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: 125434
Business Number: [...]
September 21, 2011
Dear [Client]:
Subject:
GST/HST INTERPRETATION
PROPOSED LAW/REGULATION
Application of Harmonized Sales Tax (HST) to management services
Thank you for your email of [mm/dd/yyyy], concerning the application of the HST to supplies made by [...] (ManageCo) to [...] (TrustCo). We apologise 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 Excise Tax Act (ETA) unless otherwise specified.
Background Information
Based on the information you provided in your submission, and [...] dated [mm/dd/yyyy] (Prospectus) at the Web site [...] we understand the following information:
1. ManageCo is an investment management company, incorporated pursuant to the laws of [...] [Participating Province X] in [mm/yyyy]. ManageCo supplies services to TrustCo in [Participating Province X]. ManageCo is registered for GST/HST purposes.
2. ManageCo will perform the management functions of TrustCo pursuant to the [...] Agreement under which ManageCo is responsible for delegating all investment decisions of TrustCo in accordance with the investment objectives, strategy and restrictions and for arranging for the execution of all Portfolio transactions and managing and administering the day-to-day business and affairs of TrustCo.
3. ManageCo's duties include: authorizing the payment of operating expenses incurred on behalf of TrustCo; preparing financial statements and financial and accounting information as required by TrustCo; ensuring that Unitholders are provided with financial statements and other reports as are required by applicable law from time to time; ensuring that TrustCo complies with regulatory requirements and applicable stock exchange listing requirements; preparing TrustCo's reports to Unitholders and the Canadian securities regulatory authorities; determining the amount of distributions to be made by TrustCo; and negotiating contractual agreements with third-party providers of services, including registrars, transfer agents auditors and printers.
4. Pursuant to the terms of the [...], ManageCo is entitled to a fee of [...], plus an amount equal to the [...] Fee plus applicable taxes. Fees Payable to ManageCo will be calculated and payable [...] based on the [...] of TrustCo calculated at [...] during [...]. The management fee will be paid in cash.
5. [...] Fee is defined in the Prospectus to mean the [...] fee that ManageCo pays to the registered dealers [...] for each [...] held by clients of the registered dealer.
6. TrustCo is an exchange-traded fund. TrustCo qualifies as a mutual fund trust within the meaning of the Income Tax Act. Trust Units of TrustCo are sold to Unitholders in participating and non-participating provinces across Canada.
7. ManageCo [...]; you indicate that the calculation of a rate of HST charged with respect to ManageCo's management fees will be based on the [...] given by the [...] to ManageCo. The [...].
Interpretation Requested
1. You state that TrustCo's blended HST rate effective July 1, 2010 is [...]% which will be payable by TrustCo for services supplied by ManageCo. You would like to have approval of this blended [...]% rate.
2. You also wish to know if HST applies to the [...] Fees paid by ManageCo to the registered brokers.
Interpretation Given
The following is a general interpretation with respect to the application of the GST/HST to supplies made by ManageCo to TrustCo and made by registered brokers to ManageCo, as it relates to your enquiries.
Management Services
The supply of management services to a mutual fund trust is generally not included in paragraphs (a) to (m) of the definition of financial service; even if it were, it would be excluded by paragraph (q) and/or paragraph (q.1).
Paragraph (q) excludes from the definition of "financial service" a management or administrative service or any other service (other than a prescribed service), provided by a supplier to a person that is an investment plan [as defined in subsection 149(5)] or any corporation, partnership or trust whose principal activity is the investing of funds, where the supplier is providing such management or administrative services to the person.
The following services are currently prescribed for the purposes of paragraph (q):
• the issuance of, or the transfer of ownership of a financial instrument from the supplier to the person;
• the operation or maintenance of a savings, chequing, deposit, loan, charge or other account that the person has with the supplier; and
• if the person is a trust governed by a self-directed RRIF or a self-directed RRSP, the arranging for the issuance, renewal, variation or transfer of ownership of a financial instrument of a person.
Paragraph (q.1) excludes asset management services from the definition of "financial service".
An "asset management service", as defined in subsection 123(1), 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 those 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.
