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, 15th floor
320 Queen Street
Ottawa ON K1A 0L5
[Addressee]
Case Number: 139981r
Dear [Client]:
Subject: GST/HST INTERPRETATION
Application of the GST/HST to the distribution of private placements by investment dealers
Thank you for your letter of [mm/dd/yyyy], concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to the distribution of private placements made by investment dealers. […].
[…]
The HST applies in the participating provinces at the following rates: 13% in Ontario, New Brunswick and Newfoundland and Labrador, 14% in Prince Edward Island (effective April 1, 2013) and 15% in Nova Scotia. The GST applies in the rest of Canada at the rate of 5%.
Effective April 1, 2013, the 12% HST in British Columbia has been replaced by the 5% GST and a provincial sales tax.
All legislative references are to the Excise Tax Act (ETA) unless otherwise specified.
[…]. Both the individual dealers and the firm that employs the dealers are registrants under securities legislation and regulated by […][the Regulator]. The dealers and the firms are collectively referred to as […][the Dealer(s)] .
You seek confirmation that services performed by [the Dealers] who facilitate the distribution of private placements of debt, equity or other financial instruments (Distribution Services) are financial services described in paragraph (l) of the definition of financial service and exempt supplies under section 1 of Part VII of Schedule V, whether or not the [the Dealers] underwrite the placements.
[…][You indicate that your question refers to] private placements provided in non-managed account situations only, i.e., where no portfolio management services are provided by third party portfolio managers.
You also request that in GST/HST Technical Information Bulletin B-105, Changes to the Definition of Financial Service (TIB105), and in GST Memorandum 17.1.1, Products and Services of Investment Dealers (Memorandum 17.1.1), examples be added to illustrate that Dealer Distribution Services are exempt supplies of financial services
Documentation Provided
In your letter of [mm/dd/yyyy], you provided a detailed explanation of the duties and responsibilities of [the Dealers] related to performing the Distribution Services, three sample distribution agreements, and […]:
* Non-brokered Private Placement Agreement (Agreement 1) between an Issuer and a Broker;
* Non-brokered Private Placement Agreement (Agreement 2) between a Company and a Finder;
* Brokered Agency Agreement (Agreement 3) between a Corporation and an Agent;
* […].
In your letter of [mm/dd/yyyy], you provided a further detailed explanation […] of the responsibilities, role and functions of [the Dealer] in the industry context, an example, a Sample Referral Agreement and enclosed the following additional documentation:
* Subscription Agreement between […][ACo] and Investor (the [A] Agreement);
* Subscription Agreement between […][BCo], […][CCo] and Investor (the [B] Agreement);
* […].
You also referred us to […] copy of the publicly-filed agency agreement between [BCo] and [CCo], […], […] and […] (collectively called the Agents) ([C] Agency Agreement) referred to in the above-noted [B] Agreement.
STATEMENT OF FACTS
From your letters, the documentation you provided, our telephone conversations and our meeting, we understand that:
1. […][Describes role of Regulator]
2. [The Dealer] is considered a financial intermediary under subparagraph 149(1)(a)(iii), i.e., a person whose principal business is as a trader or dealer in, or as a broker or salesperson of, financial instruments or money.
3. Private placements are the issuance and distribution of securities (debt, equity or other financial instruments) by an issuer for cash in reliance upon exemptions from the prospectus and registration requirements in Canada’s securities laws. The placements are governed by provincial securities acts, policies and regulatory instruments collectively known as Securities Rules and, for issuers listed on stock exchanges, by the policies of the stock exchange.
4. Private placements are sold to accredited investors and certain other investors that meet the applicable prospectus exemption requirements. Private placements by issuers that are listed on a stock exchange can be underwritten and distributed by [the Dealers] only, while placements that are not listed can be underwritten by either [the Dealers ] or by other parties (referred to as “finders”).
5. There are two arrangements that [the Dealers ] have with issuers for the Distribution Services: 1) agency/underwritten arrangements where the Dealer acts as the issuer’s agent when an Agency Agreement is used (the transaction may also be an underwritten bought deal, in which case an underwriting agreement is used); or 2) non-brokered arrangements where [the Dealer] does not act [as] the issuer’s agent/underwriter when a Non-Brokered Private Placement Agreement is used; instead [the Dealer] is acting as an agent for the investor.
