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.
[Addressee]
Excise and GST/HST Rulings Directorate
Place de Ville, Tower A, 15th Floor
320 Queen Street
Ottawa ON K1A 0L5
Case Number: 122135
Business Number: [...]
October 25, 2010
Dear [Client]:
Subject:
GST/HST INTERPRETATION
Application of GST/HST to services given the recent amendments to the definition of financial service
Thank you for your letter dated May 4, 2010 and your earlier email of February 17, 2010, concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to services as a result of the amendments to the definition of financial service in subsection 123(1) of the Excise Tax Act (ETA). We apologize for the delay in responding to your enquiry.
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 ETA unless otherwise specified.
We understand that you would like confirmation that brokerage services provided by full service brokers, discount brokers and introducing brokers with respect to the transfer of equity securities (shares) and interests in trusts (units) are exempt supplies of financial services.
In addition, you would like confirmation that the services described in the three examples you provided are financial services. For ease of reference we have set out our understanding of the situations described in the three examples below.
Example 1 - Fund dealer arranges for the purchase and sale of fund units/shares
In this example you described the functions performed by the fund dealer as:
• working with the investor to effect the sale of the units/shares in the investment fund;
• adhering to the applicable licensing and other regulatory laws, e.g., "know your client" rules;
• providing the investor with some advice;
• providing the investor online access to research, investment tools, and educational material; and
• sending monthly account statements to the investor or otherwise providing access to such statements electronically.
In cases where the sale relates to front-end load funds, a commission is payable by the investor to the fund dealer at the time of the sale as compensation for effecting the sale of the units/shares in the investment fund.
In cases where the sale relates to back-end load funds/deferred sales charges (DSC) funds, the commission is payable by the fund manager/fund/other third party to the dealer at the time of the sale. The investor is obliged to reimburse the fund manager/dealer/third party for this commission at the time of redemption if the units/shares are not held for a prescribed period. This reimbursement paid by the investor is referred to as the redemption fee.
A trailer commission may also be paid. This commission is payable to the fund dealer over time. Specifically, a trailer commission is a method of spreading the commission fee earned for arranging for the sale of the mutual fund unit/share over a certain period of time.
Example 2 - Fund dealer arranges for switches of fund units/shares between funds
An investor wishes to switch its holding from one fund to another fund. The switch is between two different funds or between different series of a particular fund. The fund dealer arranges for the sale of the units/shares of the investor's existing fund and also arranges for the purchase of the units/shares of the new fund. In such a situation you stated that the functions performed by the fund dealer are the same as those described in example 1. The fund dealer would charge the investor a switch fee for this service.
Example 3 - Investor redeems units/shares in a fund
An investor redeems his or her DSC units/shares in an investment fund early and pays a fee for early redemption. The redemption fee is payable by the investor to the fund manager/dealer/other third party. Such a fee is only payable where the investor redeems his or her DSC units/shares within a certain time period (i.e. an early redemption).
Fund dealers
In the above three examples, fund dealers are compensated by reference to the financial instrument (i.e. units/shares). Fund dealers must be licensed by applicable provincial regulators to provide these services. Their activities and functions are well defined by law. The fund dealer does not receive any compensation for its efforts and activities unless the financial instrument in respect of which the fund dealer provided services is sold.
Interpretation Given
Under the ETA, all supplies are taxable unless they are specifically exempt. Generally, most supplies of financial services are exempt supplies under Part VII of Schedule V. 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.
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. 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 is determined that multiple supplies are being provided by a person the possible application of sections 138 and 139 should be considered.
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 be generally 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.
In determining whether an intermediary is providing a supply of a financial service under paragraph (l), of "arranging for" a service referred to in any of paragraphs (a) to (i) and not referred to in any of paragraphs (n) to (t), it must first be determined whether an "arranging for" service is provided and whether it is the predominant element of the supply.
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 a 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.
On December 14, 2009, the Minister of Finance announced proposed legislative amendments that provide clarification on the application of the GST/HST to the definition of financial service. These amendments were incorporated in Bill C-9, Jobs and Economic Growth Act which received Royal Assent on July 12, 2010.
The amendments clarify the application of the GST/HST to financial services. Among other things, the definition of "financial service" in subsection 123(1) is amended by adding exclusionary paragraphs (q.1) and (r.4).
