5 April 2004 GST/HST Interpretation 50019 - GST New Residential Rental Property Rebate - Section 256.2

Please note that the following document, although correct at the time of issue, may not represent the current position of the Agency. / Veuillez prendre note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'Agence.

Dear XXXXX:

Thank you for your letter XXXXX, your facsimile XXXXX (with attachments), your letter XXXXX, and your availability to respond to my questions on an on-going basis concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to the transaction(s) described below.

Statement of Facts

Our understanding of the facts, the transaction(s), and the purpose of the transaction(s) is as follows:

The XXXXX contracts with external, independent, third party investment professionals (IMs) to manage its funds. Under specific mandates, (i.e. Canadian Fixed Income, International Equity, US Small Capital Equity, etc.) these IMs are given full discretion and authority to manage the XXXXX funds as they see fit. This includes evaluating which securities to purchase, issuing buy orders, monitoring the collection of dividends and/or interest income from these securities, and issuing sell orders when appreciation targets are met or valuations change.

The underlying securities are held by independent, third party custodians who co-ordinate with the managers to monitor and report on transactions made and securities held. I understand from our discussions and e-mails that the custodian holds the funds (securities) in various accounts in the XXXXX name. The funds that are the subject of this request are not held in trust accounts. In order for the IM to be able to effect the transactions within the account, the XXXXX provides the IM with a power of attorney as notification to the custodian of the IM's authority to act on the XXXXX behalf in connection with the investment portfolio (account) under the IM's supervision. It is your position that, pursuant to this power of attorney, the IMs act as agent of the XXXXX. Funds are returned to the XXXXX when required to settle underlying liabilities, disbursements and other operating costs; the IM may not authorize these disbursements from the account. At no time do the IMs hold the funds, they are held at all times by the Custodian. A copy of the XXXXX current Statement of Investment Policies and Goals (SIPG) is included in the submission as is the XXXXX Agreement for the XXXXX, XXXXX, as between XXXXX and the XXXXX.

The XXXXX is charged a management fee by the IMs for the services they have provided, usually calculated as a percentage of the market value of the assets supervised by the IM.

Transaction(s)

The relevant portions of the XXXXX Agreement for the XXXXX, XXXXX, as between XXXXX(XXXXX Agreement) and the XXXXX are as follows:

•   We XXXXX hereby retain you (IM) to act as an investment manager and portfolio manager effective XXXXX, in connection with the investment portfolio in respect of which we will provide you detailed information by that date.

•   ... you will have full discretion as to all investment decisions regarding our investment portfolio under your supervision and you are authorized and required to give instructions to XXXXX... with respect to the purchase, sale, exchange and delivery of securities and cash for our account and disbursements relating thereto. We undertake to promptly notify XXXXX of your authority to act on our behalf in connection with our investment portfolio under your supervision. XXXXX

•   All securities acquired on behalf of the Undersigned XXXXX, either at present or in the future, shall be held for safekeeping with XXXXX ... All securities of the Undersigned shall be registered in the name of the nominee of XXXXX unless otherwise directed by the Undersigned. XXXXX

•   All securities acquired on behalf of the Undersigned shall be purchased out of moneys which the Undersigned may have to its credit in the account maintained on its behalf with XXXXX. All cash balances resulting from the receipts arising from the sale or other disposition of securities held for the Undersigned shall be deposited directly to the said XXXXX for credit to the Undersigned's account. Dividends and other cash payments received in respect of such securities shall be deposited directly to the said XXXXX for credit to the Undersigned's account maintained at XXXXX. XXXXX

•   You will furnish to us quarterly reports of investment portfolio, and advice of each transaction when effected, and a monthly portfolio valuation within 10 working days of the end of each month. XXXXX

•   You are authorized to sign in the name of the Undersigned all declarations, affidavits and certificates of ownership which may be required from time to time in collecting the capital or income receipts for the Undersigned. XXXXX

•   With respect to all securities held for the Undersigned, the voting rights and powers attached thereto shall be exercised by you. Corporate reports need not be forwarded to the Undersigned unless an express request is made therefore in writing. XXXXX

•   In order to avoid unnecessary and disrupting delays in delivery of securities after sale, XXXXX will be furnished with a signed power of attorney which shall be attached to every registered share certificate or other security held for the Undersigned and registered in other than the name of the nominee of XXXXX. XXXXX

•   In performing your obligations hereunder, you shall exercise the degree of care, diligence and skill which a reasonable and prudent XXXXX would exercise in similar circumstances to avoid undue risk of loss and to obtain a reasonable return, you shall at all times act on a basis which is fair and reasonable, and shall exercise your powers and duties hereunder in good faith in accordance with your best judgment provided that neither you or any of your directors, officers, employees and agents shall be liable for any act or omission or error of judgment or for any loss suffered as a consequence of actions taken or omitted except loss suffered as a result of your negligence and/or wilful misconduct.

