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 May 17, 2012
FROM
Paul Lafond
Financial Institutions Unit
Financial Institutions and Real Property Division
TO
[Addressee]
FILE
62492
SUBJECT :
GST/HST Interpretation - Application of the GST/HST to point-of-sale terminal fees
Further to our recent conversation, we are writing in response to […][the enquiry] dated [mm/dd/yyyy], concerning the application of the Goods and Services Tax (GST) / Harmonized Sales Tax (HST) to point-of-sale processing services supplied by […][an Independent Sales Organization] ([…][the ISO]) to various merchants in Canada. We apologize for the delay in responding.
All legislative references are to Excise Tax Act (ETA) and the regulations therein, unless otherwise specified.
Provided with [the enquiry] are the following agreements for our review:
* […][Agreement 1] dated [mm/dd/yyyy], between [the ISO] and […][(the Merchant)], a merchant located in [City 1, Province 1] […].
* […][Agreement 2], dated [mm/dd/yyyy], between [the ISO] and […][(Representative)], a sales representative located in [City 1, Province 1][…].
* […][Agreement 3] and […], […][Agreement 4] both dated [mm/dd/yyyy], between [the ISO] and ([…][Company A]), a company located in [City 2, Province 2].
BACKGROUND / FACTS
[The ISO] supplies POS Terminals to merchants and charges GST/HST on the consideration. [The ISO] also provides various related services to those merchants including continuous processing services which connect consumers with the Interac network using POS Terminals.
Under the Interac Regulations, [the ISO] is regarded as an Independent Sales Organization (ISO) which is a person, other than an Acquirer, who markets or sells acquiring services on behalf of the Acquirer for POS Terminals it has sold or leased to Merchants. The ISO outsources the continuous processing services to the Acquirer, [Company A], […]. These terms will be used hereinafter to describe the parties involved with the continuous processing services.
[Agreement 1]
The Merchant has purchased a POS Terminal from the ISO to enable its customers to use the Interac network for direct debit and credit payments. Under [Agreement 1], the ISO agrees to provide all continuous processing services through the POS Terminal in order to permit these Interac Direct Payment (IDP) transactions to be completed.
In particular, the ISO provides the following services to the Merchant under [Agreement 1]:
* provide continuous processing services to […];
* provide monthly reports of activity […]; and
* settle all cash transactions […].
The Merchant agrees under [Agreement 1] to, among other things:
* use the ISO for support, data processing, and funds transfer services exclusively;
* charge a user fee to its customers at the POS Terminal equal to $[…] per transaction;
* pay from the fees generated per transaction: an amount equal to […]% to the ISO for its services; $[…] and $[…] to the Acquirer for each respective complete and incomplete debit transaction; and a processing charge to the Acquirer for credit transactions varying from $[…] to $[…] depending on the credit arrangement;
* provide access to a bank account for the purposes of settling cash transactions;
* provide any documentation or other assistance to the ISO to assist in resolving any processing adjustments, […]; and
* monitor the operation of the POS Terminal.
We understand that the ISO support consists of a call-in and repair service for the Merchant’s POS Terminal. A portion of the ISO fee charged to the Merchant is to cover this service.
The ISO has not collected GST/HST on the fees received from the Merchant as consideration for its services under [Agreement 1].
[Agreement 4]
The Acquirer is identified under [Agreement 4] as a Connection Service Provider and Settlement Agent for the ISO. As a Connection Service Provider, the Acquirer provides connection to the Interac network for the purpose of processing Interac Direct Payment transactions. As the Settlement Agent, the Acquirer uses the services of a financial institution (Bank) to provide funds and fees settlements. POS Terminals owned or leased by the ISO comply with the Acquirer’s Certified Point of Sale Terminals, meaning that the POS Terminal contains the hardware and software deeming it a certified Interac Direct Payment terminal for use in the Acquirer’s network.
The ISO engages the Acquirer to perform connection services to the Interac network in order to give card holders on-line, real time access to their bank accounts in order to obtain goods and services from merchants. The Acquirer agrees to perform all connection services including collecting all fees and monies payable to the ISO for completed transactions originating from the POS Terminals, as well as providing a bank account for purposes of settling monies held in trust by the Acquirer for the ISO.
The ISO is responsible for all costs and expenses of installing the POS Terminals and for the delivery and transmission to the Acquirer of all information associated to the POS Terminals in order to help the Acquirer function as the Connection Service Provider and Settlement Agent.
The ISO pays a processing fee to the Acquirer for each transaction conducted through each POS Terminal connected to the Acquirer’s Switch (i.e., the hardware and software that connect the POS Terminals to the Interac network). The ISO agrees that the Acquirer receive the entire fee from the Merchant and retain from that amount its fee owing by the ISO. No GST/HST is collected on the fee.
[Agreement 2]
Under [Agreement 2], the ISO engages the Representative to supply POS Terminals to merchants. The ISO provides to the Representative the equipment, monitoring services, monthly activity reports, all necessary employee training and ongoing support, as well as verification of particular transactions between the Representative and the processing connector where necessary.
The Representative is responsible for the promotion, installation and servicing of the POS Terminals in retail outlets. […].
