définition de «service financier», au
paragraphe 123(1) de la Loi, ne sont pas visés les services mentionnés au
paragraphe (2) et fournis relativement à un effet par :
la personne à risque;
la personne étroitement liée à la personne à risque, si l'acquéreur du
service n'est ni la personne à risque, ni une autre personne étroitement liée
le mandataire, le vendeur ou le courtier qui prend des mesures en vue de
l'émission, du renouvellement, de la modification ou du transfert de propriété
de l'effet pour le compte de la personne à risque ou d'une personne
étroitement liée à celle-ci.
the service supplied by the investment managers falls within any of paragraphs
(a) to (m) of the definition of “financial service”, it is an
exempt supply, unless it is excluded by any of paragraphs (n) to (t).
On the other hand, if the service does not fall within any of paragraphs
(a) to (m), it is a taxable supply.
term “financial instrument” is also defined in the Act, but nothing turns on
THE STANDARD OF REVIEW
issue at stake is the meaning to be given to the word “arrange” in paragraph
123(1) (l) of the Act. This is essentially a question of law. The standard of
review is correctness (Housen v. Nikolaisen,  2 S.C.R. 235 at paragraphs
THE ISSUE – THE
CONTENTION OF THE PARTIES
parties recognize that the service of arranging for the purchase and sale of
securities is a service included in paragraph 123(1)(d) and (l)
of the Act which refers to “arranging for … the transfer of ownership … of a
financial instrument”; « … prendre les mesures en vue d’effectuer … le
transfert de propriété d’un effet financier ».
as a minimum, both parties agree that no GST is payable on brokers’ fees
because the service brokers supply is a financial service.
matter which is in dispute is whether the term “arranging for” (« prendre
les mesures … ») in paragraph 123(1)(d) and (l) of the Act
covers the service supplied by investment managers.
appellant says it does not. She claims that Parliament treated the services supplied
by the investment managers differently from those supplied by the brokers. She claims
that the Tax Court Judge over-expanded the meaning of the words “arranging for”
which, she submits, should be read according to its ordinary grammatical
meaning and no more. She cites as authority the Concise Oxford Dictionary,
ninth edition, Clarendon Press – Oxford, page 68, which gives the following
meaning to the word “arrange”, namely “cause to occur”, and “give instruction”.
respondent submits that the Tax Court Judge gave to the word “arranging for” the
meaning consistent with the jurisprudence of this Court in (Royal Bank v. R.,
 G.S.T.C 18). CMPA argues that under the Royal Bank case, more
than one person or group of persons can be “arranging for” the supply of a
“financial service”. At paragraph 57 of its memorandum of fact and law, CMPA
argues the following:
57. This Court’s
decision in Royal Bank clearly contemplates a finding that two parties
may be “arranging for” the transfer of the same security. In Royal Bank,
the Bank (party #1) was found to have made an exempt supply by “arranging for”
Royal Mutual Funds Inc. (“RMFI”) (party #2) to “arrange for” the sale of
securities of various Royal Bank Mutual Fund Trusts and Corporations (party #3)
to retail investors (party #4). In other words, both the Bank and RMFI were
“arranging for” the selling of securities by the Mutual Fund Trusts and
Corporations to retail investors.
points should be made at the outset.
I accept the Tax Court Judge’s remark that there is no justification for drawing
a distinction between the services performed by the investment managers in
respect of segregated funds and those performed in respect of pooled funds (reasons
for judgment, para. 46).
the term “expertise” should be clarified.
her Amended Reply to the Notice of Appeal, at subparagraph 6(a) the
appellant says that:
… the over-arching
purpose of hiring an investment manager (“IM”) related to the IM’s expertise in
selecting profitable investment products and determining when to trade or sell
term “expertise” does not relate to the individuals themselves. It relates to
their training or specialty as a professional group. There is no question that
CMPA has retained the services of highly competent investment managers, but
whether, as individuals, they are competent or not is irrelevant to the issue
at stake. What needs to be determined is the nature of the service supplied. To
put it another way, we must understand what kind of services investment
managers, with their special training or specialty, have to offer that attracts
others, individuals and corporations, to retain their services.