6. […] of your letter of [mm/dd/yyyy], outlines the following steps taken by [the Dealer] in arranging for the distribution of a private placement, in the industry context, which you indicated apply for both the agency/underwritten and non-brokered private placement arrangements as follows:
a. Place the issuer’s name on […][List 1] […].This is a highly confidential list, compiled by the dealer, of issuers (listed companies) about which the dealer has material non-public information.
b. Review and provide comments on the issuer’s subscription agreement for the private placement.
c. Put the private placement on […][List 2] after public announcement and remove from [List 1]. This is to ensure that no abusive trading can occur.
d. Identify possible accredited investors from securities account holders of [the Dealer].
e. Undertake appropriate due diligence for each investor, such as a review [of] the investor’s profile and suitability of the product for the investor (e.g., does the investment complement allocation between fixed income, equity and international holdings? etc.).
f. Meet with or speak to investors to discuss the merits of the private placement in the context of each client’s overall portfolio, risk profile, expected financial requirements during the restricted period, etc. There are extensive securities commission, [Regulator], and other rules regarding the distribution of securities and receipt of payment by intermediaries including rules regarding disclosure (including possible conflicts of interest) and enhanced suitability.
g. Arrange meetings between the issuer and investor as required, and assist and discuss with the investor possible funding alternatives (i.e., the source the investor will use to pay for the securities).
h. Review the subscription agreement with the investor, answer questions on the agreement, and obtain from the investor the executed agreement. Ensure that the subscription agreement is fully and accurately completed by the investor and provide it to the issuer and/or their counsel. Answer any questions and gather additional information regarding the investor as requested by the issuer and/or their counsel. This step under the Dealer’s duty of care requires reviewing with the investor the risks, rights and responsibilities under the subscription agreement, the investor’s time horizon, risk preference, asset mix – in other words, the suitability of the securities for the investor, which now must be concluded on every transaction for each account of the investor.
i. Check investor account balances or availability of credit; and/or receive and deposit cheque(s) from investors into their accounts; and/or monitor transfers in of assets; and process transactions through (debit) accounts as required.
j. Aggregate and deliver to the issuer all net proceeds […] summarized on a spreadsheet listing investors and their investment. Simultaneously receive the share certificates for the investor and follow up as required (share certificates are issued in the name of the Dealer as nominee and usually held by the Dealer on the investor’s behalf). After the Dealer takes delivery of the share certificates, it sends the investor a confirmation showing the details of the security purchase.
k. Monitor for the end of the [#]-month restriction or hold period.
l. Convert certificates into tradable instruments, usually deposited into […] book-based nominee system to be given to the […], allowing them to be traded and settled electronically thereafter.
m. Advise the investor that the private placement can be traded after the hold period. This can be done according to the investor’s directions or preferences, e.g., orally, notice on account statements, or other means.
7. The compensation paid to [the Dealer] for underwriting a private placement is separate from the consideration paid for the Distribution Service. You are of the view that the commission for the Distribution Service is the same or essentially the same whether [the Dealer] underwrites and distributes the private placement (agency/underwritten arrangements), or only distributes the placement (non-brokered private placement arrangements).
8. You are also of the view that the nature and essence of the Distribution Service provided by [the Dealer] is the bringing together of an issuer and an investor to effect the issuance (transfer) of a financial instrument by the issuer to the investor for which the dealer performs all of the intermediary functions necessary to achieve this result.
9. You indicated that Agreement 1, Agreement 2, the [A] Agreement, the [C] Agency Agreement and the [B] Agreement are examples of non-brokered private placement arrangements. However, the provisions in the [C] Agency Agreement and the [B] Agreement are similar to those in Agreement 3 which you indicated is an example of an agency/underwritten arrangement, i.e., a brokered private placement.
Non-brokered Private Placement Agreement (Agreement 1)
10. Agreement 1 addresses the situation where [the Dealer] does not underwrite the private placement. It provides, in part, that:
* When executed, the Agreement will constitute a legally binding agreement for the payment by the Issuer to the Broker of a finder’s fee respecting any debt or equity financings arranged by the Investor. The Broker introduced the Investor to the Issuer as a possible funding source, including arranging various meetings between the Issuer and Investor and assisting in the discussion of possible funding alternatives.
