1 February 2007 GST/HST Interpretation 62393 - GST/HST Memoranda Series 4.3, Basic Groceries

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 concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to the brokering of physical commodities by an XXXXX intermediary (Company X). We apologize for the delay in our response.

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

You have advised that Company X is an XXXXX intermediary that brokers physical and financial products for the North American XXXXX markets. In the sample Broker Services Agreement (the "Agreement") provided, it indicates that the broker, Company X, is in the business of providing services that include the identification of parties able to enter into physical or financial transactions (Contracts) with the Customer. The Agreement also contains provisions concerning the customer's obligation to pay the XXXXX. Company X's customers are financial institutions and large XXXXX producers, wholesalers and marketers that may be on either the "buy" or "sell" side of a particular transaction. Company X acts as agent for both parties to a particular transaction.

It is our understanding that under a Contract the seller commits to sell and to deliver the product XXXXX at a specified date for a specified rate and the buyer has an obligation to buy the XXXXX. You have indicated that a Contract may be settled by the provision of the actual XXXXX or payment of money. Contracts that are settled by the payment of money are usually purchased and sold by XXXXX providers and users wishing to offset risk of future XXXXX price movements. The two parties determine the manner of settlement of a particular Contract before the end of the period of the contract. A sample of a Contract between the two parties was not provided.

Company X only brokers "over-the-counter" (OTC) Contracts directly between the trade counter parties. These Contracts are not traded on a recognized commodity exchange.

You have described the steps taken by Company X in a typical transaction as follows:

1. A customer (buyer) that wishes to acquire the right to a specified number of units of XXXXX at a given price will contact Company X. Company X will find a seller who meets the buyer's conditions and bring the parties together.

2. Alternatively, a seller may contact Company X and offer a fixed rate of XXXXX units or derivatives thereof and ask Company X to find a buyer.

3. Once the terms have been met for a particular transaction, the counterparty information is passed on. Company X, as agent for both parties, executes the trade by passing the information to each party verbally and summarizes the transaction with an e-mailed trade confirmation.

4. The trade confirmation identifies:

•   The underlying product;

•   The deal type;

•   The description i.e., what the buyer pays and receives;

•   Seller and Buyer information, including commission rate; and

•   The party that executes the trade (i.e., the individual broker).

5. The passing of the counterparty information commits both parties to complete the trade. Company X sends monthly invoices to its customers.

Each Contract, whether by oral or written communication, is promptly confirmed by Company X in the form of a confirmation letter.

Interpretation Requested

You would like to know if the XXXXX brokering services provided by Company X, as described above, are subject to GST.

Interpretation Given

Services provided by an intermediary are generally taxable for purposes of the GST/HST unless there is a specific exempting provision. Supplies of financial services are generally exempt and are defined in subsection 123(1). The definition of "financial service" includes, under paragraph (l), "the agreeing to provide, or the arranging for, a service referred to in any of paragraphs (a) to (i)" of the definition. For more information on the meaning of the term "arranging for", please refer to GST/HST Policy Statement P-239 Meaning of the Term "arranging for" as Provided in the Definition of "Financial Service". To determine if Company X is "arranging for" a financial service, it is also necessary to examine the supply under a Contract to determine if a financial service is being provided between the parties of a particular Contract.

Paragraph (d) of the financial service definition includes "the issue, granting, allotment, acceptance, endorsement, renewal, processing, variation, transfer of ownership or repayment of a financial instrument". If one of the parties to a particular Contract was issuing, accepting, renewing, etc., a financial instrument, a supply of a financial service would be considered to be made under the Contract.

Subsection 123(1) defines "financial instrument" to mean:

(a) a debt security,

(b) an equity security,

(c) an insurance policy,

(d) an interest in a partnership, a trust or the estate of a deceased individual, or any right in respect of such an interest,

(e) a precious metal,

(f) an option or a contract for the future supply of a commodity, where the option or contract is traded on a recognized commodity exchange,

(g) a prescribed instrument,

(h) a guarantee, an acceptance or an indemnity in respect of anything described in paragraph (a), (b), (d), (e) or (g), or

(i) an option or a contract for the future supply of money or anything described in any of paragraphs (a) to (h);

An option or a contract for the future supply of a commodity, where the option or contract is traded on a recognized commodity exchange is a financial instrument under paragraph (f) of the definition. The Contracts brokered by Company X to buy or sell a commodity at a certain time in the future for a specified price are not traded on a recognized commodity exchange. Thus, paragraph (f) of the definition of financial instrument does not apply to these Contracts brokered by Company X.

A debt security (generally a right to be paid money) and an option or a contract for the future supply of money are also financial instruments under paragraphs (a) and (i) respectively of the definition. If under a contract a party agrees to buy the underlying asset on a specified date for a specified price, the other party agrees to sell the underlying asset on the same date for the same price and the contract only contemplates settlement by the payment of money, the supply could be a financial service. This supply would generally be exempt. The Contracts brokered by Company X do not only contemplate settlement by the payment of money as they may be settled by the provision of the physical commodity instead. As a result, we cannot conclude that the Contracts meet the criteria of either paragraphs (a) or (i) of the definition of financial instrument.

Where a Contract is not a financial instrument for GST/HST purposes, the parties to the Contract cannot be considered to be making supplies of financial services when the Contract is issued, accepted, etc. As a result, Company X would not be making a supply of "arranging for" a financial service between the two parties (as defined in paragraph (l) of the definition of financial service). Since no other paragraphs of the financial services definition appear to apply, Company X would not be supplying a financial service to the two parties to a Contract when it brokers a Contract between them.

Therefore, the XXXXX brokering services provided by Company X would be taxable supplies and GST/HST would generally be applicable to the consideration for these supplies.

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, Excise and GST/HST Rulings and Interpretations Service, 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 613-952-9577.

Yours truly,

Kirk Moore
Financial Institutions Unit
Financial Institutions & Real Property Division
Excise and GST/HST Rulings Directorate

2007/02/09 — RITS 76905 — XXXXX Music Cards