Tax Court Judge understood well, in my view, the distinction between individual
expertise and professional training when he stated at the end of his paragraph
The service is not the expertise. The service is whatever it is, whether it be
provided expertly or inexpertly. The degree of skill with which a particular
service is provided does not determine the nature of the service.
at paragraph 48 of his reasons the Tax Court Judge relies on the decision of
this Court in Royal Bank v. R., 
G.S.T.C. 18 as
the basis for his conclusion that the services provided by the investment
managers are “financial services” under paragraphs 123(1)(d) and (l) of the
close look at the Royal Bank decision is in order.
that case (as explained in 2005 TCC 802, Bowie T.C.J.), the Royal Bank (the
Bank) entered into contracts with Royal Mutual Funds Inc. (RMFI), the Royal
Trust Company and the Royal Trust Corporation of Canada whereby the Bank
provided to RMFI what was called “branch services” in order to assist RMFI in
carrying out functions of distribution and management of mutual funds
securities within certain limits defined by the regulators. RMFI was required
to be and was licensed by the provincial securities commissions to carry out
such activity. As noted at paragraph 8 of the decision, the distribution of
mutual fund securities was a highly regulated activity. Banks were precluded
from distributing them by the provisions of the Bank Act, 1991, c. 46.
“branch services” in question were thus defined in the Master Servicing
Agreement (MSA) signed between RMFI, the Bank and the other signatories (see Royal
Bank, 2005 TCC 802, at paragraph 7):
Services” means the provision of Personnel, branch offices, computer services
and other necessary services of the [Bank] to permit the sale of Royal Trust
Mutual Funds and Royal Funds and continuing customer service.
Bank had consistently taken the position that the branch services were taxable
supplies. GST was collected and input tax credits (ITCs) were claimed. It was
not in dispute that if the branch services were financial services, they were
exempt services. The tax would have been paid in error by the Bank and the ITCs
would also have been claimed in error.
Minister assessed the Bank on the basis that the branch services fell within
paragraphs (d) and (l) of subsection 123(1) of the Act. The Bank’s
position was that the services supplied to RMFI were administrative services
excluded from the definition of “financial services” by paragraph (t) (“prescribed
T.C.J., at 2005 TCC 802, rejected the Bank’s argument. He accepted the Canadian
Oxford Dictionnary’s definition of “arrange” (“plan or provide for”; “cause to
occur”) and concluded that the service that the Bank provided to RMFI “was that
of arranging for the distribution of mutual funds together with providing
ongoing customer service, including responding to customers inquiries and
completing surrender documents for customers when requested to do so.” He said
at paragraph 15 of his reasons:
There is no basis in the
evidence upon which I could apportion the consideration between arranging
for sale of units and the continuing customer service; nor did either party
suggest that there was anything other than a single supply involved. To the
extent that the evidence dealt with it at all, it suggests that arranging
for sale of mutual funds was the dominant element of the activity.
Court at 2007 FCA 72 paragraph 12 confirmed by saying:
The services provided by the Appellant were
much more than clerical in nature and advice. It was agreed by the
parties that the services should be treated as a single supply of services and
not be broken down. It is obvious that the dominant and, we would say
essential, characteristic of this supply of services by personnel duly licensed
in conformity with the regulatory scheme was the selling of securities
on behalf of RMFI, i.e. the distribution of the units of the Funds.
Bank personnel had, in effect, two masters: the Bank and the RMFI. The Court
was called upon to determine the nature of the services the Bank personnel delivered.