For performing such services, the ISO pays the Representative a […] commission. No GST/HST was collected or remitted on such commissions.
QUESTION
You ask whether the fee charged by the ISO to the Merchant under [Agreement 1], and the […] commission charged by the Representative to the ISO under [Agreement 2] are subject to GST/HST.
OUR COMMENTS
Single / multiple supplies
The determination of whether a particular supply made by the ISO or the Representative 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(s) 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 ISO or the Representative are each considered to be a single supply or multiple supplies under [Agreement 1] or [Agreement 2] respectively 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.
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, it is clear that the elements of the ISO’s service relative to the POS Terminal under [Agreement 1] including continuous processing services, monthly reports, cash transaction settlements and funds transfer services and other support services are integral components that are inextricably linked to each other. This finding also holds true for each element of the Representative’s service under the [Agreement 2] consisting of promoting, selling, installing and servicing the POS Terminals. Accordingly, the ISO’s service and the Representative’s service are both considered the provision of a single supply.
Supplies of financial services
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 (a) of the definition of financial service includes the exchange, payment, issue, receipt or transfer of money, whether effected by the exchange or currency, by crediting or debiting accounts or otherwise. This may be achieved through automatic payments, direct credits, electronic funds transfer or by any other means. Examples of fees for financial services include fees charged for the use of debit cards where the issuer debits the user’s account with the sum expended (via Interac); and for transferring funds through normal banking transactions.
Paragraph (g) includes the making of any advance, the granting of any credit or the lending of money, and paragraph (i) includes any service provided pursuant to the terms and conditions of any agreement relating to payments of amounts for which a credit card voucher or charge card voucher has been issued. For example, a service of providing merchants with immediate payment for products or services purchased with a credit card by a customer is considered a financial service.
A service performed by a person that is the agreeing to provide, or 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).
However, paragraph (t) of the definition of financial service excludes from its definition, a prescribed service. Section 4 of the Financial Services (GST/HST) Regulations (Regulations) provides that the transfer, collection or processing of information and any administrative service are generally prescribed for purposes of paragraph (t) unless the service is supplied with respect to an instrument by a person at risk, a person that is closely related to a person at risk (where the recipient of the service is not the person at risk or another person closely related to the person at risk), or an agent, salesperson or broker who arranges for the issuance, renewal or variation, or the transfer of ownership, of the instrument for a person at risk or a person closely related to the person at risk.
A “person at risk” is defined in the Regulations to mean a person who is financially at risk by virtue of the acquisition, ownership or issuance by that person of the 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, authorizing a transaction, or supplying a clearing or settlement service, in respect of the instrument. An “instrument” is also defined in that subsection to mean money, an account, a credit card voucher, a charge card voucher or a “financial instrument” defined under subsection 123(1).
Where an intermediary provides a number of services including services described by any of paragraphs (n) to (t) as part of an agreement to provide or arrange for a supply of a financial service, the single supply of the bundled services may be a supply of a financial service depending on the facts surrounding the transaction, the above listed factors, and the predominant element of the supply.
The ISO’s fee charged to [the] Merchant under [Agreement 1]
Based on the information provided, in order for the ISO to provide the processing service to the Merchant under [Agreement 1], the ISO entered into [Agreement 4] with the Acquirer to perform the service. Since the Acquirer’s processing service is essential to any debit card or credit card transaction, the service is considered under paragraph (l) of the definition of financial service the agreeing to provide or the arranging for a financial service referred to in paragraphs (a), (g) or (i) in that the Acquirer effects the Interac Direct Payment transactions initiated through the POS Terminal by correctly debiting the cardholder’s account and crediting the Merchant’s accounts via the Interac payment network. Moreover, paragraph (t) does not apply to exclude the Acquirer’s processing service from the definition of a financial service since the Acquirer is a person at risk with respect to the issuance of an instrument, i.e., the Acquirer is financially at risk of any loss in settling the debit or credit card transactions.
However, even though the ISO’s service provided to the Merchant under [Agreement 1] may also be considered the agreeing to provide or arranging for a financial service under paragraph (l), paragraph (t) would apply to exclude the service as a financial service since, when considered as a whole, the ISO’s service is predominantly the transfer, collection or processing of information and/or an administrative service performed by a person who is not at risk (i.e., the ISO does not appear to be financially at risk when it provides assistance to the Merchant such as performing data processing, monthly reports, funds transfer and other support and administrative services). The supply provided by the ISO to the Merchant is therefore the supply of a taxable service which the consideration charged for the service is subject to GST/HST.
This position is consistent with GST/HST Info Sheet GI-006, ABM Services.
Representative’s […] commission charged to [the ISO under [Agreement 2]
Under the [Agreement 2], [the ISO] outsources the promotion, sales, installation and servicing of the POS Terminals to the Representative. Since the supply of these services is not included in any of paragraphs (a) to (m) of the definition of financial service under subsection 123(1), the supply is considered a taxable service. The […] commission charged by the Representative to [the ISO under [Agreement 2] is therefore subject to GST/HST.
If you require further information or clarification please do not hesitate to contact me at (613) 941-2046.
Paul Lafond
Financial Institutions Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate
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