Barr – Tax Court of Canada finds that broker fees paid to locate purchasers of a private company were HST-taxable

The sole individual shareholder retained two brokers for the sale of his company or its assets. Whether the commissions that they charged on the ultimate sale of the shares to a purchaser whom they had found were exempt from HST turned, in part, on whether their services were those of “arranging for” the sale of the shares. In finding that this exemption for a “financial service” was not available, Pizzitelli J referred inter alia to the following factors:

  1. The brokers merely brought potential purchasers to the shareholder and had no involvement in negotiating or concluding the sale, including even the price.
  2. They did not undertake to find a purchaser for the shares as contrasted to the assets – and, in fact, when they found the ultimate purchaser, that purchaser initially made an offer for the assets (at which point the brokers dropped out of the picture) and, only later, was a share sale negotiated.
  3. The “brokers were not registered business or securities brokers.”

The first point (which was consistent with 106288) could be viewed as stating that the brokers here did most of what typically is done by brokers who have been retained to find a business buyer. The second point seems asymmetrical in that presumably the commissions could not have been treated as exempt if an asset sale had culminated (and also given that any GST/HST charged likely would have been creditable on an asset sale). As elements of the first two points often are present where brokers are retained to find purchasers for a wholly-owned business, this decision increases risks that commissions paid on the sale of such business may not be considered to be GST/HST exempt.

The alternative position of CRA was that the services of the brokers were excluded by (r.4) of the “financial services” definition. This exclusion refers inter alia to market research and promotional services that are preparatory to an “arranging for” financial service. Market research and promoting the company to potential purchasers was mostly what the brokers did, so that Pizzitelli J considered that the commissions also would have been taxable on this alternative ground. This broad scope accorded to (r.4) appears to be inconsistent with Global Cash Access, a leading decision which apparently was not brought to his attention (and is also inconsistent with Rojas, also not cited). Nonetheless, his decision may embolden CRA to continue applying (r.4).

Neal Armstrong. Summaries of Barr v. The Queen, 2018 TCC 86 under ETA s. 123(1) – financial service – para. (l), para. (r.4).