An asset management service does not include a prescribed service for the purpose of that definition. Currently, no services are prescribed or proposed to be prescribed for purposes of paragraph (q.1).
ManageCo would be required to collect the GST/HST on the value of consideration for the supply of its management services that it supplies to TrustCo.
Place of supply
Subsection 13(1) of the New Harmonized Value-Added Tax System Regulations provides general rules for the place of supply of services. Please refer to Part 5, Services, of Technical Information Bulletin B-103, Harmonized Sales Tax Place of Supply Rules for Determining Whether a Supply is Made in a Province, for further details.
Subsection 13(1) provides, subject to certain exceptions, that a supply of a service is made in a province if, in the ordinary course of business of the supplier, the supplier obtains an address (referred to as the "particular address") in the province that is
(a) if the supplier obtains only one address that is a home or a business address in Canada of the recipient, the home or business address in Canada obtained by the supplier;
(b) if the supplier obtains more than one address described in paragraph (a), the address described in that paragraph that is most closely connected with the supply; or
(c) in any other case, the address in Canada of the recipient that is most closely connected with the supply.
The business address of the recipient from which the supplier is hired pursuant to the agreement for the supply (the "contracting address") will generally be the address that is most closely connected with the supply. This address will therefore determine the province in which the supply of the service is made where it is in Canada and is obtained by the supplier in the ordinary course of business.
Every recipient of a taxable supply (other than a zero-rated supply) made in a participating province is required to pay, in addition to the tax imposed by subsection 165(1) (i.e. 5%), tax in respect of the supply calculated at the tax rate for that province (i.e., the provincial part of the HST) on the value of the consideration for the supply under subsection 165(2). The term "recipient" is defined in subsection 123(1) and is generally the person liable to pay for the supply.
The manager of an investment plan is required to charge and collect the federal and provincial part of the HST on management fees determined by the place of supply rules and tax would be charged at the applicable rate (i.e., 15%, 13%, 12%, 5%, or 0% if it is a zero-rated supply).
Management services are supplied by ManageCo to TrustCo. The place of supply rules will determine the GST/HST tax rate that ManageCo will charge to TrustCo; where ManageCo obtains only one address of TrustCo that is in [Participating Province X], the place of supply for its management services supplied to TrustCo would be in [Participating Province X] and [...]% would be the applicable tax rate on the value of consideration for the supply.
Selected listed financial institutions (SLFIs)
The following information is with respect to the proposed amendments to the ETA and draft regulations referred to as the Draft Regulations Amending Various GST/HST Regulations including the Selected Listed Financial Institutions Attribution Method (GST/HST) Regulations (draft SLFI Regulations) released by the Department of Finance on January 28, 2011.
In general, the draft SLFI Regulations apply in respect of a reporting period of an investment plan that ends on or after July 1, 2010, unless otherwise specified.
Generally, a financial institution would be considered to be a selected listed financial institution (SLFI) throughout a reporting period in a fiscal year that ends in a particular taxation year of the financial institution, if the financial institution is a listed financial institution described in any of subparagraphs 149(1)(a)(i) to (x) at any time during the particular taxation year, and the financial institution has a permanent establishment in a participating province and a permanent establishment in any other province, at any time during the taxation year.
A mutual fund trust is an investment plan under subparagraph 149(5)(a)(x) and a listed financial institution under subparagraph 149(1)(a)(ix).
Under subsection 1(1) of the draft SLFI Regulations, the definition "permanent establishment" in the case of a trust means a permanent establishment as determined under subsection 2600(2) of the Income Tax Regulations.
As well, under section 4 of the draft SLFI Regulations, a mutual fund trust is deemed to have a permanent establishment in a particular province throughout a taxation year if, at any time in the taxation year the mutual fund trust is qualified under the laws of Canada or a province to sell or distribute units of the trust in the particular province, or a person resident in the particular province holds one or more units of the mutual fund trust. For example, for reporting periods that end on or after July 1, 2010, TrustCo, a mutual fund trust, would be an SLFI throughout a reporting period in a fiscal year that ends in a particular taxation year if, at any time in the taxation year TrustCo is qualified under the laws of Canada or a province to sell or distribute its units in a participating province and any other province, and/or its unitholders reside in a participating province and any other province.
