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.
Excise and GST/HST Rulings Directorate
Place de Ville, Tower A, 11th floor
320 Queen Street
Ottawa ON K1A 0L5
[Addressee]
Case Number: 173195
Subject: GST/HST AND QST INTERPRETATION
[…][Mutual Fund Units]
Dear [Client]:
Thank you for your letter of [mm/dd/yyyy], concerning the application of the goods and services tax /harmonized sales tax (GST/HST) and the Quebec sales tax (QST) to the subscription and redemption of mutual funds units.
The Canada Revenue Agency (CRA) administers the GST/HST and the QST for persons that are selected listed financial institutions (SLFIs) for GST/HST or QST purposes or both, whether or not they are located in Quebec.
The HST applies in the participating provinces at the following rates: 13% in Ontario; and 15% in New Brunswick, Newfoundland and Labrador, Nova Scotia and Prince Edward Island. The GST applies in the rest of Canada at the rate of 5%. In addition, in Quebec, the QST applies at the rate of 9.975%.
All legislative references are to the Excise Tax Act (ETA) unless otherwise specified.
STATEMENT OF FACTS
We have been provided with the following documents:
- Master Trust Agreement between […][the Manager] and […][the Trustee] dated [mm/dd/yyyy] (the [MT] Agreement);
- Amending Agreement between [the Manager] and […][the successor Trustee] dated [mm/dd/yyyy];
- Draft Letter of Appointment between the Manager and the unitholders.
Based on your letter and the above listed documents, we understand the following:
1. […][The consolidated SLFI Group] is a group of private unit investment trusts (the Funds), each of which is a selected listed financial institutions (SLFI). The Funds are created under the laws of the province of Ontario.
2. The Funds' principal place of business is located in […], Quebec, Canada.
3. The Funds are registered as an SLFI Group for GST/HST purposes and for QST purposes. The SLFI Group’s GST/HST number is […].
4. [The Manager] is the Manager of the Funds.
5. The unitholders of the Funds reside in every Canadian province and outside Canada, but the majority are Quebec residents.
6. There are no secondary markets for the Funds. All unit transactions are between the Funds and the unitholders via subscriptions (Funds issuing new units) or redemptions (Funds buying back units).
7. Section […] of the [MT] Agreement stipulates that the Manager’s fee is determined in the […][the Management Agreement] entered into by the unitholders and the Manager and is payable by such unitholders.
8. Apart from the Manager’s fee payable by the unitholders for services rendered to the Trust, Section […] and […] of the Amending Agreement gives the Manager the authority to charge a subscription and redemption charge or fee. However no further details about the fees has been provided since they are yet to be implemented.
9. Clause […] of the [MT] Agreement states that the redemption charges, contemplated in section […] of the [MT] Agreement, are the responsibility of unitholders.
10. Section […] deals with redemption of units, however it does not provide any detail with respect to redemption fees.
11. Section […] deals with subscription of units, however it does not provide any detail with respect to subscription fees.
12. The implementation of the fees is not discussed in the [MT] Agreement or in any other document provided.
13. Pursuant to a telephone conversation with you on [mm/dd/yyyy], the fees are yet to be implemented.
14. For the time being, there is no formal document indicating to whom the subscription and redemption fees paid by the unitholders will be paid to.
RULING REQUESTED
You would like to know whether the subscription and redemption fees of mutual fund units are consideration for exempt supplies of a financial service or for taxable supplies.
As indicated in GST/HST Memorandum 1.4, Excise and GST/HST Rulings and Interpretations Service, requests for rulings should include copies of any relevant supporting agreements or documents, together with references to, and summaries of the specific provisions of these agreements or documents which pertain to the request. As we have not received enough information with respect to the supply for which the subscription and redemption fees will be charged, we are unable to issue a ruling with respect to this supply. However, we are pleased to provide you with an interpretation with respect to these transaction fees.
INTERPRETATION GIVEN
GST/HST
The determination of whether a particular supply is subject to GST/HST requires a detailed review of the facts and circumstances of the transactions which generally includes a review of the agreement or agreements under which the supply is made. Although you did not provide us with detailed information with respect to the subscription and redemption fees, we are pleased to provide the following general information which may assist you in making that determination.
Where an agreement provides for the provision of a number of services or property and services, it must first be determined whether a single supply or multiple supplies are being provided under the agreement. This distinction is important in cases where a combination of services and or property is supplied by a person under an agreement, some of which would be taxable and some of which would be exempt if supplied separately. In this type of situation it is a question of fact whether the person is making a single supply or multiple supplies.
GST/HST Policy Statement P-077R2, Single and Multiple Supplies, provides additional information on determining whether a single supply or multiple supplies are being provided. If it is determined that multiple supplies are being provided by a person the possible application of sections 138 and 139 should be considered.
