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: 125864
Business Number: [...]
July 19, 2011
Dear [Client]:
Subject:
GST/HST RULING
Application of GST/HST to Profit Share Payments
Thank you for your letter [mm/dd/yyyy], concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to quarterly payments and service reimbursement fee that [...] (the Bank) will be receiving.
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.
Statement of Facts
We understand the following from your letter and discussion of [mm/dd/yyyy]:
1. The Bank is [...].
2. The Bank is registered for GST/HST purposes.
3. The Bank will be launching a credit card program and issuing credit cards to Cardholders across Canada.
4. The Bank entered into [...] (the Agreement) with [...] (the Insurer), pursuant to which the Insurer will provide insurance to the Bank's credit Cardholders and the Bank will, among other things, perform services with respect to such insurance. The copy of the Agreement provided was [...].
5. The Bank will be the group policy holder of the insurance; Cardholders who purchase the insurance will become certificate holders under the policy.
6. Paragraph [...] of the Agreement states that:
a) The Bank shall use commercially reasonable efforts to arrange for the issuance of [...] insurance to Cardholders using [...] interceptors and telephone representatives to directly offer Cardholders enrolment in such insurance.
b) The Bank shall be solely responsible for offering enrolment to Cardholders such insurance and forwarding completed applications for Certificates under the Group Policy for issuance by the Insurer.
c) Neither the Insurer nor any person other than the Bank acting on the Insurer's behalf shall take any action that would constitute any aspect of arranging for the issuance of [...] insurance to any Cardholder.
d) For greater certainty, the Insurer is permitted to perform the following administrative functions with respect to the issuance of [...] insurance to a Cardholder:
(i) Perform an additional check to confirm Cardholder's age as indicated on the application is such that the Cardholder is eligible for coverage; and
(ii) Send the physical insurance certificate to the Cardholder."
7. Paragraph [...] of the Agreement provides that the Bank will provide the administrative, marketing and promotional services listed as duties of the Bank in Section [...] of Schedule [...] to the Agreement; such schedule may be amended from time to time.
8. Under paragraph [...] of the Agreement, the Insurer shall do the following:
a) Provide the services listed and Duties of Insurer in Schedule [...]; as such schedule may be amended from time to time as agreed by the Bank and the Insurer, both acting reasonably, where any services are added, amended, or deleted.
9. Subparagraph [...] of the Agreement provides that the Bank will be entitled to a quarterly [...] Payment from the Insurer [...]. The payment is consideration for the services provided by the Bank in paragraph [...] of the Agreement. Where the [...] is [...] the Bank will pay the [...] re-payment to the Insurer.
10. Pursuant to [...] of the Agreement, the monthly premiums (including applicable sales tax) shall be billed and collected by the Bank in accordance with its obligations in Schedule [...].
11. Pursuant to section [...] of the Agreement, the Insurer will also be paying the Bank a [...]. The [...] is consideration for various administrative, marketing and promotional services provided by the Bank, as set out in section [...] of Schedule [...] of the Agreement.
12. Schedule [...] to the Agreement provides that the following services among others shall be provided by the Insurer:
a) Provide timely and courteous service to Insureds.
b) The Insurer will process [...]% of eligible enrolments and issue a Certificate of Insurance and cover letter to Insureds within [...] hours of receipt of enrolment information from the Bank.
13. Section [...] of Schedule [...] to the Agreement provides that the Bank shall do the following among other things:
a) Plan and execute all marketing of the [...] to Cardholders, through such channels of distribution as may be elected by the Bank and agreed by the Insurer.
b) Design, develop and produce all marketing material and shall be responsible for the final approval of the [...]. Notwithstanding the obligations in this section of Schedule [...], the Bank shall not be responsible at any time to ensure compliance of the marketing materials or the [...] with the group policy or applicable law.
c) Adequately train the Bank and customer service provider personnel, and any other entities' personnel, engaged in the promotion of the [...] in accordance with the training instructions the Insurer provides to the Bank in writing in advance from time to time. The Bank shall use commercially reasonable efforts to ensure that its personnel engaged in the promotion of the [...] adhere to such training instructions.
