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, 11th floor
320 Queen Street
Ottawa ON K1A 0L5
June 15, 2021
Case Number: 196187
Subject: GST/HST INTERPRETATION
Application of the GST/HST to supplies made by an Independent Sales Organization
Thank you for your letter of December 19, 2018, concerning the application of the goods and services tax/harmonized sales tax (GST/HST) to supplies made by an Independent Sales Organization (ISO). We apologize for the delay in our response.
The HST applies in the participating provinces at the following rates: 13% in Ontario; and 15% in New Brunswick, Newfoundland and Labrador, Nova Scotia and Prince Edward Island. The GST applies in the rest of Canada at the rate of 5%.
All legislative references are to the Excise Tax Act (ETA) unless otherwise specified.
You represent an unnamed client (the Taxpayer) who is a GST/HST registrant. As an ISO, the Taxpayer markets or sells services on behalf of an acquirer for point of sale (POS) debit and credit card machines it has sold or leased to card acceptors. In addition to your incoming letter, you also provided two redacted agreements - […] (Agreement 1) between an unnamed acquirer and the Taxpayer and […] (Agreement 2) between an unnamed acquirer and the Taxpayer - to illustrate two scenarios under which the Taxpayer receives […] fees.
The Taxpayer has contracted with an acquirer to receive device driver services and merchant acquiring program and residual services from the acquirer for […] (payment networks). Under this arrangement, the Taxpayer has an agreement with the merchant under which the Taxpayer earns a fee from the merchant as a result of each successfully processed debit and credit card transaction on POS machines that the Taxpayer may own or lease. You have not provided any sample agreements between the Taxpayer and a merchant. You have described this fee as the debit/credit transaction fee and/or communication fee required to be paid by the merchant on using the POS machine.
An acquirer is registered with [payment networks] and provides electronic transaction processing for debit and credit card purchases. The Taxpayer will solicit purchasers of the acquirer’s services. As an independent contractor, the Taxpayer will identify potential merchants and may negotiate some terms of a merchant agreement between the acquirer and the prospective merchant under which the acquirer will provide payment processing services to the prospective merchant. Although the Taxpayer may recommend the fees to be charged to a prospective merchant, the acquirer has the final review and approval of both the prospective merchant and the fees to be charged. The Taxpayer will also ensure that prospective merchants have completed the application, verify the business activity of each prospective merchant, obtain and submit any other information required by the acquirer, and ensure that each prospective merchant receives copies of the appropriate terms and guides. The Taxpayer is compensated for its services based on a percentage of the total credit card sales volume. The Taxpayer may also receive commission fees when certain payments cards are activated.
You have requested a GST/HST interpretation on whether the […] fees earned by the Taxpayer are consideration for supplies of exempt financial services.
In particular, you would like to know whether the fees earned by the Taxpayer:
* from the merchant in respect of an arrangement governed by Agreement 1 are consideration for supplies of exempt financial services on the basis that the Taxpayer is a “person at risk” under the Financial Services and Financial Institutions (GST/HST) Regulations (the Regulations); and
* from the acquirer in respect of an arrangement governed by Agreement 2 are consideration for supplies of exempt financial services on the basis that the Taxpayer is an agent of a “person at risk” under the Regulations.
The determination of whether a particular supply made by the Taxpayer 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 Taxpayer are considered to be a single supply or multiple supplies is a question of fact. GST/HST Policy Statement P-077R2, Single and Multiple Supplies 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.
As you have not provided the agreement between the Taxpayer and the merchant, in conjunction with Agreement 1, to provide clarity of the Taxpayer’s specific actions, obligations, roles, and responsibilities to the merchant, it is unclear what the Taxpayer’s supply would be and whether the Taxpayer would be providing a single or multiple supplies under that agreement. If each element of the Taxpayer’s supply 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 Taxpayer’s services would be considered the provision of multiple supplies.
When reviewing the limited facts as set out above as they relate to Agreement 2, it is clear that the elements of the Taxpayer’s service are integral components that are inextricably linked to each other. Accordingly, the Taxpayer’s supply to the acquirer under Agreement 2 would be considered to be a single supply.
Characterization of supplies
A GST/HST registrant is generally required to charge GST/HST on a taxable supply of property or a service made in Canada (other than a zero-rated supply that is taxable at 0%) but not on an exempt supply. A supply of a financial service is exempt under Part VII of Schedule V to the ETA unless it is specifically zero-rated under Part IX of Schedule VI to the ETA. A financial service is defined in subsection 123(1) to mean anything that is included in any of paragraphs (a) to (m) of that definition and is not excluded by any of paragraphs (n) to (t) of that same definition.
Paragraph (a) of the definition of “financial service” includes the exchange, payment, issue, receipt or transfer of money, whether effected by the exchange of currency, by crediting or debiting accounts or otherwise.
Paragraph (l) of the definition of “financial service” means the agreeing to provide, or the arranging for, a service that is referred to in paragraph (a) to (i) and not referred to in any of paragraphs (n) to (t) of that same definition. 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.
As explained in Technical Information Bulletin TIB B-105, Changes to the Definition of Financial Service, in determining whether an intermediary's service is included in paragraph (l) of the definition of “financial service”, 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 a business of providing financial services).
Paragraph (t) of the definition of “financial service” excludes from its definition, a prescribed service. Section 4 of the Regulations lists services that are prescribed under this paragraph. Subsection 4(2) of the Regulations provides that the transfer, collection or processing of information and any administrative service, including an administrative service in relation to the payment or receipt of claims, benefits or other amounts, other than solely the making of the payment or the taking of the receipt, are generally prescribed for purposes of paragraph (t) unless subsection 4(3) of the Regulations applies to the service.