* In consideration for the Broker’s services in bringing the two parties together, the Issuer has agreed to pay the Broker a finder’s fee (Fee 1) on any financings which are arranged for the Issuer or its subsidiaries by the Investor. Fee 1 will consist of X% cash fee based on the gross proceeds to the Issuer or its subsidiaries from a financing, and other compensation that may be added (e.g., broker warrant).
* The Broker is not and has not acted as its agent in respect of the financing.
* Fee 1 is paid as consideration for the Broker’s services in introducing the Investor and the Issuer only.
* The Broker will not be providing any additional services in relation to the Financing.
* The Broker will not be making any recommendations with respect to the Issuer or the financing to any Investor or potential investor.
* The Broker will be paid Fee 1 upon closing of the financing or a portion thereof.
* The Broker has no obligations or responsibilities in respect of the financing and completion of the financing is the responsibility of the Issuer and Investor.
* Fee 1 is payable to the Broker irrespective of any other commissions or fees which the Issuer may pay to any broker or other third party, including the Investor, in respect of the financing.
* The Issuer has no obligation to accept any subscription agreement for securities executed by a potential Investor and may, at its discretion reject a subscription without any liability to the Broker at the Issuer’s sole and unfettered discretion.
Non-brokered Private Placement Agreement (Agreement 2)
11. Agreement 2 is similar to Agreement 1 in that [the Dealer] does not underwrite the private placement. It provides, in part, that:
* The Company seeks to complete a financing (Offering) and, for this purpose, the Finder may introduce to the Company persons who wish to participate in the Offering.
* The Company will pay the Finder a fee (Fee 2) of X% in cash and X% in share purchase warrants. The Company will also reimburse the Finder for any expenses that the Finder reasonably incurs in connection with the Offering regardless of whether the Offering is completed, or the Finder introduces any Purchasers or becomes entitled to Fee 2.
* The Finder has no obligation to market the Offering or solicit Purchasers for the Offering. The Finder is not an agent of the Company however is acting exclusively as the agent for the Purchasers, if there are any Purchasers, in connection with the Offering.
* The Company represents, warrants and covenants to and with the Finder that the common shares will, upon issue and delivery, be validly issued as fully paid and non-assessable, and the warrant shares, if any, will be duly and validly allotted and authorized to be issued as fully paid and non-assessable upon receipt by the Company of full payment thereof.
12. There is no further explanation provided in either Agreement 1 or Agreement 2 that details the actions, obligations, roles, or responsibilities of the Broker/Finder (i.e., [the Dealer]) for which Fee 1 or 2 (respectively) is paid as consideration for the supply of the Distribution Service. In your letter of [mm/dd/yyyy], you have indicated that services provided in conjunction with Agreements 1 and 2, as well as with the additional agreements submitted with that letter, include the additional elements as set out in facts 6(a)-6(m) above. However, we note that the additional elements in facts 6(a)-(m) are at times inconsistent with Agreements 1 and 2. For example, Agreement 1 provides that the Broker is introducing the Investor and Issuer only and not providing any other service in relation to the Financing, is not making any recommendations to Investors regarding the Financing, and has no obligations or responsibilities in respect of the Financing. Agreement 2 provides that the Finder may introduce the Company to persons who wish to participate in the Offering and is not obligated to market the Offering or solicit Purchasers for the Offering. The reference to a Finder and Finder’s fee appears to indicate that the Finder is only providing an introductory service. Agreement 2 does not indicate that the Finder is providing any additional services.
[A] Agreement
13. […] [Under the] [A] Agreement […] between [ACo] (the Corporation) and an investor (the Investor)[,] […] the Investor may subscribe to purchase a specific number of shares or warrants of the Corporation. It provides, in part, that:
* The Investor is required:
- to deliver or fax to the Corporation or its counsel the completed subscription agreement duly completed and executed in accordance with the instructions provided on the face page of the agreement;
- deliver or fax evidence the subscription funds have been delivered to either the Corporation or the Corporation’s counsel;
- upon request, complete and deliver any other information as may reasonably be required to complete the purchase and sale contemplated by the subscription agreement.
* On closing, certificates representing the shares and warrants will be delivered to the Investor as the Investor shall instruct. Once the subscription agreement is accepted by the Corporation, the completion of the sale of the units contemplated by the subscription agreement is subject only to regulatory approvals being obtained.
* The Corporation may pay a finders or referral fee in connection with the subscription in its discretion. There is no indication in the [A] Agreement that this fee is paid only to licensed brokers or dealers and [the Agreement] does not state when and on what basis the fee is paid.
* The Corporation or its law firm may complete or correct the Investor’s Subscription Agreement as necessary in order to make it effective.
Brokered Agency Agreement (Agreement 3)
14. Agreement 3 addresses the situation where the [the Dealer] is the exclusive Agent of the Corporation (i.e., the Issuer) and underwrites the private placement. It provides, in part, that:
* The Corporation appoints the Agent to act as the Corporation’s exclusive Agent. The Agent agrees to act as the Corporation’s Agent and to use commercially reasonable efforts to find and introduce to the Corporation potential Purchasers to purchase by way of private placement Offered Securities, i.e., equity units of the Corporation; each unit consisting of 1 share and ½ warrant.
* The Agent is under no obligation to purchase any of the Offered Securities, although it may do so if desired.
* If necessary, the Agent will form, manage and participate in a group of sub-agents (registered under Securities Laws) to offer and sell the Offered Securities on the terms set forth in Agreement 3.
* The Agent will offer for sale the Offered Securities to Purchasers resident in Qualifying Jurisdictions (includes most provinces and other jurisdictions agreed to by the Corporation and the Agent) and will notify the Corporation of each Purchaser’s identity and residency.
* The Agent will obtain from each Purchaser a properly completed and duly executed:
a. Subscription Agreement (an agreement between the Corporation and a Purchaser pursuant to which the Purchaser subscribes for units and includes all exhibits and appendices thereto as they may be amended or supplemented from time to time),
b. […] (a Canadian certificate for Purchasers resident in Canada attached as […] to each Subscription Agreement), and
c. if applicable, Form […],
together with any additional documentation as may be requested by the Exchange […].
* Not less than 48 hours prior to the closing of the private placement (Closing), the Agent will deliver, or cause to be delivered, to the Corporation, the Subscription Agreements including the registration particulars of the certificates representing the shares and the warrants purchased by the Purchasers.
* At the Closing, the Agent (on behalf of the Purchasers and on its own behalf) will deliver, or cause to be delivered, to the Corporation, a wire transfer or one or more cheques or bank drafts made payable to the Corporation in an amount equal to the gross proceeds of the sale of the Offered Securities less the Agent’s fee (Fee 3) and the Agent’s expenses.
* At the Closing, the Corporation will deliver or cause to be delivered to the Agent:
- a direction authorizing the Agent to retain from the gross proceeds of the sale of the Offered Securities an amount equal to Fee 3 and any unpaid Agent’s Expenses;
- certificates representing the shares and warrants comprising the units sold, as well as the Agent’s options, registered in the name(s) directed by the Agent; and
- the legal opinions, officer’s certificates, receipts and other closing materials provided for in Agreement 3.
* In consideration for the services to be rendered by the Agent to the Corporation under Agreement 3, the Corporation agrees to pay the Agent (Fee 3):
a. a cash fee of […]% of the Subscription Proceeds (i.e., the aggregate gross subscription proceeds paid by the Purchasers) realized from the sale of the Offered Securities by the Agent; and
b. the issuance by the Corporation of non-transferable Agent’s Options equal to X% of the number of Offered Securities sold by the Agent (Agent’s Options).
* Each Agent’s Option entitles the holder to purchase one common share of the Corporation (Agent’s Option Share) at a price determined per Agent Option Share on the date the holder exercises the Agent’s Option after Closing.
* The Corporation will also pay all reasonable Agent’s Expenses (regardless of whether the placement is completed) in connection with the private placement of which an estimate will be deducted at Closing from the Subscription Proceeds on the sale of the Offered Securities.
[C] Agency Agreement
15. The [C] Agency Agreement is between the Issuer and the Agents which provides, in part, that:
* The Issuer appoints the Agents as the Company’s exclusive agents to offer for sale by way of private placement on a “best efforts” basis, without underwriter liability, the Special Warrants to be issued and sold pursuant to the Offering (the issuance and sale of Special Warrants) and the Agents agree to arrange for purchasers of the Special Warrants.
* In consideration for the Agents’ services rendered in connection with the Offering, the Issuer will pay at closing time, the Commission.
