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: 117014
Business Number: […]
May 17, 2012
Dear [Client]:
Subject: GST/HST RULING
Application of the GST/HST to various fees and reimbursed expenses
This is in response to a letter dated [mm/dd/yyyy], […], concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) on fees charged by, and expenses reimbursed to, various companies. […]
HST applies at the rate of 15% in Nova Scotia, 13% in Ontario, New Brunswick, 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.
The letter also included the following documents for our consideration:
* […] Corporate Structure (Flow Chart).
* […] (LP Agreement).
* […] (Management Agreement).
* […] (Partnership Offering Memorandum).
* […] (Investment Management Agreement).
* […] (Fund Offering Memorandum).
* […] (Service Agreement).
STATEMENT OF FACTS
Fees and reimbursement of expenses charged to […] (Partnership)
1. […] (General Partner) and […] (Manager) were both incorporated on [mm/dd/yyyy], and governed under the laws of the Province of […]. […] (Partnership) is a limited partnership registered under the [provincial Act] on [mm/dd/yyyy]. The principle place of business of the General Partner, Manager and Partnership is [city, province]. The Manager is registered for the GST/HST under Business Number […].
2. The General Partner is the general partner of the Partnership. According to the LP Agreement, the General Partner is responsible for the management of the Partnership directly or through one or more service providers (e.g., advisers, experts or consultants) engaged by the General Partner, with full power and authority to control, administer and operate the activities and affairs of the Partnership. The General Partner will also monitor and supervise the activities of the Manager on behalf of the Partnership.
3. In accordance with the Management Agreement, the General Partner appoints the Manager to direct the day-to-day business, operations and affairs of the Partnership as described in the Partnership Offering Memorandum including:
a) furnish a continuous investment program for the Partnership;
b) invest, reinvest and manage the investments of the Partnership;
c) lend securities of the Partnership;
d) sell, transfer, or dispose of any property or securities held in the Partnership;
e) borrow cash and/or securities for and on behalf of the Partnership;
f) select the dealer or broker and negotiate commissions or service charges in connection with portfolio transactions;
g) execute all documents and perform all other acts necessary or appropriate to manage the investments of the Partnership without obtaining prior approval or direction from the General Partner or its authorized agents;
h) exercise all rights, powers, options, privileges, and other powers incidental to ownership of the securities in the Partnership;
i) execute or cause to be executed proxies respecting the voting of securities held by the Partnership at all meetings of holders of such securities;
j) participate in the marketing and distribution of Units in the Partnership;
k) provide administrative support to the General Partner when requested;
l) determine the portion of the Partnership assets to invest or to hold uninvested and provide liquidity for the redemption of the Units in the Partnership; and
m) provide any information required for reports or registrations to be filed with any governmental authority on behalf of the Partnership or the General Partner.
4. Under the Management Agreement, the primary objective of the Partnership is to earn a positive return on capital every year […]. The Manager agrees to provide portfolio management services, including the development and implementation of an investment program and strategies designed to achieve this objective.
5. The LP Agreement notes that the Partnership engages in making investments in accordance with the objectives and restrictions determined by the General Partner and that the financial instruments available for investment and the strategies employed are within the discretion of the Manager.
6. The Partnership Offering Memorandum notes that the Manager engaged […] (Investment Manager) to manage the portfolio of the Partnership and will pay the Investment Manager out of fees earned by the Manager from the Partnership.
7. The Management Agreement notes that on behalf of the Partnership, the Manager will maintain complete records of all portfolio transactions; open accounts with brokerage firms, banks or others; invest Partnership assets in various securities; borrow money or securities to complete trades, obtain guarantees, or pledge securities; engage in all other activities necessary or incidental to maintain and operate the accounts; and enter into soft dollar arrangements and effect transactions.
8. The Partnership Offering Memorandum, the LP Agreement, and the Management Agreement all indicate that the Manager is entitled to receive an ongoing management fee as well as a performance fee from the Partnership for its services of managing the business and affairs of the Partnership.
9. […] the Management Agreement breaks down the Manager’s fees as follows:
a) A monthly management fee on […]
b) An annual performance fee calculated on […]
10. The Partnership Offering Memorandum further specifies that fees payable by the Partnership to the Manager are subject to GST and will be deducted as an expense in the calculation of the […] Value of each series of each class of Units to which they relate. The Manager will pay to the Investment Manager such portion of the fees it receives from the Partnership as the Manager and Investment Manager may agree from time to time:
11. The Partnership Offering Memorandum indicates as well that the Manager is entitled to reimbursement of expenses incurred by the Manager on behalf of the Partnership. The Management Agreement further states that the Manager is not responsible for any fees or expenses of the Partnership and that it will be reimbursed by the Partnership for any such costs and expenses including but not limited to expenses to which the General Partner is entitled to reimbursement under the Limited Partner Agreement.
