15 March 2006 GST/HST Interpretation 55993 - Application of GST/HST on cash-back amount paid on a vehicle trade-in

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 and various meetings and telephone conversations concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to the Interchange Fees paid by Issuers to Acquirers for Shared Cash Dispensing (SCD) Services.

Statement of Facts

Our understanding of the selected facts you submitted relevant to the GST/HST treatment of the interchange fee is as follows:

1. XXXXX.

2. XXXXX.

3. XXXXX.

4. XXXXX:

XXXXX.

Shared Cash Dispensing ("SCD"), which allows cardholders to access their accounts to withdraw cash at automated banking/teller machines ("ABMs") not belonging to the financial institution that issued their banking card.

5. SCD involves the following functions (the same person may perform more than one function):

•   Issuers. Issuers maintain demand accounts and issue debit, credit or charge cards (the Cards) to their customers, which can be used to access their accounts to withdraw cash at ABMs connected to the XXXXX network. Only financial institutions are eligible to be Issuers.

•   Cardholders. Cardholders are the customers of the Issuers who wish to access their accounts to withdraw cash at ABMs.

•   Acquirers. Acquirers are members of XXXXX who obtain a request message from a Cardholder. The Acquirer may be a financial institution or a non-financial institution.

•   Card Acceptors. Card Acceptors are persons who accept a card issued by an Issuer, facilitate the transmission of transaction data to an Acquirer, and from whose ABMs cash is ultimately dispensed to the Cardholder. In some cases, the Card Acceptor may also be the Acquirer.

6. In a typical SCD transaction, a Cardholder will stand at an ABM that displays an XXXXX logo and request a withdrawal from his/her account by entering certain information including a personal identification number ("PIN"). The transaction message is sent to an Acquirer, who confirms which Issuer (i.e., financial institution) issued the Card. The Acquirer then sends the transaction message XXXXX to the appropriate Issuer. The Issuer receives the transaction message, verifies the PIN and checks to see that funds are available in the Cardholder's account, and then sends a message back XXXXX to the Acquirer either approving or declining the transaction. The Acquirer passes the appropriate instruction back to the Card Acceptor. If the transaction is approved, the Card Acceptor's ABM will dispense the requested funds to the Cardholder and provide a printed record of the transaction.

7. XXXXX.

8. XXXXX.

9. XXXXX .

10. XXXXX.

11. XXXXX:

XXXXX.

12. Where an Acquirer is the Card Acceptor cash is dispensed from the Acquirer's ABM.

13. Where an Acquirer is not the Card Acceptor cash is dispensed from the Card Acceptor's ABM.

14. XXXXX.

15. Authorization of a transaction approved by an Issuer to an Acquirer is done in real time.

16. Cash is dispensed and then the funds are settled. The settlement of funds with respect to cash dispensed from an ABM flow from the Issuer to the Settlement Agent of the Acquirer, rather than from the Issuer to the Card Acceptor. Issuers do not recognize or settle any monies with non-Acquirer ABM owner/operators.

Interpretation Requested

In a SCD transaction, when a client of an Issuer uses an ABM of another financial institution or a non-bank ABM to withdraw money, the Issuer must pay an Interchange Fee to the Acquirer of the transaction. You requested an interpretation as to whether the supply for which the Interchange Fee is consideration is a supply of a financial service for GST/HST purposes.

Interpretation Given

Based on the information provided in your letters mentioned above, XXXXX, our meetings and telephone conversations, we provide the following interpretation as to the application of the GST/HST to the supply for which the Interchange Fee is consideration when paid by an Issuer to an Acquirer, in respect of dispensing cash to a Cardholder. Specifically, whether the supply is a financial service.

Subsection 123(1) of the Excise Tax Act (ETA) defines "financial service", in part, as

(a) the exchange, payment, issue, receipt or transfer of money, whether effected by the exchange of currency, by crediting or debiting accounts or otherwise" ...

(l) the agreeing to provide, or the arranging for, a service referred to in any of paragraphs (a) to (i)".

Where an Acquirer is the Card Acceptor, the service provided by an Acquirer to an Issuer of dispensing cash to a Cardholder is included in paragraph (a) of the definition of "financial service" as the payment, issue or transfer of money.

Where an Acquirer is not the Card Acceptor, the service provided by an Acquirer to an Issuer of dispensing cash to a Cardholder is included in paragraph (l) of the definition of "financial service" as the Acquirer is "agreeing to provide" a service referred to in paragraph (a) of that definition.

Although the service is included in paragraphs (a) to (m) of the definition of "financial service", the application of paragraphs (n) to (t) of the definition exclude certain services and must be considered. The services provided by an Acquirer to an Issuer in respect of a SCD transaction typically involve a mix of financial and administrative elements.

Paragraph (t) of the definition of "financial service" excludes a prescribed service from the definition. Section 4 of the Financial Services GST/HST Regulations (the Regulations) prescribes services for the purpose of paragraph (t). Generally, in these instances, the prescribed services include the collection and processing of information and any administrative service unless the service is supplied with respect to an instrument by a person at risk. The terms "instrument" and "person at risk" are defined in subsection 4(1) of the Regulations. A person is considered a "person at risk" in relation to an instrument pursuant to the Regulations when that person has a chance of incurring a financial loss (liquidity risk). There are a number of possible scenarios where the Acquirer is at risk as a result of dispensing or agreeing to dispense cash pursuant to a Cardholder request and an Issuer's approval of a transaction.

Generally, where an Acquirer is the Card Acceptor, the Acquirer is a "person at risk" in respect of the dispensing of cash to Cardholders pursuant to paragraph 4(3)(a) of the Regulations, since the Acquirer is financially at risk for the period from the time cash is dispensed to a Cardholder to the time funds are settled. As a result, the Acquirer is making a supply of a service that is not excluded as a prescribed service under paragraph (t), of the definition of "financial service".

Where an Acquirer is not the Card Acceptor, the Acquirer is generally a "person at risk" in respect of agreeing to dispense cash to a Cardholder pursuant to paragraph 4(3)(a) of the Regulations, since the Acquirer is financially at risk with respect to an instrument through the settlement process. As a result, the Acquirer is also making a supply of a service that is not excluded as a prescribed service under paragraph (t) of the definition of "financial service" in these circumstances.

A supply of a service described in the definition of "financial service" in paragraphs (a) to (m) that is not excluded by paragraph (n) to (t) is exempt under Section 1 of Part VII of Schedule V to the ETA unless it is zero-rated under Part IX of Schedule VI. XXXXX. Consequently the zero-rating provisions would not be applicable. Supplies of financial services, by an Acquirer to an Issuer under the XXXXX system, for which an Interchange Fee is consideration are exempt supplies of financial services.

It should be noted that, generally, registrants are not eligible to claim input tax credits (ITCs) on inputs relating to supplies of exempt financial services.

The status of any fee paid by an Acquirer to another person, such as a Card Acceptor, will be determined by reference to the relevant agreement between the parties for the supply.

The foregoing comments represent our general views with respect to the subject matter of your letter. Proposed amendments to the Excise Tax Act, if enacted, could have an effect on the interpretation provided herein. These comments are not rulings and, in accordance with the guidelines set out in section 1.4 of Chapter 1 of the GST/HST Memoranda Series, do not bind the Canada Revenue Agency with respect to a particular situation.

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

Yours truly,

Ivan Bastasic
Director
Financial Institution and Real Property Division
Excise and GST/HST Rulings Directorate

2006/04/06 — RITS 57514 — Application of the GST/HST to ABM Services