SLFI Group – Federal Court of Appeal finds that the Invesco group successfully reduced their HST-taxable management fees by having a third party take over the funding of broker commissions

A non-resident bank (Citibank) agreed to fund the payment of the upfront brokerage commissions that were payable on the issuance of units in the Invesco/Trimark funds (the “Funds”) in consideration for receiving an assignment of a portion of the amounts that otherwise would have been earned by the Invesco manager as management fees. More precisely, the manager agreed to reduce its management fees (i.e., reduce its percentage charge of NAV), and the Funds agreed to pay the same percentage amounts to a special purpose non-resident Citibank-formed vehicle (“Funding Corp”) essentially in consideration for Funding Corp paying the brokerage commissions. Funding Corp then immediately sold its fee-amount entitlements to Citibank.

The Tax Court had essentially found that taking care of the brokerage commissions was part and parcel of the management duties of the manager, and that delegating that duty to Funding Corp did not detract from its performance being a management function. Therefore, the consideration paid by the Funds to Funding Corp was tainted as Funding Corp was providing a management service.

Woods JA found that history is bunk, i.e., it was irrelevant that what Funding Corp was receiving was in a sense in lieu of what previously had been paid by the Funds as management fees. She stated:

[T]he character of the supply is determined by its dominant element, which … is in the nature of a financing service provided by third party financial institutions.

The amounts paid by the Funds to Funding Corp were for an exempt “financial service” under para. (a) or (l) of the definition.

Although the facts grounding this finding in this case were unique, Woods JA made a finding with broader ramifications, namely that the denial under s. 261(2)(b) of the right to claim a rebate for tax that has been assessed applied even where it is another person to whom the assessment was issued.

Neal Armstrong. Summaries of SLFI Group v. Canada, 2019 FCA 217 under ETA s. 123(1) financial service – para. (l), para. (q), s. 261(2)(b) and Statutory Interpretation - Interpretation Act, s. 8.1.