Attribution Percentage for SLFI exchange-traded fund
Under subsection 1(1) of the draft SLFI Regulations, an exchange-traded fund means a distributed investment plan (such as a mutual fund trust), any units of which are listed or traded on a stock exchange or other public market and an exchange-traded series of a stratified investment plan means a series of the plan, the units of which are listed or traded on a stock exchange or other public market.
The additional information requirements referred to in section 55 of the draft SLFI Regulations do not apply to an exchange-traded fund. Therefore, an exchange-traded fund calculates its provincial attribution percentage for a participating province based on the province of residency of its unitholders determined in accordance with section 6 of the draft SLFI Regulations (e.g., an individual is resident in the province in which the individual's principal mailing address in Canada is located). An exchange-traded fund is not required to obtain additional information based on the type of unitholder.
To calculate its provincial attribution percentage for a participating province, an SLFI stratified investment plan that is an exchange-traded fund would apply the formula in section 35 of the draft SLFI Regulations and an SLFI non-stratified investment plan that is an exchange-traded fund would apply the formula referred to in section 36 of the draft SLFI Regulations.
Under proposed section 225.3, an SLFI that is an exchange.traded fund may apply to the Minster of National Revenue (Minister) to use an alternative method to calculate its provincial attribution percentages for the fund or series of the fund. Proposed subsection 225.3 is intended to allow an exchange-traded fund to use an alternate method in respect of the fund or an exchange-traded series of the fund where it is unable to calculate its provincial attribution percentages for a participating province for the series or the fund using the methods referred to in sections 35 or 36 of the draft SLFI Regulations. Where an exchange-traded fund has both exchange-traded series and series that are not exchange-traded series, it may only apply under proposed section 225.3 in respect of the exchange-traded series.
Proposed subsection 225.3(3) provides that the application made by the SLFI stratified/non-stratified exchange-traded fund must be made in prescribed form, contain prescribed information and be filed with the Minister on or before the day that is 180 days before the first day of the fiscal year to which the application applies (or any later day that the Minister may allow). Until a specific form is prescribed, an exchange.traded fund may make an application by sending a letter to the Assistant Director of Audit of the exchange.traded fund's tax services office before the day that is 180 days before the first day of the fiscal year to which the application applies. The letter should include the following information:
• the name of the exchange.traded fund;
• the name(s) of the exchange.traded series of the stratified investment plan with respect to which the application relates;
• an explanation of why the exchange.traded fund is unable to determine the province of residency for 90% of its unit holders for a exchange.traded fund or exchange.traded series where the exchange.traded fund is a stratified investment plan;
• a detail description of the particular method(s) for which authorization is being requested to be used to calculate the provincial attribution percentage for each participating province for an exchange.traded fund or each exchange.traded series in which the exchange.traded fund has an actual or deemed permanent establishment. The details on the method(s) to be used to calculate its percentage for each participating province should include details on the attribution points chosen;
• the first day of the fiscal year to which the application applies; and
• the signature of the authorized signatory of the exchange.traded fund.
It is important to note that once a specific application form is prescribed, an exchange-traded fund would be required to use that form to make an application.
Tax adjustment transfer election
Under section 58 of the draft SLFI Regulations, it is proposed that an investment plan, such as a mutual fund trust, that is an SLFI and a manager of the investment plan may jointly elect to transfer the investment plan's adjustments to net tax calculated using the special attribution method (SAM) in subsection 225.2(2) to the manager, effective from the first day of a reporting period of the manager.
The SAM formula is adapted under section 51 of the draft SLFI Regulations for stratified investment plans and for non-stratified investment plans with a real-time method election in effect. For further information regarding the adapted SAM formula under section 51 of the draft SLFI Regulations, refer to the guide RC4050, GST/HST Information for Selected Listed Financial Institutions.
With respect to a mutual fund trust, manager of the investment plan is defined in subsection 1(1) of the draft SLFI Regulations as the person that has ultimate responsibility for the management and administration of the assets and liabilities of the investment plan.
