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
Case Number: 194625
[Addressee]
Dear [Client]:
Subject: GST/HST RULING
Services Provided to an Introducing Broker by a Carrying Broker
Thank you for your letter of October 12, 2018, concerning the application of the goods and services tax/harmonized sales tax (GST/HST) to trade ticket fees payable for carrying broker services.
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%.
All legislative references are to the Excise Tax Act (ETA) unless otherwise specified.
STATEMENT OF FACTS
Based on your letter and the documents provided, we understand the following:
1. […][The introducing broker]and […][the carrying broker] entered into a Uniform Type 3 Introducer/Carrier Broker Agreement dated [mm/dd/yyyy] (the Agreement).
2. […] is the carrying broker and […] is the introducing broker.
3. Article […] of the Agreement details the services to be provided by the carrying broker. Article […] of the Agreement indicates that the carrying broker shall trade securities for the introducing broker in the exchanges and the over-the-counter markets as agreed to in Schedule […].
4. Schedule […] specifies that the introducing broker shall effect all of its trades on all of the exchanges and in the over-the-counter markets that are checked off. All exchanges and over-the-counter markets listed in Schedule […] of the Agreement are checked off.
5. Article […] of the Agreement further states that the carrying broker will provide the following services:
- Clearing services: Article […] states that the carrying broker shall make deliveries and settlements of cash and securities in respect of trades made for the introducing broker’s clients.
- Segregation/safe-keeping services: Article […] states that the carrying broker shall hold securities and/or cash of the introducing broker’s clients and of the introducing broker in segregation or safekeeping, as the case may be. The carrying broker is able to use this cash and/or securities in the same manner it is permitted to use cash and/or securities of its own clients.
- Record keeping/information services: Article […] states that the carrying broker shall prepare and issue confirmation of trades, monthly statements and statements in respect of inactive accounts to the introducing broker’s clients in the name of the introducing broker.
6. Article […] of the Agreement stipulates that the introducing broker shall trade or otherwise deal in securities where properly registered or licensed to do so and shall cause all trades in the markets as agreed to in Schedule […]. Schedule […] and […] both state that “[…][the introducing broker] is solely responsible for the acceptance and the execution of securities orders”.
7. Pursuant to Article […] and Schedule […] of the Agreement, the carrying broker charges the introducing broker "trade ticket fees" in respect of the services it supplies. Section […] of Schedule […] stipulates that the introducing broker shall pay to the carrying broker the higher of (a) a monthly minimum fee of CAD $[…] per calendar month or (b) the actual fees for the services calculated in accordance with the clearing and settlement services fee table set forth in Section […] of Schedule […].
8. Section […] of Schedule […] sets out that the carrying broker will provide clearing and settlement services based on a per trade cost that varies depending on the volume of trades per month that are cleared and settled.
9. Article […] of the Agreement stipulates that the introducing broker may provide to the carrying broker a Deposit as described in Schedule […] in order to secure the payment and performance of all of its obligations to the carrying broker.
10. Schedule […] stipulates that the introducing broker agrees to maintain at all times in its account with the carrying broker during the terms of the agreement at least CAD $[…] in short-term Government of Canada treasury bills or such other collateral as agreed to by the carrying broker in its sole discretion.
11. Article […] of the Agreement stipulates that the introducing broker acknowledges that all obligations to pay for securities purchased and to deliver securities sold by clients rests with the clients and the introducing broker and not the carrying broker.
12. Under Article […] of the Agreement, the introducing broker agrees to indemnify and save harmless the carrying broker from any loss, liability, damages, costs or expenses which the carrying broker may suffer or incur by reason of the failure of the introducing broker or any of the clients to make any payment of money or delivery of securities to the carrying broker as and when required by it.
13. Under Article […] of the Agreement, the introducing broker agrees to indemnify and save harmless the carrying broker from any loss, liability, damages, costs or expenses suffered or incurred by it arising out of any act or failure to act on the part of the carrying broker in the course of it in good faith carrying out its obligations or exercising its discretion, up to the indemnity amount and such further indemnity amounts as are necessary to be paid to satisfy the obligation, except where such loss, liability, damages, costs or expenses are suffered or incurred as a result of the negligence of the carrying broker.
RULING REQUESTED
You would like to know whether the trade ticket fees payable by the introducing broker to the carrying broker are consideration for the supply of an exempt financial service.