12. In particular, the Partnership Offering Memorandum notes that the Manager, among others, is entitled to reimbursement from the Partnership for all costs and operating expenses actually incurred in connection with the business of the Partnership, including administrative fees and expenses of the Partnership such as: investment manager’s fees; accounting and legal costs; insurance premiums; custodial fees; registrar and transfer agency fees and expenses; bookkeeping and record keeping costs; communication expenses; organizational and set up expenses; regulatory fees and expenses; all reasonable or non-recurring expenses; and fees and expenses relating to the Partnership’s portfolio investments, including the cost of securities, interest on borrowings, commitment fees, brokerage fees, commissions and expenses, and banking fees.
Fees and reimbursement of expenses charged to […] (Advisor)
13. […] (Advisor) is a […] company incorporated on [mm/dd/yyyy], and […]. […] ([…]%) of the common shares of the Advisor are owned by the Manager. The Advisor is licensed under the […] [Act] to provide management and administrative services to private and professional mutual funds marketed to high net worth international investors.
14. The Advisor’s accounting functions and its books and records are located at its business address in […][Non-Canadian Location A]. The Advisor’s Directors and Officers are all [Non-Canadian Location A] residents, however the ultimate mind and management of the Advisor rests with its Canadian resident shareholders.
15. The Advisor is the investment manager for […] (Fund), a […] mutual fund corporation under the […] [Act]. The Fund’s business operation as well as its record keeping and accounting functions are located in [Non-Canadian Location A]. The Fund’s control and management rests with its Directors and Officers also residing in [Non-Canadian Location A]. The Fund’s investment objective is to earn a positive return on capital every year […].
16. Under the Investment Management Agreement, the Advisor is given discretionary authority to manage the Fund’s assets, formulate the Fund’s investment objectives, and allocate assets among investments in its sole discretion.
17. According to the Service Agreement, the Advisor retains the Manager to provide various services namely: advising on the Fund’s portfolio strategy; ongoing oversight of risk policy; making purchase and sale recommendations; liaising with the administrators and brokers on the day to day trading activities; and assisting in making presentations to prospective investors in the Fund.
18. The Service Agreement further notes that in consideration for the Managers services, the Advisor will pay […] per month to the Manager as an Investment Management Fee plus an annual Performance Bonus, and will at all times keep the Manager fully indemnified against all expenses arising out of the performance of its services under the Agreement.
Fees and reimbursement of expenses charged to […] (Fund)
19. Under the Investment Management Agreement, the Advisor performs several services for the Fund including providing advice on its portfolio strategy including the implementation and ongoing oversight of risk policy; making purchase and sale recommendations; liaising with the administrators and brokers on the day to day trading activities; and assisting in making presentations to potential investors in the Fund.
20. In accordance with the Fund Offering Memorandum, the Fund also entered into an agreement with […] to be the Administrator of the Fund and perform most secretarial and bookkeeping functions, as well as the Fund’s Registrar and Transfer Agent and maintain the Fund’s share registers, and issue, redeem and transfer all shares. Also, the Memorandum notes that the Fund maintains accounts with […] who acts as the Clearing Broker for the Fund to execute orders on behalf of the Fund yet the Broker does not act in any supervisory capacity or participate in the Fund’s management.
21. The Investment Management Agreement also notes that in consideration for the Advisor’s services, the Fund will pay a monthly Management Fee to the Advisor as well as a Performance Fee set out in the Fund Offering Memorandum as follows:
a) A monthly Management Fee calculated on […]
b) An annual Performance Fee for […]
22. The Investment Management Agreement further states that the Fund will at all time keep the Advisor fully indemnified against all expenses arising out of the performance of its Services.
23. There is no indication whatsoever in any of the above agreements of the creation of an agency relationship between any of the parties to the agreements
RULING REQUESTED
You would like to know whether GST/HST applies:
* to the Management Fee and Performance Fee charged by the Manager to the Partnership;
* to the Investment Management Fee and Performance Bonus charged by the Manager to the Advisor;
* to the Management Fee and Performance Fee charged by the Advisor to the Fund; and
* to the reimbursement of expenses paid by the Manager and the Advisor on behalf of the said entities.