* The Agents represent to the Issuer that they shall:
- Offer and solicit offers for the purchase of the Special Warrants in compliance with securities laws;
- Use their best efforts to obtain from each Purchaser a completed and executed subscription agreement and other documents to ensure compliance with securities laws;
- Use commercially reasonable efforts to complete the distribution of the underlying securities and advise the Issuer when it is completed.
* Upon closing, the Issuer will deliver the Special Warrants to the Agents by way of electronic deposit or delivery of certificates against payment by the Agents to the Issuer by wire transfer, certified cheque, bank draft of an amount equal to the gross proceeds from the sale of the Special Warrants issued and sold less the Commission and reimbursed expenses of the Agents.
* The Agents have an obligation to purchase the Special Warrants at closing, subject to enumerated conditions.
* The Issuer shall pay to the Agents a commission of […]% of the gross proceeds realized by the Issuer in respect of the Special Warrants sold pursuant to the Offering (or the exercise of the option). The obligation to pay the commission will arise at the closing time.
* The Issuer and Agents acknowledge that the Agents are acting solely as agents in connection with the Offering, and that no Agent will assume any advisory responsibility in favour of the Company in connection with the contemplated transactions.
[B] Agreement
16. The [B] Agreement provides, in part, that:
* The Issuer represents to the Purchaser that the representations and warranties made by the Issuer to the Agents in the [C] Agency Agreement between the Issuer and the Agents are incorporated by reference into this agreement.
* The Purchaser agrees to purchase a specific number of Purchased Securities each of which is comprised of one special warrant of the Issuer entitling the holder to […] common share of the Issuer and […] common share purchase warrant.
* Pursuant to the [C] Agency Agreement, the Agents have agreed to act as the Issuer’s exclusive agents to offer for sale on a “best efforts” agency basis, the Purchased Securities. In accordance with the [C] Agency Agreement, and subject to the terms and conditions of this agreement, upon acceptance by the Issuer of this subscription (in whole or in part), the Purchaser will be obliged to purchase from the Issuer the number of Purchased Securities in respect of which this subscription has been accepted.
* The Purchaser is required to deliver the Subscription Amount payable in respect of the Purchased Securities to one of the Agents by a certain date and time by certified cheque, money order or bank draft or wire transfer and payable to the Agent, or payable in such other manner as may be specified by the Agents.
* The Purchaser shall complete, sign and return to the Agent, in accordance to the instructions provided to the Purchaser by the Agents at a certain date and time: one completed and executed copy of the subscription agreement; for Purchasers resident in Canada, one completed and executed copy of the accredited investor status certificate in the form specified in Schedule […] of the [B] Agreement and, if applicable, one completed and executed copy of the […] Form as set out in Schedule […] of the [B] Agreement, and any other document required by applicable securities laws which the Agents or Issuer requests. The documents are to be held by the Agents until certain conditions are satisfied.
* The closing of the subscription of the Purchased Securities (the Closing) will be completed at the offices of […] in [City 1, Province 1]. The Agents are required to deliver to the Issuer (a) all completed subscription agreements and (b) the aggregate Subscription Amount, against (i) delivery by the Issuer of the Purchased Securities by way of global certificate registered to or electronically deposited with […] (or such other evidence of issue as the Agents and the Issuer may agree) and (ii) delivery by the Issuer of such other documentation as may be required by the Agents.
* The Purchaser appoints one of the Agents [CCo] with full power of substitution, as its true and lawful attorneys and agents with the full power and authority in its place and stead to (i) act as its representative at the Closing and execute on its behalf all closing receipts and required documents (ii) approve any opinions, certificates or other documents addressed to the Purchaser and provided for by the Agency Agreement (iii) to complete or correct any errors or omissions in the subscription agreement on behalf of the Purchasers (iv) to extend such time periods and perform various other duties on the Purchaser’s behalf in respect of the subscription agreement including terminating the subscription agreement.
* The Purchaser understands that in connection with the Offering (which includes the Purchased Securities), the Issuer will pay to the Agents a cash commission of […]% of the gross proceeds of the Offering (including on any exercise of the Agents’ Option). The obligation of the Issuer to pay the commission shall arise at Closing Time.
