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: 129883
February 17, 2011
Dear [Client]:
Subject:
GST/HST INTERPRETATION
Application of the GST/HST to certain services provided by investment dealers
Thank you for your comments on GST/HST Notice 250, Proposed Changes to the Definition of Financial Service (Notice 250) provided in your letter [...] as well as concerns with respect to the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to supplies made by investment dealers in Canada, given the recent changes to the definition of financial service. Please note that Notice 250 has been replaced by GST/HST Technical Information Bulletin: B-105, Changes to the Definition of Financial Service published in February 2011.
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.
We understand that [...] has concerns with the application of the changes to the definition of financial service to investment dealer services.
More specifically you have concerns regarding:
• investment dealers arranging for the purchase or sale of securities on behalf of a client;
• investment dealers arranging for the purchase or redemption of mutual funds on behalf of a client as it relates to trailer fees; and
• underwriting fees.
Interpretation Given
The determination of whether a particular supply made by an investment dealer 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 or agreements under which the supply is made. Although you did not provide us with sample agreements, we are pleased to provide the following general information which may assist you in making that determination.
Under the ETA, all 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 XI (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 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), the issue, granting and transfer of ownership or repayment of a financial instrument. A "financial instrument" is defined in subsection 123(1) and includes among other things, an "equity security" which, in turn, is defined to mean a share of the capital stock of a corporation or any interest in or right to such share; an interest in a trust, or any right in respect of such an interest.
Also, a service of underwriting of a financial instrument is a financial service as described under paragraph (h) of the definition of financial service.
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 it 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 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.
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 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 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 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.
The following exclusionary paragraphs, among others, were added to the definition of financial service in subsection 123(1) by Bill C-9, the Jobs and Economic Growth Act, which received Royal Assent on July 12, 2010.
New paragraph (q.1) to the definition of "financial service" clarifies that asset management services are excluded from that definition.
An asset management service 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.
A new definition of a management or administrative service clarifies that it includes an asset management service.
In addition, new 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 similar service.
Currently, no services are prescribed or proposed to be prescribed for the purposes of paragraph (r.4).
Examples 1 and 2 of Notice 250/TIB B-105, 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 arranging for 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) or (r.4) from the definition of financial service.
Where, in consideration for a fee or commission paid by the investor to a dealer (e.g. 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, 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 arranging for the purchase, redemption or exchange of 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 from the definition of financial service by paragraph (q) of that definition in subsection 123(1).
Please note that example 4 of Notice 250/TIB B-105 illustrates a situation that relates to certain commissions paid with respect to mutual fund units.
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 guidance with respect to a particular case, please submit a request for a ruling including all relevant contracts and related documents. If you require clarification with respect to any of the information discussed in this letter, please call me directly at 613-952-9248 or Dawn Weisberg, Manager, at 613-952-9210.
Yours truly,
Ivan Bastasic
Director
Financial Institution and Real Property Division
Excise and GST/HST Rulings Directorate
UNCLASSIFIED
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