•   For your service, we will pay you quarterly fees in arrears based on the market value of our investment portfolio under your supervision which will be calculated as set out in XXXXX this Agreement. XXXXX

•   The Undersigned will not hypothecate any of the securities in our investment portfolio under your supervision held by XXXXX without first advising you of our intention to do so. XXXXX

•   XXXXX

According to the SIPG provided XXXXX, the IMs shall:

•   Select securities within each asset class, subject to any applicable legislation and constraints and directives contained in this Statement and in any supplementary document provided by the XXXXX;

•   Provide the XXXXX with monthly portfolio reports of all assets of the Fund and monthly reports of all transactions during the period;

•   Give prompt notice to the Custodian of all purchases, sales and other security transactions;

•   Reconcile all month end cash and security balances with the statements provided by the Custodian;

•   Meet with the XXXXX at least once a year to present their analysis of the investment performance and to describe their current and further investment strategies regarding their specific investment mandate;

•   Be governed by the Code of Ethics and Standards of Professional Conduct of the Association for Investment Management and Research;

•   Provide annually an audited financial statement (including listing of the securities held) for all pooled funds in which the XXXXX has a financial interest.

The relevant portions of the Code of Ethics and Standards of Professional Conduct of the Association for Investment Management and Research are as follows:

Standard IV. Relationships With and Responsibilities to Clients and Prospects

A. Investment Process

A.1 Reasonable Basis and Representations

(a) Exercise diligence and thoroughness in making investment recommendations or in taking investment actions.

(b) Have a reasonable and adequate basis, supported by appropriate research and investigation, for such recommendations or actions.

(c) Make reasonable and diligent efforts to avoid any material misrepresentation in any research report or investment recommendation.

(d) Maintain appropriate records to support the reasonableness of such recommendations or actions.

A.2 Research Reports

Members shall:

(a) Use reasonable judgment regarding the inclusion or exclusion of relevant factors in research reports.

(b) Distinguish between facts and opinion in research reports.

(c) Indicate the basic characteristics of the investment involved when preparing for public distribution a research report that is not directly related to a specific portfolio or client.

...

B.2 Portfolio Investment Recommendations and Actions

Members shall:

(a) Make a reasonable inquiry into a client's financial situation, investment experience, and investment objectives prior to making any investment recommendations and shall update this information as necessary, but no less frequently than annually, to allow the members to adjust their investment recommendations to reflect changed circumstances.

(b) Consider the appropriateness and suitability of investment recommendations or actions for each portfolio or client. In determining appropriateness and suitability, members shall consider applicable relevant factors, including the needs and circumstances of the portfolio or client, the basic characteristics of the investment involved, and the basic characteristics of the total portfolio. Members shall not make a recommendation unless they reasonably determine that the recommendation is suitable to the client's financial situation, investment experience, and investment objectives.

(c) Distinguish between facts and opinions in the presentation of investment recommendations.

(d) Disclose to clients and prospects the basic format and general principles of the investment processes by which securities are selected and portfolios are constructed and shall promptly disclose to clients and prospects and changes that might significantly affect those processes.

Ruling Requested

Whether the investment management services provided by a number of third party service providers to the XXXXX are subject to the GST/HST.

Ruling Given

Based on the facts set out above, and the XXXXX Agreement for the XXXXX, as between XXXXX and the XXXXX, we rule that the services provided are not "financial services" as this term is defined at subsection 123(1) of the Excise Tax Act (ETA). The services are taxable supplies pursuant to the application of subsection 165(1) of the ETA.

This ruling is subject to the general limitations and qualifications outlined in section 1.4 of Chapter 1 of the GST/HST Memoranda Series. We are bound by this ruling provided that none of the above issues is currently under audit, objection, or appeal; that there are no relevant changes in the future to the Excise Tax Act, or to our interpretative policy; and that you have fully described all necessary facts and transaction(s) for which you requested a ruling.

Explanation

In the context of the documents provided, the IMs provide a number of services to the XXXXX. Reference to the CRA's Policy Statement P-077R, would indicate that the IM services are provided as a single composite supply for a single consideration. It is our view that the over-arching purpose of hiring an investment manager relates to the IM's expertise in selecting profitable investment products and determining when to sell or trade these products. The provision of quality investment expertise and advice of the IM makes up the main part of the supply, while record keeping, securities administration (acting as proxy in respect of voting rights attached to securities, etc.), meeting with XXXXX, adhering to the Code of Ethics and Standards of Professional Conduct of the Association for Investment Management and Research, and providing audited financial statements annually for all pooled funds in which the XXXXX has an interest are all important related elements of this supply. Without the IMs' provision of professional investment selection, the other elements of the supply would not be required. For these reasons, it is our view that the supply from the IM to the XXXXX is primarily one of investment advice leading to the activities within the account and the requirement to provide the related reporting activities. The XXXXX Agreement, Code of Ethics and Standards of Professional Conduct of the Association for Investment Management and Research, and the SIPG, support the view that the supply is the on-going selection of investment products and the research and decision-making related to their acquisition and sale with a view to realizing a certain amount of investment revenue annually. The information contained in the above-noted agreements, specifically the terms of the SIPG in relation to the duties of the investment manager and reasons for which an agreement with an investment manager may be terminated, support this determination.

The primary service provided by the investment manager is its expertise in the selection of securities, which is a service other than a financial service set out in paragraphs (a) to (m). The IMs' knowledge of the markets, research into productive investment products and decisions related thereto are key elements of the supply made to the XXXXX. Without this expertise, the other related services provided by the IMs are unnecessary to the operations of the XXXXX accounts, as it is the custodian who, in fact, operates these accounts for the XXXXX. This provision of selection expertise (and the related reconciliation and reporting functions) is not a supply of a "financial service" included in any of paragraphs (a) to (m).

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at 613-952-9262.

Yours truly,

Sheena France
Financial Institutions Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate

2004/04/21 — RITS 50434 — Application of GST/HST to a Contract Engagement