RULING GIVEN
Based on the facts set out above, we rule that the services performed by the Manager for the Partnership and for the Advisor, and by the Advisor for the Fund, are each considered the provision of a single taxable supply of an asset management service or a preparatory service. Any fee charged in relation to such supply of services is therefore subject to GST/HST.
We also rule that any reimbursement of the expenses paid by the Manager on behalf of both the Partnership and the Advisor, and by the Advisor on behalf of the Fund, is also subject to GST/HST since the Manager and Advisor are not acting as agents for the principals when making such acquisitions.
This ruling is subject to the qualifications in GST/HST Memorandum 1.4, Excise and GST/HST Rulings and Interpretations Service. We are bound by this ruling provided that none of the above issues are currently under audit, objection, or appeal, that no future changes to the ETA, regulations or our interpretative policy affect its validity, and all relevant facts and transactions have been fully disclosed.
EXPLANATION
The determination of whether a particular supply made by the Manager or Advisor is subject to the 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 have been made 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. In this type of situation it is a question of fact whether the person is making a single supply or multiple supplies. 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.
Under the ETA, supplies of investment advice, financial planning, estate or retirement planning, are taxable supplies unless they are specifically exempt.
A supply of a financial service is exempt under Part VII of Schedule V unless 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 not otherwise excluded by any of paragraphs (n) to (t) of that same definition.
A financial service includes, for example, under paragraph (d), the issue, granting, and transfer of ownership or repayment of a financial instrument. A financial instrument is defined in subsection 123(1) and includes, among other things, an equity security which, in turn, means a share of the capital stock of a corporation or any interest in or right to such a share, an interest in a trust, or any right in respect of such an interest.
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 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 performs various 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.
Paragraph (q.1) of the definition of financial service clarifies that an asset management service (other than a prescribed service) is excluded from that definition. An asset management service includes a full range of investment portfolio management and administration activities rendered by one person in respect of the assets or liabilities of another person, such as:
* managing or administering the assets or liabilities, with or without discretionary authority granted by the other person to manage those assets or liabilities;
* providing research, analysis, advice or reports in respect of the assets or liabilities;
* determining which assets or liabilities are to be acquired or disposed of; and
* acting to realize performance targets or other objectives in respect of the assets or liabilities.
A “management or administrative service” is defined under subsection 123(1) and includes an asset management service.
Also, paragraph (r.4) excludes from the definition of financial service, a service (other than a prescribed service) that is preparatory to the provision or the potential provision of a service referred to in any of paragraphs (a) to (i) and (l) of the definition of financial service, or that is provided in conjunction with a service referred to in any of those paragraphs, that is:
* a service of collecting, collating or providing information, or
* a market research, product design, document preparation, document processing, customer assistance, promotional or advertising service or similar service.
Currently, no services are prescribed or are proposed to be prescribed for the purposes of paragraphs (q.1) and (r.4).
Paragraphs (q.1) and (r.4) are deemed to have come into force on December 17, 1990, except where it is in respect of a supply rendered under a written agreement where all of the consideration for the supply became due or was paid on or before December 14, 2009, and the supplier did not, on or before that day, charge, collect or remit any amount as or on account of GST/HST in respect of the supply or any other supply that is made under the agreement that includes a service referred to in paragraphs (q.1) and (r.4).
Technical Information Bulletin B-105, Changes to the Definition of Financial Service, explains the GST/HST status of services performed by, among others, investment managers.
Reimbursement of expenses
Generally, where a disbursement of expenses is incurred by an intermediary other than in its capacity as agent for a particular client, GST/HST must be charged by the intermediary on the subsequent reimbursement to that client (to the extent that the consideration for the service provided by the intermediary is taxable). Conversely, where a disbursement is incurred by an intermediary as agent for that client, the subsequent reimbursement will not be subject to the tax.
Whether an intermediary is considered to be acting as an agent for the principal for GST/HST purposes is based on a representation of fact and principles of law.
For more information on this issue, please refer to GST/HST Policy Statement P-182R, Agency.
ADDITIONAL INFORMATION
Supplies of zero-rated exported services
Section 7 of Part V in Schedule VI is the general zero-rating provision for exported services. A supply of a service provided to a non-resident person is zero-rated (i.e., GST/HST rate is 0%) under section 7 as long as the supply is not specifically excluded under paragraphs (a) to (h). Even though paragraphs 7(b), an advisory, consulting or professional service, and 7(f), a service of acting as an agent of the non-resident person, apply to exclude the service from zero-rating, the exported service may still be considered a zero-rated supply under either sections 5 or 23 of Part V in Schedule VI.
For more information on exported services, please refer to GST/HST Memoranda Series 4-5-3, Exports - Services and Intellectual Property.
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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