Subsection 4(3) of the Regulations provides, in part, that a service referred to in subsection 4(2) of the Regulations is not a prescribed service for purposes of paragraph (t) where the service is supplied with respect to an instrument by a person at risk, or by 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. Under subsection 4(1) of the Regulations a “person at risk” means 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.
Financial risk relates specifically to an instrument, not to what could otherwise be described as business or operational risks. Financial risk does not mean risk of financial loss arising because of negligence or failure to perform certain administrative obligations with respect to an instrument.
It is generally understood that the supplies made by an acquirer to a merchant under a merchant agreement with respect to the processing of credit and debit card payments within those payment networks are supplies of a financial service that is referred to in any of paragraphs (a) to (i) of that definition and not referred to in any of paragraphs (n) to (t).
Under Agreement 1, the acquirer will provide services to the Taxpayer and, presumably, the Taxpayer will then provide these services to the merchant. The merchant is not a party to Agreement 1. Although you have indicated that the Taxpayer has a separate agreement with the merchant, that agreement was not provided. Based on the limited information provided, it is unclear precisely what is the nature of the supply that the Taxpayer is making to the merchant.
Although you have not provided specific details regarding a supply made by the Taxpayer to the merchant, it is not uncommon for a merchant to enter into an agreement with an ISO that has itself entered into an agreement with an acquirer for services. Under that scenario, the acquirer may be making taxable supplies to the ISO and the ISO may be making taxable supplies to the merchant. For example, an ISO may provide services to a merchant related to equipment the ISO has sold or leased to the merchant, such as initial setup and certification of connection to a network, technical support for software and hardware, operation and maintenance services, software, or marketing services. These supplies are generally taxable for GST/HST purposes. Alternatively, the acquirer may be making exempt supplies of processing credit and debit card transactions to the Taxpayer and the Taxpayer may be making exempt supplies of processing credit and debit card transactions to the merchant.
As previously noted, a “person at risk” relates to a person who is financially at risk in respect of an 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. Financial risk does not relate to what could otherwise be described as business or operational risk. As you have not provided a copy of the agreement between the Taxpayer and the merchant, there is insufficient information to conclude that the Taxpayer would or would not be financially at risk in respect of an instrument with respect to the Taxpayer’s supply to a merchant. For example, additional training costs or costs associated with the purchase and installation of hardware and software would not be financial risks related to an instrument, but are merely business expenses. However, we do note that, under Agreement 1, the Taxpayer is required to maintain a settlement account in Canada which could give indication that the Taxpayer is a person at risk in respect of an instrument by virtue of the services that it supplies to the merchants.
As noted above, that the supplies made by an acquirer to a merchant under a merchant agreement with respect to the processing of credit and debit card payments within those payment networks are supplies of a financial service that is referred to in any of paragraphs (a) to (i) of that definition and not referred to in any of paragraphs (n) to (t). On this basis, there may be scope to consider that the Taxpayer may be making a supply of an exempt financial service under paragraph (l).
Based on the information provided in Agreement 2, we understand that the Taxpayer represents the acquirer with respect to soliciting merchants on behalf of the acquirer in order that the acquirer may make supplies to the merchant under a merchant agreement between the acquirer and the merchant. There is indication that the Taxpayer has direct involvement and effort in the provision of the acquirer’s supplies of financial services made to merchants under the merchant agreement. The Taxpayer has some autonomy within Agreement 2 to recommend fees and rates to the acquirer with respect to the merchant agreements. There appears to be a significant degree of reliance by both the acquirer and the merchant on the Taxpayer in concluding the merchant agreement and the information substantiates the Taxpayer’s intention of effecting a supply of a financial service.
Based on the nature of the supply provided by the Taxpayer and the facts surrounding Agreement 2, there is indication that the essential character of the supply would fall within paragraph (l) of the definition on the basis that the Taxpayer arranges for the supply of an exempt financial service made by the acquirer to the merchant. It is generally accepted that the essential character of the acquirer’s supply to the merchant is referred to in any of paragraphs (a) to (i) of the definition and is not referred to in any of paragraphs (n) to (t). Although some aspects of the Taxpayer's supply may be preparatory in nature, these elements would not be considered the essential character of the supply made to the acquirer. Furthermore, it would not appear that the nature of the services supplied by the Taxpayer would fall within paragraph (t) so the determination of whether the Taxpayer or the acquirer is a person at risk is not necessary.
Under Agreement 2, as an independent retailer the Taxpayer may also sell card processing equipment or Internet gateway services and software which has been approved by the acquirer and which is compatible with the acquirer’s operational systems. The acquirer will provide price lists for these items from time to time if the Taxpayer chooses to purchase those items from the acquirer. The Taxpayer is required to identify the card processing equipment that the merchant will use in conjunction with the acquirer’s services. The sale, lease and/or rental of POS terminals and other equipment will be offered under a separate written agreement between the Taxpayer and the merchant. As noted above, the sale or lease of POS equipment is not a financial service and is subject to GST/HST.
In accordance with the qualifications and guidelines set out in GST/HST Memorandum 1.4, Excise and GST/HST Rulings and Interpretations Service, the interpretation(s) given in this letter, including any additional information, is not a ruling and does not bind the Canada Revenue Agency (CRA) with respect to a particular situation. Future changes to the ETA, regulations, or the CRA’s interpretative policy could affect the interpretation(s) or the additional information provided herein.
If you require clarification with respect to any of the issues discussed in this letter, please call me directly at 902-719-7843. 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.
Financial Services Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate