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: 77006
September 6, 2011
Dear [Client]:
Subject:
GST/HST RULING
Application of GST/HST to services performed related to credit card accounts
Thank you for your letters of [mm/dd/yyyy] and [mm/dd/yyyy] concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to services performed related to credit card accounts. 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 Excise Tax Act (ETA), unless otherwise specified.
Statement of Facts
The following is our understanding of the facts:
1. [...] (FinanceCo), and [...] (Service Provider), [...] have entered into a [...] Agreement on [mm/dd/yyyy] (Agreement). The parties to this Agreement are not members of the same closely related group.
2. Based on [...] the Agreement the Service Provider agrees to perform services for FinanceCo and acknowledges that the services are regulated by and subject to certain [...] requirements which govern the processing and maintenance of certain information and data in respect of those services.
3. The services are outlined in the Agreement as two main groups. The first group of services are the [...] [A] Services (section [...] of the Agreement). These services were necessary to convert FinanceCo's systems to the Service Provider's platforms by adapting and installing software applications and processing systems on FinanceCo's system to be later used by the Service Provider.
4. The second group of services are referred to in the Agreement as the [...] [B] Services (see section [...] of the Agreement). Those services are essentially ongoing processing services performed by the Service Provider with respect to FinanceCo's credit card portfolios. These services are further described in Schedules [...] to the Agreement.
5. Schedule [...] [X] of the Agreement describes the [B] Services performed by the Service Provider for FinanceCo. [B] Services include [...] [Standard] [B] Services, Optional [B] Services and Other [B] Services.
6. [Standard] [B] Services include a variety of services that relate to the processing of credit card applications, card production, storage and maintenance of cardholder information, and authorization of purchases. A few examples of such services are provided below:
• [...]: on-line application entry and processing of applications based on FinanceCo's selected criteria.
• [...]: post cardholder financial adjustments such as balance and cash and finance charges.
• [...]: creating cardholder file with account information such as account balance and posting all pending authorizations to cardholder accounts through on-line enquiry.
• [...]: processing and rendering of billing statements.
• [...]: embossing, issuing, reissuing and replacing cards.
• [...]: on-line statements, account cycle and miscellaneous history.
7. Optional [B] Services referred to in Schedule[X] of the Agreement, include a variety of services that relate to different systems used with respect to credit scoring, fraud detection, as well as services related to training. A few examples of these services are provided below:
• [...]: initial set-up to establish a link to [...], ongoing standard tape and transmission, storage of data from various sources (credit bureaus, [...], in-house systems).
• [...]: installation to use the Service Provider's behavioral scoring systems including, support and assistance, start-up and training, scorecard, software documentation, design and implementation.
• [...]: authorization system using scorecards.
• Total Voice Response System: site installation, voice recording, hook-up and hardware, user training, application development, storage of data, design analysis, programming, handling/processing of calls.
• Training and Documentation Services: manuals including updates.
Other [B] Services are referred to in Schedule [X] of the Agreement and include:
• Envelopes: purchase of standard envelopes and handling charge.
• Telecommunications: handling charge for line and equipment.
• Hardware: lease of compatible hardware.
8. Section [...] of the Agreement provides in part that fees will be paid to the Service Provider and such fees are set out in Schedule [...] [XX] of the Agreement.
9. Section [...] of the Agreement provides for additional expenses and other payments to be paid by FinanceCo to the Service provider. These are also further described in Schedule [XX] of the Agreement.
10. Subsection [...] of the Agreement provides that nothing in the Agreement shall be construed to create a partnership or joint venture between the parties. In addition, nothing in the Agreement or the contemplated relationship between the parties will render the Service Provider an agent of FinanceCo for any purpose whatsoever.
11. Fees in respect to [Standard] [B] Services and Other [B] Services are described in Schedule [XX] of the Agreement. Each of the elements of the service is separately itemized with its own unit of measure and its own fee attached to it.
12. The Service Provider is a non-resident and is not registered for GST/HST purposes. Since no GST/HST was charged on any of the services performed by the Service Provider under the Agreement (as evidenced in the sample copy of an invoice submitted), FinanceCo has been self-assessing GST under Division IV of the ETA on such services.
Ruling Requested
You would like to know whether GST/HST applies to the ongoing processing services, referred as the [B] Services in Schedule [X] of the Agreement, performed by the Service Provider for FinanceCo.
Ruling Given
Based on the facts set out above, we rule that ongoing processing services, referred as the [B] Services in Schedule [X] of the Agreement performed for FinanceCo by the Service Provider is a single taxable supply of services.
This ruling is subject to the qualifications in GST/HST Memorandum 1.4, Goods and Services Tax Rulings. We are bound by this ruling provided that none of the above issues is 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
As the Agreement provides for the provision by the Service Provider of a number of services and property to FinanceCo, it must first be determined whether a single supply or multiple supplies are being provided under the agreement. Whether the Service Provider 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.
Based on the Agreement, since the [A] Services were necessary in order to convert the platform previously used by FinanceCo to the one used by the Service Provider before the Service Provider can provide the ongoing processing services referred to as the [B] Services both services form part of a single supply. Also based on the Agreement, none of the elements of the services mentioned in the Agreement (including: the [A] Services, [B] Services, Optional [B] Services, non-exclusive [B] Services, Other [B] Services) can be sensibly separated in separate supplies as they are inextricably linked. When looking at the transaction and the Agreement, it is clear that FinanceCo wanted to acquire the services of the Service Provider as a comprehensive package. Although there is a separate fee identified for each element of the service in the Agreement and on the invoices this does not result in concluding that there are separate supplies. Based on the Agreement the Service Provider is making a single supply of Services to FinanceCo.
As the Service Provider is making a single supply, the predominant element of the supply must be established. If the predominant element of the single supply is 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 IX 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.
A financial service is defined in subsection 123(1) and includes, for example, under paragraph (b) that definition the operation or maintenance of an account (e.g. a credit card account) and 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 a debt security which, in turn, is defined under that provision to include a right to be paid money (e.g. a loan).
A financial service also includes under paragraph (g), the making of any advance, the granting of any credit or the lending of money, and under paragraph (l), a service that is the arranging for a service referred to in any of paragraphs (a) to (i) and not referred to in any of paragraphs (n) to (t).
Based on the Agreement, FinanceCo is making a supply of a financial service pursuant to paragraphs (b), (d) and (g) of the definition of financial service. Although involved in the issuance process of credit cards by FinanceCo, the Service Provider does not issue credit cards. Please note that the embossing, personalization and mailing of a credit card is not considered to be the issuance of a credit card.
Also, based on the Agreement it is FinanceCo that is making a supply of a financial service pursuant to when FinanceCo maintains the credit card account of a cardholder. Although the Service Provider provides services to FinanceCo in respect to storage of account information, cardholder information and other record keeping services those are simply inputs necessary to allow FinanceCo to provide the operation and maintenance of the account to the cardholder.
As the Service Provider is an intermediary it is necessary to see if the supply made by the Service Provider is a service of "arranging for" a financial service pursuant to paragraph (l) of the definition of 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 a business of providing financial services).
In general, services in the nature of management, administration, marketing or promotional activities are intended to be taxable as they are not themselves financial services. Based on the Agreement, while some of the activities, such as processing credit applications, assist FinanceCo in providing a financial service of issuing a credit card and operating and maintaining cardholder accounts, when considered as a whole are predominantly administrative in nature including storage of account information, card production services, services related to cardholder data and contact centre services. As a result, the supply is not a financial service as it is not included in paragraphs (a) to (m) of the definition of financial service in subsection 123(1).
Even if the supply was to be included in paragraphs (a) to (m) of the definition of financial service in subsection 123(1) it would be excluded by paragraphs (r.3) to (r.5) and (t) of that same definition. Please also note that even if the services were considered separate supplies each supply would also be excluded from the definition of financial services by paragraphs (r.3) to (r.5) and (t).
Paragraph (r.3) clarifies that a service (other than a prescribed service) of managing credit in respect of a credit or charge card or similar payment card, or in respect of a credit, charge or loan account or an account in respect of any advance, where the service is supplied to a person that is granting, or potentially granting, credit is excluded from the definition of "financial service". A service of managing credit includes:
• checking, evaluating or authorizing credit;
• making decisions on behalf of the person in relation to a grant, or an application for a grant of credit;
• creating or maintaining records for the person in relation to a grant, or an application for a grant, of credit or in relation to the cards or accounts; or
• monitoring another person's payment record or dealing with payments made, or to be made, by the other person.
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.
Paragraph (r.5) excludes from the definition of financial service, property (other than a financial instrument or prescribed property) when it is delivered or made available to a person in conjunction with the rendering by the person of a service referred to in any of paragraphs (a) to (i) and (l) of that definition.
Currently, no services are prescribed for the purposes of paragraph (r.3) to (r.5).
Please note that, for purposes of Division IV (i.e. self-assessing tax), paragraphs (r.3) to (r.5) are deemed to have come into force on December 17, 1990.
For additional information on the term "arranging for" and new exclusionary paragraphs (r.3) to (r.5) please refer to GST/HST Technical Information Bulletin, B-105, Changes to the Definition of Financial Service which now replaces GST/HST Policy Statement P-239, Meaning of the Term "Arranging for" as Provided in the Definition of "Financial Service".
Paragraph (t) excludes a prescribed service from the definition of financial service. Section 4 of the Regulations prescribes services for the purposes of paragraph (t). Generally, a prescribed service for this purpose will include the collection and processing of information and any administrative service unless the administrative service relates solely to the making of a payment or the taking of a receipt of dividends, interest, principal, claims, benefits or other amounts. The collection and processing of information or any administrative service will not be a prescribed service if it is supplied with respect to an instrument (e.g., an account) by:
(a) a person at risk,
(b) a person that is closely related to a person at risk, where the recipient of the service is not the person at risk or another person closely related to the person at risk, or
(c) an agent, salesperson or broker who arranges for the issuance, renewal or variation, or the transfer of ownership, of the instrument for a person at risk or a person closely related to the person at risk.
The accounts are FinanceCo's accounts. Based on the Agreement, the risks incurred by the Service Provider are operational risks. Also based on the Agreement, the Service Provider is not an agent, salesperson or broker who arranges for the issuance, renewal or variation, or the transfer of ownership, of the instrument (e.g. an account) for a person at risk.
If you require clarification with respect to any of the issues discussed in this letter, please call me directly at 613-952-9211.
Yours truly,
Hélène Bustamante
Financial Institutions Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate
UNCLASSIFIED
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