Both parties agreed that the services should be treated as one single supply
and not be broken down. Moreover, the evidence suggested that the selling of
securities was the dominant character of the service supplied.
the case at bar, it is the nature of the service delivered by the investment managers
which is at stake, not that of the investment managers and of the brokers. There
is no agreement between the parties in the case at bar that the two services
should not be broken down. The dominant character of the investment management
services is also in dispute.
find that the Royal Bank case is of no assistance.
examine the nature of the services delivered by the investment managers.
begin with the facts.
trading desk of the investment managers called by CMPA at trial consisted of
individuals who would select the securities to be acquired or disposed of and
execute the trading. Other investment managers issue instructions to buy and
sell and the broker would execute the order. The evidence shows that investment
managers are hired to think smart, to read the market and to beat the market in
both good and bad times. They are analytical stock pickers, burrowing through
financial statements and engaged in laborious research in relevant fields in
order to discover hidden gems and detect poor stocks. It is on account of their
know-how in the selection or selling of securities that they are paid, somewhat
generously, on a percentage basis by reference to the size of the portfolio
under management. The more successful they are in their choice of securities,
the better the result. And if the value of the portfolio increases, the amount
of money they receive increases. Investment management services entail a special
training and the exercise of judgment in order to successfully deal with
complex and ever-changing market conditions.
transfer of ownership of financial instruments is the end result of the
exercise. “Arranging for” the transfer of ownership of a financial instrument,
i.e., give instructions, cause to occur or issue buying and selling orders to
the brokers is infinitesimal in terms of skill and time involved. The issuance
of the order represents, however, an essential and vital part of the investment
managers’ activity but it is not the dominant one. The skill shown in the pick,
i.e., the research necessary for the preparation of the buying or selling
order, is the core of the investment managers’ activity and the raison d’être
of their being hired. The quality of the pick is the trademark of their
legal question is the following: How should this activity as a whole be
classified under subsection 123(1) of the Act?
legal meaning is to be given to the word “arranging for” of paragraphs 123(1)(l)
(« … prendre les mesures pour … ») and to the words “the service of
providing advice” (« … les services de conseil … ») in paragraph 123(1)(p)
of the Act?
find that the policy statements and various other documents referred to by the
respondents, namely GST Policy Statement P-119 – Trailer Commission
Servicing Fees, dated February 22, 1994; GST Policy Statement P-239 – Meaning
of the Term “Arranging For” as Provided in the Definition of “Financial
Service”, dated January 30, 2002; Michael Wilson, Department of Finance,
“Goods and Services – Notice of Ways and Means Motion”, Canadian Goods and
Services Tax Reports No. 4, (December 19, 1989); Michael Wilson,
Department of Finance, “Goods and Services Tax Technical Paper”, Canadian
Goods and Services Tax Reports No. 1, (August 8, 1989), are not useful:
either they are too general or the examples described are not those of the case
at bar, or they assert propositions without demonstrating their well-foundedness.
Concise Oxford Dictionary of Current English lists equivalent terms as “cause
to occur”, “give instructions”. The Merriam-Webster Collegiate Dictionary
refers to “make preparation for”; “plan”. The French phrase
« prendre des mesures » refers to « prendre les dispositions, les
mesures pour ».
find that the words “give instructions”, “make preparation for”, « prendre
les dispositions pour » are all acceptable and are as wide and as elastic as
one wishes them to be.
the one hand, there is the world of a difference between the services of the investment
managers and those of a broker who generally accomplishes a more mechanical
type of work. If I were to retain the dominant character of the investment
managers’ services, the research and analysis aspect of the trade would be the dominant
character of the services they supply.
the other hand, the research and analysis aspect of the trade will be
purposeless if it does not end with a buy or sell order or a “hold” decision.
The final order is an essential characteristic of the management of the funds
by the investment manager. Otherwise, the investment manager does not manage at
find that, considered as a whole, the services performed by investment managers
cannot be divided. It is a mix. They do not provide advice, since there is no
one to provide advice to except themselves. The end result of their services is
to “cause to occur a transfer of ownership … of a financial instrument”. They fall
within paragraph 123 (1) (d) and (l) of the Act.
a result, the services they provide are exempt financial services.
would dismiss this appeal with costs.
M. Nadon J.A.”
Pierre Blais J.A.”