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: 127795
Business Number: […]
June 5, 2012
Dear [Client]:
Subject: GST/HST INTERPRETATION
Application of the GST/HST to fees associated to a point of sale terminal
Thank you for your letter dated [mm/dd/yyyy], and your facsimile dated [mm/dd/yyyy], concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to fees associated to various transactions performed through a point of sale terminal (POS Terminal). We apologize for the delay in responding.
HST applies at the rate of 15% in Nova Scotia, 13% in Ontario, New Brunswick, and Newfoundland and Labrador, and 12% in British Columbia. GST applies at the rate of 5% in the remaining provinces and territories.
All legislative references are to the Excise Tax Act (ETA) unless otherwise specified.
We understand that […] [the corporation] is a corporation doing business as […][Merchant] at [#] separate retail locations in [Province 1] […]
The Merchant is registered for the GST/HST under Business Number […].
On [mm/dd/yyyy], a […] (Agreement) was signed between the Merchant (the Card Acceptor) and […] (Supplier), located in [Province 2], for the purchase and sale of one POS Terminal with warranty in the amount of $[…] for use by the Merchant to process credit and debit transactions at one of its locations.
Under the terms of the Agreement, the Merchant:
* will not submit debit transactions to any other person other than to the Supplier and its designated Vendor;
* will connect its POS Terminal only to that Vendor;
* will use the POS Terminal for processing all debit and credit card transactions; and
* will adhere to all Interac rules, regulations, policies and directives.
The Agreement further states that the Merchant and the Vendor, […], signed a separate agreement (not provided with your letter) which allows the Merchant to subscribe to Visa and MasterCard credit card transaction services, debit transaction services, and […] (credit and debit) services collectively referred to in your letter as Payment Processing Services.
[…]
Under the Interac Regulations:
* the Merchant is regarded as a Card Acceptor since it operates the POS Terminal and accepts debit and credit cards from its customers (Cardholders);
* the Supplier is considered an Independent Sales Organization (ISO) since it markets and sells services on behalf of the Vendor for POS Terminals it has sold to the Merchant; and
* the Vendor is regarded as an Acquirer since it offers Interac direct payment services and is listed as an Interac Association Member connected to the network.
These terms will be used hereinafter to describe the parties involved with the Payment Processing Services.
The fees charged by the ISO to the Merchant include a […]¢ Debit Transaction Fee and a […]¢ Communication Fee per attempted or completed credit or debit transaction. The Merchant agrees to pay any taxes imposed on such fees, as well as on the equipment, supplies and any other goods provided under the Agreement.
The Agreement notes that the ISO will pay to the Merchant the Debit surcharge generated by the operation of the POS Terminal net of any fees, charges, assessments, or liabilities owing to the ISO. The Merchant agrees to relinquish […]% of all Debit surcharge earned, net of any fees (unless a buyout option is exercised entitling the Merchant to […]% of the surcharge).
[…]
There is no further explanation provided in the Agreement that details the actions, obligations, roles, or responsibilities of the ISO for which the Transaction Fee and Communication Fee is charged by the ISO as consideration for the supply of its services to the Merchant. […].
INTERPRETATION REQUESTED
You would like to know whether the Debit Transaction Fee and the Communication Fee charged by the ISO to the Merchant under the Agreement are each consideration paid for the provision of an exempt supply of a financial service or for the supply of a taxable service.
INTERPRETATION GIVEN
The determination of whether a particular supply made by the ISO 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.
Single / multiple supplies
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 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.
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 limited facts set out above regarding the Payment Processing Services performed by the ISO for the Merchant under the Agreement for which a Debit Transaction Fee and Communication Fee is charged as consideration, it is not free from doubt whether a single supply or multiple supplies are being provided. If each element of the ISO’s services is determined to be intricately linked to each other with no option to acquire certain services separately, then each element would be considered an integral part of a single supply. If not, then the ISO’s services would be considered the provision of multiple supplies.
Further details of the ISO’s services that clearly demonstrate its actions, obligations, roles, and responsibilities under the Agreement would be required in order to make a determination.
Taxable or exempt supplies
Generally, all supplies are taxable unless they are specifically exempt.
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 financial services include the use of debit cards where the issuer debits the user’s account with the sum expended (via Interac); the transfer of funds through normal banking transactions; and the receipt of payments by one entity on behalf of another entity by crediting or debiting accounts.
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).
Acquirer’s Payment Processing Service
Since the ISO is not considered an Acquirer and is therefore prohibited from performing the Payment Processing Service for the Merchant, a second agreement was entered into with the Acquirer. As the Acquirer’s service essentially ensures that the transactions initiated through the POS Terminal result in the correct debiting and crediting of accounts via the Interac network, its service may be considered under paragraph (l) of the definition of financial service the agreeing to provide or arranging for a financial service referred to in paragraphs (a), (g) or (i). Moreover, paragraph (t) may not apply to exclude the Acquirer’s Payment Processing Service from the definition of a financial service if the Acquirer is considered a person at risk with respect to the issuance of an instrument (i.e., where the Acquirer is financially at risk of any loss until the transactions have gone through the settlement process). If this is the case, then the Acquirer would not charge GST/HST on its Payment Processing Service. A detailed review of the agreement between the Merchant and the Acquirer (not provided with your letter), as well as the facts and circumstances surrounding the transactions would be required to confirm the application of the GST/HST to the Acquirer’s Payment Processing Service.
ISO’s Debit Transaction Fee / Communication Fee
Even though the ISO’s service provided to the Merchant under the Agreement may also be considered the agreeing to provide or arranging for a financial service under paragraph (l), paragraph (t) may apply to exclude the service as a financial service if the ISO’s service, when considered as a whole, 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., where the ISO is not financially at risk when it provides these services to the Merchant). If this is the case, the supply provided by the ISO to the Merchant would be a supply of a taxable service and any consideration for such service would be subject to GST/HST. However, due to the lack of information explaining the service provided by the ISO for which it receives the Debit Transaction Fee and/or the Communication Fee, we are not in the position to confirm with certainty the application of the GST/HST to such fees. Again, while the service appears to be taxable, we would require details that clearly demonstrate the actions, obligations, roles, and responsibilities under the Agreement in order to make a determination of its tax status with certainty.
For more information on this matter, please refer to GST/HST Info Sheet GI-006, ABM Services, in particular Scenario 4.
ADDITIONAL INFORMATION
It is important to note that since GST/HST will generally apply to the sale or lease of the POS Terminal to the Merchant, the Merchant cannot claim an input tax credit for the GST/HST paid or payable in respect of such lease or purchase if the Terminal is only used to make exempt supplies of financial services. This rule will also apply to any taxable service incurred by the Merchant related to the use of the Terminal including any services performed by the ISO that are determined to be taxable. However, any subsequent sale of the POS Terminal would not be subject to GST/HST since the Terminal would have been used exclusively in making exempt supplies.
For more information on the input tax rules, please refer again to GST/HST Info Sheet GI-006.
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 613-941-2046. 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,
Paul Lafond
Financial Institutions Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate
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