Please note that the following document, although correct at the time of issue, may not represent the current position of the Canada Revenue Agency. / Veuillez prendre note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'Agence du revenu du Canada.
[Addressee]
FILE: 153009
[Dear Client:]
SUBJECT : [GST/HST INTERPRETATION]
[…][Whether a zero-rated supply of a Financial Service to a non-resident shareholder]
This […][is about] whether […] (the Corporation) is making a zero-rated supply of a financial service to its non-resident shareholders. […].
[…]
[…][The incoming submission] includes the […] analysis of various issues surrounding specific activities undertaken by the Corporation which relate to […] a zero--rated supply of a financial service being made by the Corporation to its shareholders.
All legislative references are to the Excise Tax Act (ETA) unless otherwise specified.
[…][INTERPRETATION REQUESTED]:
1. Whether the activities described below are “financial services” as defined in subsection 123(1).
2. Whether, by performing the activities described below, the Corporation is making a supply.
3. If the Corporation is making a supply of a “financial service”, whether the supply is zero--rated when supplied to the Corporation’s non-resident shareholders?
[…]
[…][STATEMENT OF FACTS]
Based on the documentation provided, our understanding of the facts is as follows:
1) The Corporation is registered for GST/HST purposes and is resident in Canada.
2) […][Information about the corporation’s structure, jurisdictions and business lines]
3) The Corporation is not engaged exclusively in commercial activities.
4) […]
5) […]
[…]
[…][The incoming submission] has identified the following activities that the Corporation performs on an ongoing basis, amongst others:
a) The Corporation offers shares to investors; its shareholders are both residents and non-residents of Canada.
b) The Corporation declares and pays dividends to shareholders of record.
c) The Corporation issues, transfers and cancels share certificates.
d) The Corporation provides information to shareholders – e.g., financial reports, notices for shareholders, information circulars, etc.
e) The Corporation manages shareholders’ accounts including processing shareholders’ change of addresses, and the change of ownership of shares. The Corporation also deals with tasks such as lost certificates, duplicate mailings, and providing shareholder information electronically.
f) The Corporation supports the functions of the Board of Directors, including managing meetings of the Board, such as: the annual general meeting for all shareholders, regularly scheduled Board meetings, and meetings of special committees for the Board.
[…][The submission] also noted some of the areas where the Corporation incurred costs relating to “its obligations to shareholders”, including: salaries and wages of staff involved in shareholder relations; outsourcing of functions in maintaining the shareholder registries and custody; external audit fees and printing costs; and general overhead. However, these are not addressed in our response because […][the submission] has already identified them as inputs the Corporation incurs in meeting its obligations and we concur with this position.
Regarding the question of whether the Corporation is making a supply, […][the submission] takes the view that it is and that the supply being made is a “financial service” under subsection 123(1). […][The submission] states that the Corporation is making “one or more” supplies to its shareholders under the following paragraphs of the definition of a “financial service”:
1) paragraph (d):
* the issuing of shares, and
* the granting, endorsing, processing, variation, and transfer of ownership of a share. […][The submission] suggests that this occurs when, for example, in the case of stock splits or situations where a share that was originally issued to a shareholder is sold by that shareholder and purchased by another shareholder. By acknowledging and changing the legal ownership and registration of the share from one shareholder to another (legally and in its records), [the submission] states that the Corporation is performing activities coincident with this provision;
2) paragraphs (a) and (f):
* the payment of money as dividends, and,
* through the payment of money as principal, benefits or any similar payment. [The submission] suggests that this would arise with regard to the ongoing claim that the shareholders have against the Corporation as would be the case in a liquidation of the Corporation; and,
3) paragraph (b):
* the operation or maintenance of … (an) account. [The submission] proposes that a shareholder, by virtue of holding shares in an issuer, has an account with that party. The Corporation, on an ongoing basis, operates and maintains such accounts to record activity pertaining to shares.