* Other than the Agents (and any group of investment dealers or selling group members working with the Agents for purposes of the Offering), there is no person acting or purporting to act in connection with the transactions contemplated herein who is entitled to any brokerage or finder’s fee and the Purchaser acknowledges that the Agents have retained a selling group member with whom it has entered into a fee sharing arrangement.
* Section […] provides that, by its acceptance of this agreement, the Issuer agrees that the Purchaser shall have the benefit of the representations, warranties and covenants made by the Issuer to the Agents in Agreement […] which form an integral part of this agreement.
You have indicated in your letter of [mm/dd/yyyy] that the non-brokered private placement distribution service is more than just a referral service of providing contacts. You contend that in the industry context, and due to regulatory responsibilities, there are no substantive differences in the responsibilities, role and functions of [the Dealer] in a non-brokered private placement agreement and an agency/underwritten agreement (i.e., where the dealers are exclusive agents of the issuer) in terms of taking the necessary steps to bring the issuer and investor together and effect the issuance of the issuer’s financial instruments to the investor in a private placement.
INTERPRETATION GIVEN
The determination of whether a particular supply made by [the Dealer] as the Broker, Finder or Agent to the respective Issuer, Company or Corporation 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.
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.
Whether services performed by [the Dealer] are considered to be a single supply or multiple supplies under each agreement is a question of fact. 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, 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.
If it is determined that multiple supplies are being provided by a person, the possible application of sections 138 and 139 should be considered. However, 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.
When reviewing the facts set out above, in connection with Agreements 1, 2, 3, the [A] Agreement, [B] Agreement, and [C] Agency Agreement, it is clear that each element of the Distribution Service is intricately linked to each other and that the Issuer, Company or Corporation do not have the option to acquire certain services separately. Since each element is therefore an integral part of the Distribution Service being performed, [the Dealer], as the Broker, Finder or Agent, provides a single supply to the Issuer, Company or Corporation in connection with Agreements 1, 2 ,3, the [A] Agreement, [B] Agreement, and [C] Agency Agreement.
Supplies of financial services are exempt under Part VII of Schedule V unless they are specifically zero-rated under Part IX of Schedule VI (which generally requires that the supply be made by a financial institution to a non-resident and that certain other conditions are met). 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.
For example, paragraph (d) of the definition of financial service includes the issue, granting, allotment, acceptance, endorsement, renewal, processing, variation, transfer of ownership or repayment of a financial instrument. Under their respective definitions in subsection 123(1), a “financial instrument” includes a “debt security”, which generally means a right to be paid money including a deposit of money, and an “equity security”, meaning a share of the capital stock of a corporation or any interest in or right to such a share.
A service performed by a person that is the “arranging for” a financial service is also considered a financial service under paragraph (l) of the definition of 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.
In determining if an intermediary’s service is included in paragraph (l), all of the facts surrounding the transaction, including the following factors, must be considered:
* the degree of direct involvement and effort of the person in the provision of a financial service referred to in any of paragraphs (a) to (i);
* the time expended by the intermediary in the provision of a financial service referred to in any of paragraphs (a) to (i);
* the degree of reliance of either or both the supplier and the recipient on the intermediary in the course of providing a financial service referred to in any of paragraphs (a) to (i);
* the intention of the intermediary to effect a supply of a financial service referred to in any of paragraphs (a) to (i); and
* the normal activities of an intermediary in a given industry (including whether the intermediary is engaged in business of providing financial services).
Where an intermediary 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 above listed factors, and the predominant element of the supply.
Based on the additional information provided in the letter of [mm/dd/yyyy], we understand that, although the steps taken by [the Dealers] are not fully described in, and are at times inconsistent with, the non-brokered private placement agreements, taking into account the industry context as you have described, [the Dealers’] services under those agreements would be no different than those described in the agency agreements. (Although you have indicated in your letter of [mm/dd/yyyy], that the [B] Agreements would be non-brokered agreements, they appear to be more consistent with Agreement 3, an agency agreement, for example, due to references to the broker being the exclusive agent of the issuer.)
Therefore, taking into account the industry context, the parties intended that in connection with the non-brokered agreements (Agreements 1, 2 and the [A] Agreement), similar to the agency agreements (Agreement 3, the [B] Agreement and the [C] Agency Agreement), [the Dealers] be directly involved in taking the steps necessary to complete the issuance or sale of financial instruments by the Issuer or Company.
