7 October 2005 GST/HST Interpretation 51783 - Application of the GST/HST to Mutual Fund Redemption Fees

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 letters XXXXX (with attachments) concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to your operations. We apologize for the delay in responding to your enquiry.

Statement of Facts

Our understanding of the facts is as follows:

1. XXXXX is in the XXXXX business of XXXXX managing XXXXX mutual funds in Canada. In addition, XXXXX provides business management and administrative services to other public mutual funds and private accounts.

2. XXXXX is a registrant for GST/HST purposes.

3. A trust holds investor contributions to the XXXXX funds. The XXXXX is the type of agreement used to create and administer the various funds XXXXX (Funds). In accordance with the XXXXX, XXXXX "declares itself trustee of the Funds."

4. XXXXX as Trustee has the ability to either appoint a manager for the Funds or act as Manager for the Funds XXXXX. The XXXXX defines the Manager as the person or corporation that XXXXX.

5. XXXXX also acts as registrar and transfer agent for the Funds.

6. An investor purchasing units from a Fund has two options in relation to dealer sales charges: the "sales charge option" or the "redemption charge option". In accordance with the redemption charge option, the XXXXX will pay to the dealer the sales commission on behalf of the investor and the investor may be required to pay a redemption fee upon the redemption of the units if the units are redeemed within XXXXX years.

7. XXXXX. In general, the Fund is responsible for the costs associated with the issuance and redemptions of units. However, redemption charges XXXXX paid by investors are specifically excluded XXXXX from the operating expenses of the Fund.

8. The sales charges paid by investors are not included in the purchase price of the units, XXXXX:

The purchase price for each unit XXXXX shall be the XXXXX net asset value per unit XXXXX. Any sales charge payable by an investor shall be paid in addition to the purchase price XXXXX.

9. XXXXX the XXXXX describes the charge as follows:

The Manager XXXXX may require unitholders who have purchased units on a deferred sales charge basis to pay a redemption charge XXXXX. ...

The Manager, XXXXX shall withhold the redemption charge or fee from the proceeds payable to the unitholder on the redemption of the units.

XXXXX Manager is entitled to redemption charges that are disclosed to investors.

10. The Fund is involved in processing the redemption of units, and pays the investor the redemption amount XXXXX.

11. XXXXX the XXXXX gives the Trustee the power to appoint a manager. The relationship between the Manager and the Trustee of the Fund is described in a Management Agreement. XXXXX.

12. The main services provided by the Manager under the Management Agreement are as follows:

(a) Management services;

(b) Administration services including, "administrating and managing all redemptions and changes of securities, all distributions to security holders and all investors' service plans XXXXX; and

(c) Investment advisory services.

13. The Manager receives a percentage of the net asset value as a management fee XXXXX. In addition to the management fees the Manager is paid certain operating expenses. However, the Manager is responsible for all dealer compensation programs, "other than the payment of selling commissions on the distribution of securities" XXXXX.

14. XXXXX the Management Agreement describes the Manager's entitlement to the redemption fees XXXXX:

XXXXX.

15. XXXXX.

16. XXXXX.

17. XXXXX.

18. XXXXX.

19. In general, the Manager manages the public offering of the Fund's units. The Manager has the discretion to provide for sales charges and redemption charges to facilitate the sale of units XXXXX:

XXXXX:

XXXXX; or

XXXXX.

20. The public offering of units described in the XXXXX is achieved by using a simplified prospectus.

21. XXXXX. These XXXXX recognize that the investor is required to pay the redemption fee. These XXXXX do not clearly indicate who is entitled to receive the redemption fee paid by the investor XXXXX.

22. The investor's obligation to pay the redemption charge to XXXXX is recognized in the XXXXX Application form used by investors XXXXX. XXXXX:

XXXXX.

Interpretation Requested

Whether the investor pays the "redemption fee" as consideration for an exempt supply of a "financial service" as referred to in the definition of "financial service" found in subsection 123(1) of the Excise Tax Act (ETA).

Interpretation Given

Based on the information provided, it is our view that the investor pays the "redemption fee" to the Manager as consideration for a supply of a "financial service" as referred to in the definition of "financial service" found in subsection 123(1) of the ETA.

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, Goods and Services Tax Rulings, 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.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 952-9210.

Yours truly,

Dawn Weisberg
Manager
Financial Institutions Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate

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