[The submission] took paragraphs (n) through (t) of the definition of “financial service” into consideration and concluded that the supply being made was not excluded from the definition. […][The analysis] noted that paragraph (t) refers to a “prescribed service” and […] the corresponding Financial Services (GST/HST) Regulations (the Regulations). [The submission] proposes that the Corporation is a “person at risk” through the issuance of equity securities and, […], the Corporation’s supply would not be prescribed under paragraph (t) of the definition; the supply to its shareholders would be a “financial service” for GST/HST purposes.
[…][INTERPRETATION GIVEN]
Subsection 123(1) defines “supply” to mean, subject to sections 133 and 134, the provision of property or a service in any manner, including sale, transfer, barter, exchange, licence, rental, lease, gift, or disposition.
[The submission] proposes that when the Corporation manages shareholders’ accounts, such as change of address or ownership, lost certificates, eliminating duplicate mailings, sending shareholder material electronically, etc., these activities are supplies of financial services under paragraph (b) of the definition of “financial service” in subsection 123(1). It is our view that the Corporation, in performing these activities, is not making a supply; instead, it is performing these activities in meeting its regulatory requirements. The costs incurred by the Corporation for these activities are inputs into its operations.
The following activities identified […][in the submission] also relate to the obligations the Corporation has under general corporate governance and to inputs the Corporation incurs in its operations:
• providing information to the shareholders on the status of the Corporation;
• providing support functions for the Board of Directors; and
• general administrative functions pertaining to the operations of the Corporation, for example, managing shareholder and Board of Directors’ meetings.
These activities are not supplies.
Paragraph (d) of the definition of “financial service” in subsection 123(1) includes the issue, granting, allotment, acceptance, endorsement, renewal, processing, variation, transfer of ownership or repayment of a “financial instrument”. Under their respective definitions in this same subsection, a "financial instrument" includes an "equity security", meaning a share of the capital stock of a corporation or any interest in or right to such a share. Therefore, by definition, shares are financial instruments for GST/HST purposes and the issuance of the shares by the Corporation is a financial service under paragraph (d) of the definition of “financial service”. Also, this financial service is “supplied” to shareholders, as this term is defined in the ETA, as the shares are provided to shareholders. As is the case with various activities relating to shareholders’ accounts discussed above, transferring or cancelling share certificates constitutes part of the required activities of the Corporation for regulatory and corporate governance purposes and is not a supply being made by the Corporation to its shareholders.
The Corporation also pays out dividends to the shareholders. The paying of dividends is a “financial service” under paragraph (f) in subsection 123(1). When the Corporation provides the payment of the dividends to a shareholder, the Corporation is making a supply to the shareholder.
Under section 1 of Part VII of Schedule V, a supply of a financial service that is not included in Part IX of Schedule VI is exempt. Therefore, the Corporation’s supplies of issuing shares to shareholders are exempt provided that the supplies are not zero-rated.
Section 1 of Part IX of Schedule VI zero-rates a supply of a financial service (other than a supply that is included in section 2) made by a financial institution to a non-resident person, except where the service relates to
(a) a debt that arises from
(i) the deposit of funds in Canada, where the instrument issued as evidence of the deposit is a negotiable instrument, or
(ii) the lending of money that is primarily for use in Canada;
(b) a debt for all or part of the consideration for a supply of real property that is situated in Canada;
(c) a debt for all or part of the consideration for a supply of personal property that is for use primarily in Canada;
(d) a debt for all or part of the consideration for a supply of a service that is to be performed primarily in Canada; or
(e) a financial instrument (other than an insurance policy or a precious metal) acquired, otherwise than directly from a non-resident issuer, by the financial institution acting as a principal.
If […] the Corporation is a “financial institution”, this section may zero-rate an otherwise exempt supply of a financial service, provided the supply is not excluded by paragraphs (a) to (e) of section 1, or by section 2, of Part IX of Schedule VI.
[…]
If you require clarification with respect to any of the issues discussed […], please call me directly at 604-658-8526.
Yours truly,
Marjorie Stevens
Financial Services Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate
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