Specifically, based on the additional information provided, for purposes of the non-brokered agreements (Agreement 1, 2, and the [A] Agreement) and pursuant to the agency agreements (Agreement 3, [B] Agreement, [C] Agency Agreement) [the Dealers] would act as an intermediary directly involved in facilitating the sales process. [The Dealer] is generally the only contact the potential Investor or Purchaser will have with the Issuer, Company or Corporation and is relied on by both parties in the provision of the issuance of the securities. In the brokered or agency agreements (Agreement 3, [B] Agreement, [C] Agency Agreement), this is provided for directly in the agreement. For example, in Agreement 3, at Closing, the Agent on behalf of the Purchaser: will deliver the gross proceeds of the sale of the Offered Securities to the Corporation; and will receive from the Corporation the shares and warrants certificates sold to the Purchaser as well as other closing materials.
You have advised, in your letter of [mm/dd/yyyy], that, although the non-brokered private placement agreements do not fully reflect [the Dealers’] services and are at times inconsistent with the activities described in facts 6(a)-(m), when considered in the industry context, similar steps are undertaken by [the Dealers’] in both agency and non-brokered private placement arrangements. Accordingly, such functions would also be undertaken in the context of Agreement 1, 2 and the [A] Agreement. For example, although not specifically provided for in Agreement 1, 2, and the [A] Agreement, as described in facts 6(h), 6(i), 6(j), [the Dealer] would nevertheless review the Subscription Agreement with the investor, ensure it is accurately completed, submit it to the issuer; process the transaction through the relevant accounts; and take delivery of share certificates for the investor.
Although [the Dealer] also provides elements of managing, marketing and promoting private placements, as well as information, document preparation or processing, and customer assistance that may be preparatory to the provision of a financial service when considered on their own, the services provided in conjunction with the non-brokered agreements (Agreements 1, 2, and the [A] Agreement) as further described in your letter of [mm/dd/yyyy], and the services provided pursuant to the agency agreements (Agreement 3, [B] Agreement, and the [C] Agency Agreement), do not appear to be limited to these preparatory services. In particular, although you have indicated that in non-brokered private placements, [the Dealer] is acting as agent for the investor, and facts 6(b), (e), and (f) above refer to obligations of [the Dealer] towards the investor, it is our understanding that [the Dealers’] fees are paid by issuers. Fees are earned by [the Dealers] when [the Dealers’] efforts and time expended in finding investors and introducing them to issuers, together with the steps they take in ensuring that documents are completed, payments are processed and share certificates are issued, result in a supply consisting of a transfer of ownership of a financial instrument of the issuer, in which [the Dealer] is directly involved, and relied upon by the issuer and investor.
Accordingly, based on all of the information provided as a whole and to the extent that [the Dealer] is taking the steps as outlined in facts 6(a)-(m), it is our view that the Distribution Service performed by [the Dealer] in connection with Agreements 1, 2, and the [A] Agreement, and the Distribution Service provided under Agreement 3 and the [C] Agency Agreement is predominantly the “arranging for” the financial service of the issuance by the Issuer, Company, or Corporation of a financial instrument that is not excluded from the definition of financial service by any of paragraphs (n) through (t) and therefore is a supply of a financial service.
However, if the services provided by [the Dealer] should differ from the description set out in your letters and accompanying documents, and in particular, if a Dealer should provide any advisory or consulting services to the issuer in addition to the Distribution Service described above, or if a Dealer does not provide the services in non-brokered private placements that are described in your letter, this could affect the characterization of the supply provided by [the Dealer] for GST/HST purposes.
The foregoing comments represent our general views with respect to the subject matter of your request. These comments are not rulings and, in accordance with the guidelines set out in GST/HST Memorandum 1.4, Excise and GST/HST Rulings and Interpretations Service, do not bind the Canada Revenue Agency with respect to a particular situation. Future changes to the ETA, regulations, or our interpretative policy could affect this interpretation.
If you require clarification with respect to any of the issues discussed in this letter, please call me directly at 613-952-9248 or Kirk Moore, Manager, at 613-952-9577. If you require guidance with respect to a particular case, please submit a request for a ruling including all relevant contracts and related documents.
Yours truly,
Ivan Bastasic
Director
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate
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