Paragraph (q.1) clarifies that an asset management service is excluded from the definition of financial service. An "asset management service" is defined in subsection 123(1) to mean a service (other than a prescribed service) rendered by a particular person in respect of the assets or liabilities of another person that is a service of:
(a) managing or administering the assets or liabilities, irrespective of the level of discretionary authority the particular person has to manage some or all of the assets or liabilities,
(b) providing research, analysis, advice or reports in respect of the assets or liabilities,
(c) determining which assets or liabilities are to be acquired or disposed of, or
(d) acting to realize performance targets or other objectives in respect of the assets or liabilities.
Currently, no services are prescribed for the purposes of paragraph (q.1).
Please note that examples 1 and 2 of GST/HST Notice 250, Proposed Changes to the Definition of Financial Service (Notice 250) illustrate situations that relate to certain services provided by investment managers that are an asset management service and as such excluded from the definition of financial service.
Where an investment dealer registered under provincial legislation (e.g. as a dealer in securities) is arranging for the purchase or sale of securities on behalf of a client and the predominant element of the supply is the purchase or sale of securities, the supply would generally be a supply of a financial service and would not be excluded by paragraph (q.1) from the definition of financial service.
New paragraph (r.4) is added to clarify that certain services that are preparatory to or provided in conjunction with a financial service are excluded from that definition.
Specifically, 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:
(i) a service of collecting, collating or providing information, or
(ii) a market research, product design, document preparation, document processing, customer assistance, promotional or advertising service or similar service.
Currently, no services are prescribed for the purposes of paragraph (r.4).
Where, in consideration for a fee or commission paid by the investor to a mutual fund dealer, the dealer provides a service of assisting the investor in purchasing, redeeming or exchanging units held in the investor's account and the dealer is a financial intermediary as described in subparagraph 149(1)(a)(iii), the service would generally be an exempt supply of arranging for a financial service. Whether services, for which consideration is a commission on the purchase of the units or a trailing commission, provided by a fund dealer to a fund manager or other third party are considered to be a single supply of a financial service is a question of fact. The facts and circumstances of each transaction would have to be considered on their own merits.
However, where a person provides services including assisting in purchasing, redeeming and exchanging units held in a fund to an investment plan (as defined in subsection 149(5)) or any corporation, partnership or trust whose principal activity is the investing of funds, the service would generally be excluded by paragraph (q) of the definition of financial service in subsection 123(1).
Please note that example 4 of Notice 250 illustrates a situation that relates to certain commissions paid with respect to mutual fund units.
Subject to all of the above, where a fund dealer arranges for the purchase and sale of fund units/shares and the fund dealer performs the functions as outlined in your Example 1, the services provided by the fund dealer to the investor would generally be a financial service and would not be excluded from that definition only by reason of paragraph (r.4).
Where in your Example 2, a fund dealer arranges for switches of fund units/shares between two different funds or between different series of a particular fund and the functions performed by the fund dealer are the same as those described in your Example 1, the supply of the service to the investor would generally be a supply of a financial service and would not be excluded from the definition of financial service only by reason of paragraph (r.4).
Where in your Example 3, a fee is charged by the intermediary to an investor who redeems his or her DSC units/shares in an investment fund early and that fee is for services of arranging for the transfer of the units, it would generally be regarded as consideration for an exempt supply of a financial service and would not be excluded from the definition of financial service only by reason of paragraph (r.4).
Brokerage services provided by full service brokers, discount brokers and introducing brokers may also be financial services.
Generally a full service broker, introducing broker and discount broker are licensed to fulfill the role of an intermediary, e.g. a dealer in financial instruments. Where the agreement and surrounding circumstances are such that the service provided by one of these brokers to an investor, for which an investor pays a fee or commission to the broker, is predominantly one of execution of trades, the service in that case would constitute "arranging for" a financial service, as provided under paragraph (l) and would not be excluded from the definition of financial service by paragraphs (n) through (t), including paragraphs (q.1) and (r.3) to (r.5).
Please note that example 3 of Notice 250 illustrates a situation that relates to certain services provided by a full service broker.
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 Dawn Weisberg at 613-952-9210.
Yours truly,
Ivan Bastasic
Director
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate
UNCLASSIFIED
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