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.
DATE February 4, 2014
TO [Addressee]
FROM Kirk Moore
Financial Services Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate
320 Queen St., Tower A, 14th Floor, Ottawa, ON
K1A 0L5
FILE 106288
SUBJECT : GST/HST INTERPRETATION
GST Treatment of Merger and Acquisition Services
This […][interpretation] is in response to your […][correspondence] dated [mm/dd/yyyy], […] regarding the application of the GST to fees charged by […] (the Service Provider) to […] (the Company) for services relating to mergers and acquisitions.
[…]
All legislative references are to the Excise Tax Act (ETA) unless otherwise specified.
DOCUMENTS PROVIDED
The summary of background facts in the next section is based on the following documents and correspondence: […][listing of documents submitted]
SUMMARY OF BACKGROUND FACTS
Key Services Provided and Ultimate Transaction
* A summary of the key features in the foregoing documents, that would be relevant to the characterization of the services provided to the Company by the Service Provider, is set out in the attached […].
* The documents submitted […] relate to the services that the Service Provider agreed to provide to the Company in connection with a potential disposition of the Company's financial services operations, either by way of a sale of receivables, or a sale of […] shares, as well as entering into a […] program with a purchaser […].
* According to the Purchase Agreement […], the ultimate transaction took the form of a sale of assets of the Business, consisting of the […] Activity, the […] Products Activity and the […] Program (the Transaction; capitalized terms have the meaning set out in the Purchase Agreement; "transaction" in lower case refers to potential transactions in general, with respect to which the Service Provider was engaged).
* While there are many descriptions of the Service Provider's role in the various documents, key elements of the descriptions may be summarized as follows:
1. Acting as a financial advisor, advice re evaluation of strategic alternatives including structure of the Transaction […] as demonstrated by: […].
2. Assistance in searching for a purchaser […] and organizing the bidding process, including ongoing liaison and co-ordinating visits, as demonstrated by the following: […].
3. Preparation of documentation relating to the search for a purchaser, as follows: […].
4. Assistance in negotiating financial aspects of the Transaction […], as demonstrated by the following: […].
* In this regard, it should be noted that there were certain responsibilities that were not exercised by the Service Provider, as follows:
- the Company and the Purchaser reserve the right to negotiate the terms of an agreement […];
- Directors of the Company are to assess a proposed transaction and to approve the transaction […]; and
- In addition, key documents pertaining to the final stages of the Transaction and its closing do not refer to the Service Provider and were not prepared by the Service Provider […].
Residence and Registration Status
* […] the Company is resident and registered for GST/HST purposes; […]; the Service Provider is non-resident and is registered […].
[…][INTERPRETATION REQUESTED]
* The key issue is whether the services provided by the Service Provider to the Company constitute an exempt supply pursuant to paragraph 123(1)(l) of the definition of “financial service” that is not otherwise excluded by any of paragraphs (n) to (t) of that same definition.
- […] GST charged with respect to services provided by the Service Provider to the Company.
[…][INTERPRETATION PROVIDED]
* The key issues to be addressed in determining the GST treatment of the services provided by the Service Provider to the Company are:
- Is there a single supply or multiple supplies?
- What is the place of supply of the services?
- What is the predominant element of the supply, and does the predominant element constitute “arranging for” an exempt supply, as provided for under paragraph 123(1)(l) of the definition of financial service? and
- As a related issue, even if the Service Provider's services include elements that could be characterized as “arranging for” an exempt supply, is the supply by the Service Provider excluded under paragraphs (n) to (t) of that same definition?
Single or Multiple Supplies?
* The determination of whether a particular supply made by the Service Provider is subject to GST 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. As indicated in TIB B-105: Changes to the Definition of Financial Service (TIB B-105), where an agreement provides for various services to be provided, it must first be determined whether a single supply or multiple supplies are being provided. 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.
* Whether services performed by the Service Provider for the Company are considered to be a single supply or multiple supplies is a question of fact. GST/HST Policy Statement P-077R2: Single And Multiple Supplies, and the Excise and GST/HST News, No. 67, Winter 2008, provide additional guidance in determining whether a single supply or multiple supplies are being provided, 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.
* Applying the criteria set out in these documents to the services provided by the Service Provider under the Service Agreement, the various elements would constitute a single supply made by the Service Provider to the Company.
- A key factor to consider in this regard is the fact that there is a very strong relationship among the service elements.
- The service elements are intended to achieve the objective that is set out at the beginning of the Service Agreement: to act “as financial advisor in connection with an evaluation of strategic alternatives for the financial services operations of the Company”.
- Also, the Company does not have the option to acquire the elements separately, and each of them serves to enhance the over-all “package” of services that is designed to meet the Company's needs.
Place of Supply
* The single supply of the Service Provider's services is deemed to be made in Canada under paragraph 142(1)(g) since, according to the information provided, the services are performed, at least in part, in Canada.
Predominant Element, Whether “Arranging For” a Financial Service
* 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 the Service Provider provides a number of services including services described by 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 listed factors in TIB B-105, and the predominant element 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.
* A service will be 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.
* Based on the information provided to us, the ultimate Transaction could constitute a single exempt supply that is a financial service under one of paragraphs (a) through (i) of the definition of financial service in subsection 123(1); in particular, paragraph (d), which refers to the transfer of ownership of a financial instrument.
- On this basis, it is necessary to consider whether the predominant element of the supply made by the Service Provider constitutes “arranging for” the Transaction, for purposes of paragraph 123(1)(l) of the definition of financial service.
- However, in light of our advice regarding the “arranging for” issue, we are not providing conclusive advice with respect to the characterization, for GST purposes, of the Transaction.
* Key services performed by the Service Provider under the Service Agreement (as set out above under the heading “Key Services Provided and Ultimate Transaction”) include advice on what form the transaction should take, as well as other advisory services, assistance in searching for a purchaser, and document preparation, all of which are taxable elements. As a result, even if one of the elements of the Service Provider's supply could be characterized as arranging for the Transaction, this would not form the predominant element of its supply, in terms of the work the Service Provider does, the time expended, its underlying expertise, and the overall services they provide. Instead, the predominant element of the Service Provider's supply would be taxable advisory services.
* Also, the Service Provider is not “arranging for” the Transaction based on CRA’s position, as set out in publications (for example, TIB B-105, Examples 16, 17) notwithstanding it may be considered a financial intermediary. A key factor in this regard is that the Service Provider is not “effecting” the Transaction as it does not exercise decision-making authority.
- Even though the Service Provider assists in bringing the parties together by providing financial analysis, organizing the bidding process, and providing advice regarding negotiations, responsibility for negotiating the terms of the final agreement and closing the Transaction rests with the Company and the Purchaser.
Advisory, Preparatory Services
* As a related question in the determination of the predominant element, even if the supply made by the Service Provider includes services included in paragraph (l) of the definition of “financial service” in subsection 123(1), it would be excluded by paragraph (r.4) of that same definition, which clarifies that services such as customer assistance or document preparation are preparatory to the provision or potential provision of a service referred to in paragraphs (a) to (i) and (l), and therefore do not constitute a financial service. It would also be excluded by paragraph (p) of the definition of "financial service", which refers to advisory services.
SUMMARY
* Although the services performed by the Service Provider under the Service Agreement played an important role in setting the stage for the Transaction to occur, these services do not constitute “arranging for” a service that is a financial service. Instead, the Service Provider's services constitute a single supply of taxable advisory services. Also, even if the supply made by the Service Provider includes services that may be included in paragraph (l) of the definition of “financial service” in subsection 123(1) it would be excluded by paragraphs (p) and (r.4) of that same definition.
If you require clarification with respect to any of the issues discussed in this [interpretation], please contact me at 613-952-9577.
Kirk Moore
Financial Services Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate
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