The manager of the investment plan is required to charge and collect the federal and provincial part of the HST on management fees determined by the place of supply rules and tax would be charged at the applicable rate. Normally, the provincial part of the HST paid by the investment plan throughout the year would be subtracted from the provincial part of the HST otherwise determined under the SAM formula in subsection 225.2(2), resulting in a decrease or increase in tax liability (referred to as the "net tax adjustment amount") for the investment plan.
The amounts that can be transferred where a tax adjustment transfer election is in effect between an investment plan and manager vary depending on whether or not a reporting entity election under section 56 of the draft SLFI Regulations is also in effect.
Where a tax adjustment transfer election under section 58 and a reporting entity election under section 56 of the draft SLFI Regulations are both in effect for a reporting period, the tax adjustment transfer amount would be the positive or negative net tax adjustment amount determined by the application of the SAM formula in subsection 225.2(2).
Where only the tax adjustment transfer election under section 58 of the draft SLFI Regulations is in effect for a reporting period without a reporting entity election under section 56 of the draft SLFI Regulations, the tax adjustment transfer amount allowed to be transferred to the investment plan manager would generally be limited to the provincial part of the HST with respect to supplies made by the manager to the SLFI investment plan in applying the SAM formula in subsection 225.2(2).
If there is a positive net tax adjustment (i.e., an amount owed by the investment plan) this liability with respect to the provincial part of the HST of the investment plan would be an adjustment to be added when determining the net tax of the investment plan manager. If there is a negative net tax adjustment (i.e., the investment plan would be eligible for a credit), where the investment plan manager has credited that amount of the provincial part of the HST to the investment plan, this credit would be an adjustment to be deducted when determining the net tax of the investment plan manager.
Please refer to the guide RC4050, GST/HST Information for Selected Listed Financial Institutions for further information regarding how an investment plan manager would report a tax adjustment transfer amount on its GST/HST return.
If there is a tax adjustment transfer election in effect for a reporting period between ManageCo and TrustCo, the effect of the tax adjustment transfer election would be that it may increase or reduce the amount of net tax owing by ManageCo. There is no blended rate that ManageCo may charge to TrustCo. The tax rate with respect to the management fees is determined by the place of supply rules and tax would be charged at the applicable rate (i.e., 15%, 13%, 12%, 5%, or 0% if it is a zero-rated supply).
Under section 59 of the draft SLFI Regulations, an SLFI investment plan that has entered into a reporting entity election under section 56 and/or a tax adjustment transfer election under section 58 and has not made an election under section 57 of the draft SLFI Regulations, is prescribed for purposes of proposed subsection 240(1.2) and is required to register.
Under proposed subsection 240(2.1) an SLFI investment plan that is required to register under proposed subsection 240(1.2) must apply for registration before the day that is 30 days after the day the particular election comes into effect.
Please refer to GST/HST Notice 265, GST/HST Registration for Listed Financial Institutions (Including Selected Listed Financial Institutions) for more information regarding registration requirements for SLFIs.
[...] Fees
As we discussed during our telephone conversation on [mm/dd/yyyy], in order to determine the tax status of the [...] Fee that ManageCo pays to the registered dealers we would need to be provided with an agreement between ManageCo and the dealer. The Prospectus does not provide enough information regarding these [...] fees to comment on the tax status of this supply. The tax status of these services would be the same for both GST and HST purposes.
Please note that example 4 of the GST/HST Technical Information Bulletin B-105, Changes to the Definition of Financial Service illustrates a situation related to mutual fund dealers. This publication replaces GST/HST Notice No. 250, Proposed Changes to the Definition of Financial Services.
Whether a fee paid to a registered dealer is consideration for a financial service is a question of fact and it is necessary to look at the activities performed by the dealer in return for the fee. The facts and circumstances of each transaction would have to be considered on their own merits.
The foregoing comments represent our general views with respect to the proposed amendments to the ETA as they relate to the subject matter of your request. Any change to the wording of these proposed amendments or any future proposed amendments to the ETA, if enacted, could have an effect on the interpretation provided herein. 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.
If you require clarification with respect to any of the issues discussed in this letter, please call me directly at 613-952-0328. 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,
Katherine Lairson
Financial Institutions Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate
UNCLASSIFIED
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