14. Section [...] of Schedule [...] to the Agreement also provides that the Insurer will do the following among other things:
a) Process and review all Cardholders insurance enrolments and cancellation and fulfill Cardholders who are eligible for insurance coverage under the group policy.
b) Advise the Bank with respect to the premiums and applicable sales tax to be charged to each insured and comply with any obligations imposed on insurers or vendors under any statute imposing a sales tax.
c) Issue and mail Certificates to Insureds within [...] hours of enrolments (with such Certificates to be based on information verified by Insurer, the processing provider or the customer service provider).
d) Explain terms of insurance coverage to the Cardholders (including any changes in premium rates) that have been approved in accordance with the terms of this Agreement.
15. On [mm/dd/yyyy], you [confirmed] in a telephone conversation that as of [mm/dd/yyyy], the Bank was no longer using [...] interceptors. Since [mm/dd/yyyy], the Bank has a call centre where customers phone-in to have their new credit card activated. During that phone call the Call Centre employee will offer the Cardholder the [...] insurance.
Ruling Requested
You would like to know whether the service provided by the Bank to the Insurer in the issuance of the [...] insurance for [...] Cardholder including the administrative, marketing and promotional services associated with the insurance is an exempt supply of a financial service.
Ruling Given
Based on the facts set out above, we rule that the supply of the service provided by the Bank to the Insurer in the issuance of the [...] insurance for [...] Cardholders is a taxable supply.
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
Under the ETA, supplies are taxable 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. In general, financial services relating to insurance policies issued by a financial institution are zero-rated to the extent that the policy relates to risks ordinarily situated outside Canada. A service is 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.
A financial service includes, for example, under paragraph (d) of the definition of financial service, the issue, granting and transfer of ownership or repayment of a financial instrument. A "financial instrument" is also defined in subsection 123(1) and includes an "insurance policy" which in turn, is defined under that provision and includes, among, other things, a policy or contract of insurance (other than a warranty in respect of the quality, fitness or performance of tangible property, where the warranty is supplied to a person who acquires the property otherwise than for sale) that is issued by an insurer. Another example of a financial service is in paragraph (f.1), the payment or receipt of an amount in full or partial satisfaction of a claim arising under an insurance policy.
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.
Based on the Agreement, the Bank provides a number of services to the Insurer. Whether the Bank 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 Agreement, it is clear that the activities performed by the Bank in assisting the Insurer to issue the [...] insurance to Cardholders, including the various administrative, marketing and promotional services associated with the [...] insurance as outlined in section [...] of the Agreement and section [...] of Schedule [...] to the Agreement, are intricately linked to each other. As such, the Bank is providing a single supply to the Insurer in the issuance of [...] to Cardholders.
Services in the nature of management, administration, marketing or promotional activities are intended to be taxable as they are not themselves financial services. However, an activity performed by a person that is the "arranging for" a financial service referred to any of paragraph (a) to (i) is included in paragraph (l) of the definition of financial service provided it is not excluded by any paragraphs (n) to (t) of that definition. For an insurance intermediary, it is therefore important to determine whether a supply of "arranging for" a financial service is provided and if so, whether that financial service 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 (e.g. insurance policies) 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 performs a number of services including services described in any of paragraphs (n) to (t) as part of an agreement to arrange for a supply of an insurance policy, 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.
Based on the Agreement, the activities undertaken by the Bank are the promotion of the insurance policy offered to Cardholders on the [...] credit card as well as forwarding the applications for Certificates under the Group Policy for issuance by the Insurer. The Bank has limited involvement with respect to the provision of a financial service by the Insurer. While some of the activities may assist the Insurer in the provision of a financial service of issuing an insurance policy to a Cardholder and, as such, are activities that may be included in paragraph (l) of the definition of financial service, viewed as a whole the activities undertaken by the Bank are predominantly promotional services. Promotional services are excluded from the definition of financial service under paragraph (r.4).
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 a similar service.
Currently, no services are prescribed or proposed to be prescribed for the purposes of paragraph (r.4).
This paragraph is deemed to have come into force on December 17, 1990, except where it is in respect of a service rendered under an agreement, evidenced in writing, for a supply if 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 preparatory service.
If you require clarification with respect to any of the issues discussed in this letter, please call me directly at 613-954-1433. 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,
Gabrielle Nadeau
Financial Institutions Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate
UNCLASSIFIED
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