5 April 2006 GST/HST Interpretation 60463 - Application of GST/HST on Vehicle "Trade-ins"

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 Sir/Madam:

Thank you for your letter XXXXX sent to us by XXXXX, which provided information on the activities of acquirers and in which you expressed concerns regarding the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to automated banking machine (ABM) services as set out in GST/HST Info Sheet G-006, ABM Services issued in September 2004.

As you are aware, subsequent to the publication of the Info Sheet, the Canada Revenue Agency (CRA) undertook a review of its position on the application of the GST/HST to supplies for which the interchange fee is consideration and to supplies involving the dispensing of cash for which the consideration is derived from the interchange fee.

We would like to advise you that as a result of our review, we are currently revising GST/HST Info Sheet G-006. In addition, we are providing the following interpretation that reflects our revised position regarding the application of the GST/HST to Interchange Fees paid by Issuers to Acquirers. We trust that given our revised position, the other issues outlined in your letter will no longer be a concern.

All legislative references are to the Excise Tax Act (ETA) and the regulations therein, unless otherwise specified.

Statement of Facts

Based on information that we have been provided with respect to our review, the following is our understanding of the facts:

1. Shared Cash Dispensing (SCD) 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.

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

•   Issuers. Issuers maintain 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 a network XXXXX. 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 the network 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.

3. In a typical SCD transaction, a Cardholder will stand at an ABM that displays a network logo XXXXX 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 across the network 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 across the network 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.

4. XXXXX:

XXXXX

5. The Interchange Fee is not paid for unsuccessful transactions nor where the Cardholder declines to accept the surcharge, even though the transaction has been approved by the Issuer and funds are available for dispensing.

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

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

8. XXXXX.

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

10. 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 Given

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 service 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. The zero-rating provisions in section 1 of Part IX of Schedule VI will only apply where the Issuer is a non-resident, the Acquirer is a financial institution, and the exclusions set out in paragraphs (a) to (e) of that section do not apply. Therefore, where section 1 of Part IX of Schedule VI does not apply, supplies of financial services by an Acquirer to an Issuer 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 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.

If you require clarification with respect to any of the issues discussed in this letter, please call me directly at (613) 952-9210.

Yours truly,

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

2006/02/23 — RITS 61456 — Application of GST to Complimentaries