If it is determined that a single supply is being provided, then the predominant element of that supply must be established to determine the nature of the supply. If the predominant element of the single supply is determined to be a financial service, then the supply as a whole will be considered a financial service. This determination will generally be based on written agreements, between the person providing the service and the person's client, detailing the actions, responsibilities and obligations of the person in connection with the supply.
Under the ETA, all supplies are taxable unless they are specifically exempt. A supply of a financial service is exempt under Part VII of Schedule V unless specifically zero-rated under Part IX of Schedule VI. A service is a financial service where it is included in any of paragraphs (a) to (m) of the definition of financial service in subsection 123(1) and is not otherwise excluded by any of paragraphs (n) to (t) of that same definition.
A financial service includes, under paragraph (d), the issue, granting and transfer of ownership or repayment of a financial instrument. A "financial instrument" is defined in subsection 123(1) and includes among other things, an “interest in a trust”, which means, according to CRA’s GST/HST Technical Information Bulletin B-101, Trusts, an interest or right with respect to the trust itself and does not represent an interest or right in respect of the property held by the trust. In the present case, the units in the unit trusts that are being subscribed to or redeemed are financial instruments. Therefore, the subscription or redemption of these units constitutes a transfer of ownership of a financial instrument which is a financial service pursuant to paragraph (d) of the definition of financial service in subsection 123(1).
In determining whether an intermediary is providing a supply of a financial service under paragraph (l), of “arranging for” a service referred to in any of paragraphs (a) to (i) and not referred to in any of paragraphs (n) to (t), it must first be determined whether an “arranging for” service is provided and if so whether that financial service is the predominant element of the supply.
The term “arranging for” is generally intended to include intermediation activities that are normally performed by financial intermediaries described in subparagraph 149(1)(a)(iii), such as agents, brokers and dealers in financial instruments or money.
Where an intermediary performs a number of services including services described in any of paragraphs (n) to (t) as part of an agreement to arrange for a supply of a financial service, the single supply of the bundled services may be a supply of a financial service of arranging for, depending on the facts surrounding the transaction, the above listed factors, and the predominant element of the supply.
Where a unitholder pays a redemption fee or subscription fee in respect of the redemption or subscription of a Fund's units, the fee may be consideration for a supply of a financial service pursuant to paragraph (l) of the definition of financial service in subsection 123(1). Section 1 of Part VII of Schedule V to the ETA exempts this supply unless the zero-rating provisions in section 1 of Part IX of Schedule VI to the ETA apply.
Based on the limited information provided to us, it is our view that the subscription and redemption fees could be consideration for either a supply of a financial service pursuant to paragraph (d) of the definition of financial service in subsection 123(1) or a supply of arranging for a financial service pursuant to paragraph (l) of the definition of financial service in subsection 123(1) and would generally not be excluded from the definition of financial service by paragraph (q) of that definition in subsection 123(1). As it is not clear whether it is the Fund that is providing the service of subscribing and redeeming the units or the Manager arranging for the service of subscribing and redeeming the units, we are unable to specifically indicate which of paragraph (d) or (l) of the definition of financial service applies. The draft Letter of Appointment between the Manager and the unitholders seems to indicate that the fee will be a separate fee from the asset management fee implying that the fee is to be paid to the Fund. Moreover, we were informed during our telephone conversation of [mm/dd/yyyy], that the subscription or redemption fee will be paid directly to the Fund and that the Manager’s annual asset management fee won’t increase as a result of implementing those transaction fees.
However, section […] of the [MT] Agreement stipulates that management fees for services rendered to the Funds by the Manager is payable by the unitholders. This adds uncertainty as to whom the subscription and redemption fees will be paid to and whether these fees will be part of a single supply of management services supplied to the unitholders by the Manager or a separate supply of a financial service. Paragraph (q.1) of the definition of financial service in subsection 123(1) excludes asset management services from the definition of financial service. Thus, a supply of management services is a taxable supply.
QST
As the QST provisions are consistent with the GST/HST provisions discussed above, our interpretation with regard to the application of the QST in the above-mentioned situation is consistent with the interpretation provided for the GST/HST.
In accordance with the qualifications and guidelines set out in GST/HST Memorandum 1.4, Excise and GST/HST Rulings and Interpretations Service, the interpretations given in this letter including any additional information is not a ruling and does not bind the CRA with respect to a particular situation. Future changes to the Excise Tax Act, An Act Respecting the Québec Sales Tax, regulations, or the CRA’s interpretative policy could affect the interpretations or the additional information provided herein.
If you require clarification with respect to any of the issues discussed in this letter, please call me directly at 613-670-1322. Should you have additional questions on the interpretation of the GST/HST and QST with respect to persons that are SLFIs for GST/HST or QST purposes or both, please contact a GST/HST Rulings officer at 1-855-666-5166.
Yours truly,
Jemima Mbombo
Financial Services Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate
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