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: 111922
July 19, 2011
Dear [Client]:
Subject:
GST/HST INTERPRETATION
Third party administrative services
Thank you for your letter of [mm/dd/yyyy], and your subsequent fax dated [mm/dd/yyyy] concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to third party administrative services. We apologize for the delay in responding.
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.
In your letter, excerpts from Corporation X's [...] (Duties) attached to the letter, and your fax which includes a sample [...] (Notice), you provided the following information.
Corporation X performs third party services of administering insurance policies for several large health plan providers (Providers) and independent employers (Employers) including employee benefit plans and flex plans such as extended health and dental plans (Administrative Services). Corporation X is registered for the GST/HST.
In accordance with your letter, the Duties and the Notice, Corporation X performs the following activities for the Providers and Employers in order to provide the Administrative Services:
• maintains employee eligibility files;
• prepares monthly employee benefit billings;
• collects and accounts for the premiums from those billings;
• remits premiums to various insurers;
• performs accounting for premiums and prepares monthly premium statements;
• processes claims and administers renewals and benefit changes;
• prepares updates of member information;
• updates and balances pre-authorized chequing payments for electronic transmission;
• processes month-end reports;
• produces employee wallet certificates and distributes [...] cards;
• maintains records with respect to the administration of the employee plans; and
• provides client support and clerical duties.
Interpretation Requested
You would like to know whether the supply of the Administrative Services is subject to GST/HST.
Interpretation Given
The determination of whether a particular supply is subject to GST/HST requires a detailed review of the facts and circumstances of the transactions which generally includes a review of the written agreement or agreements detailing the actions, responsibilities and obligations of the parties in connection with the supply.
Where an agreement includes 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 Corporation X is making 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, including the following principles.
1. Every supply should be regarded as distinct and independent.
2. A supply that is a single supply from an economic point of view should not be artificially split.
3. There is a single supply where one or more elements constitute the supply and any remaining elements serve only to enhance the supply.
When reviewing the facts above, since each element of the Administrative Services is intricately linked to each other, Corporation X is providing a single supply to the Providers and Employers and, as such, 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.
All supplies of financial services are exempt under Part VII of Schedule V unless they are specifically zero-rated under Part XI 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.
Paragraph (f) of the definition of financial service in subsection 123(1) includes the payment or receipt of money as dividends (other than patronage dividends), interest, principal, benefits or any similar payment or receipt of money in respect of a financial instrument. In addition, the definition includes under paragraph (f.1), the payment or receipt of an amount in full satisfaction of a claim arising under an insurance policy. A "financial instrument" is defined in subsection 123(1) to include an insurance policy. An "insurance policy", also defined in that subsection, includes a policy or contract in the nature of accident and sickness insurance, whether the policy is issued, or the contract is entered into, by an insurer.
Also, the definition of financial service includes in paragraph (l) an activity performed by a person that is the "arranging for" a 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 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.
In general, services in the nature of management, administration, marketing or promotion are intended to be taxable as they are not themselves financial services. Based on the information provided, since the services performed by Corporation X as part of the Administrative Services assist the Providers and Employers in administering the employee benefit plans, the extended health plans and the dental plans, those Services, when considered as a whole, are predominantly taxable services.
Even if some elements of the Administrative Services may be within the definition of financial service (such as "arranging for" a financial service under paragraph (l)), those elements are excluded from the definition by paragraphs (r.4) and (t).
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 such 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 a similar service;
Currently, no services are prescribed or proposed to be prescribed for the purposes of paragraph (r.4).
Certain elements of the Administrative Services that are performed by Corporation X, namely collecting, collating, and providing information as well as document preparation, document processing, and customer assistance, are preparatory to the provision of a financial service under paragraph (r.4) and, as such, are not financial services.
For more information, please refer to GST/HST Technical Information Bulletin B-105, Changes to the Definition of Financial Service.
In addition, paragraph (t) of the definition of financial service excludes a prescribed service. The Financial Services (GST/HST) Regulations (Regulations) lists services that are prescribed under that paragraph. Specifically, subsection 4(2) of the Regulations states in part that, subject to subsection 4(3), the services of transferring, 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, is prescribed for purposes of paragraph (t) of the definition of financial service. Those services are therefore not considered supplies of exempt financial services unless subsection 4(3) applies to the services.
Subsection 4(3) of the Regulations provides in part that a service referred to in subsection 4(2) is not a prescribed service for purposes of paragraph (t) of the definition of financial service where the service is supplied with respect to an instrument by a person at risk. An "instrument" is defined under subsection 4(1) to mean money, an account, a credit card voucher, a charge card voucher or a financial instrument. A "person at risk", also defined under that subsection 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.
While the service of processing claims for the Providers and Employers may on its own be included in paragraphs (f), (f.1) or (l) of the definition of financial service in subsection 123(1), the supply of the Administrative Services will be excluded from the definition of financial service under paragraph (t) where Corporation X provides the supply in respect of an employee benefit, health or dental plan and is not a person at risk when making the supply (such as where the plan is funded by the Provider or Employer as the insurer, and Corporation X is only responsible for the processing and payment of claims thereby assuming no financial risk). In this case, the provision of the claims processing service falls under subsection 4(2) of the Regulations and is therefore excluded from the definition of financial service.
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 613-952-9262. 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
UNCLASSIFIED
Email this Content