RULING GIVEN
Based on the facts set out above, we rule that the trade ticket fees charged by the carrying broker to the introducing broker are consideration for a taxable supply for GST/HST purposes. This ruling does not address any Service Fees as listed in the addendum to Schedule […].
EXPLANATION
As in any transaction, it is important to properly characterize what is being supplied in order to determine how GST/HST applies to that transaction. Based on the Agreement, the carrying broker provides a number of services to the introducing broker. It is necessary to determine whether the carrying broker is making a single supply or multiple supplies.
The determination of whether a transaction consists of a single supply or multiple supplies is a determination of fact. GST/HST Policy Statement P-077R2, Single and Multiple Supplies (P-077R2) provides guidelines to help make that determination, including the following principles:
1. Every supply should be regarded as distinct and independent.
2. A supply that is a single supply from an economic point of view should not be artificially split.
3. There is a single supply where one or more elements constitute the supply and any remaining elements serve only to enhance the supply.
P-077R2 also provides that, when examining an agreement, it should not be viewed in isolation. Rather, it must be examined in the context of other factors such as the intent of the parties, the circumstances surrounding the transaction, and the supplier's usual business practices. When examining the Agreement it is clear that the overall intent of the parties is for the carrying broker to provide the services outlined in Article […] to the introducing broker. The services outlined in Article […] are intricately linked to each other, forming together a single supply. In fact, the segregation/safe-keeping services, the recordkeeping services and the clearing services are an integral part of providing the overall supply. Accordingly, the carrying broker is providing a single supply to the introducing broker.
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 to the ETA unless specifically zero-rated under Part IX of Schedule XI to the ETA. 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 definition.
A financial service includes, under paragraph (d), the issue, granting and transfer of ownership or repayment of a financial instrument. The transaction between the seller of a financial instrument and the purchaser of a financial instrument is a financial service under paragraph (d) of the definition. A financial service also includes, under paragraph (l) of the definition, the arranging for a service that is referred to in any of paragraphs (a) to (i).
Article […] of the Agreement and Schedule […] stipulate that the introducing broker shall trade or deal in securities where properly licensed to do so and shall cause all trades or other dealings in securities in the markets agreed to in Schedule […] of the Agreement. Accordingly, the introducing broker that effects the trade execution is making a supply of a financial service to its clients in accordance with paragraph (l), i.e., arranging for the transfer of ownership of a financial instrument.
The carrying broker is not supplying a financial service under paragraph (l) to the introducing broker. The predominant element of the supply made by the carrying broker to the introducing broker is administrative in nature. Accordingly, the carrying broker is making a single supply of administrative services to the introducing broker which does not fall within paragraphs (a) to (m) of the definition of “financial service” in subsection 123(1). The supply of an administrative service is taxable. For greater certainty, even if the overall supply of the administrative services was included in any of paragraphs (a) to (m), it would be excluded by paragraph (t) because the carrying broker is providing an administrative service and the exclusions set out in subsection 4(3) of the Financial Services and Financial Institutions (GST/HST) Regulations (“the Regulations”) do not apply.
The carrying broker is not a “person at risk” for purposes of paragraph 4(3)(a) of the Regulations. A “person at risk” is defined in subsection 4(1) of the Regulations as a person who is financially at risk by virtue of the acquisition, ownership or issuance by that person of a financial instrument or by virtue of a guarantee, an acceptance or an indemnity in respect of the instrument, but does not include a person who becomes so at risk in the course of, and only by virtue of, supplying a clearing or settlement service in respect of the instrument. Given the indemnities and deposit provided by the introducing broker to the carrying broker to carry out the services and the nature of the clearing and settlement services supplied, the carrying broker is not a person at risk in respect of the services it provides to the introducing broker. Paragraphs 4(3)(b) and 4(3)(c) of the Regulations would also not apply under these circumstances. Accordingly, the supply of the services falls under paragraph (t).
In accordance with the qualifications and guidelines set out in GST/HST Memorandum 1.4, Excise and GST/HST Rulings and Interpretations Service, the Canada Revenue Agency (CRA) is bound by the ruling given in this letter provided that: none of the issues discussed in the ruling are currently under audit, objection, or appeal; no future changes to the ETA, regulations or the CRA’s interpretative policy affect its validity; and all relevant facts and transactions have been fully and accurately disclosed.
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 and application of GST/HST, please contact a GST/HST Rulings officer at 1-800-959-8287.
Yours truly,
Jemima Mbombo
Financial Services Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate
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