30 January 1997 GST/HST Interpretation 11595-2 - Tax Status of the Service of "Arranging For" Swap Transactions

This is in reply to your memo of October 23, 1996 concerning the tax status of certain services provided by XXXXX to its XXXXX parent company, XXXXX[.]

Facts:

Our understanding of the facts of this case is as follows:

•   Ltd. is a newly incorporated Canadian subsidiary of Inc.

•   Ltd. is in the business of "arranging for" swap transactions between Inc. and unrelated Canadian entities. Ltd. is not involved in (swap contract) transactions or funding, but it simply "links up" a perspective Canadian business partner with Inc.

•   Ltd is compensated for its efforts on a "cost plus" basis from Inc.

•   Another Canadian subsidiary of Inc. will provide administrative services to Ltd within Canada.

•   XXXXX provides the following analysis that Ltd.'s supply is zero rated. Hence, Ltd. does not need to collect tax on its supply, but it is eligible to claim input tax credits on tax paid in making the supply.

•   The swap transaction is a financial service, and Ltd.'s services fall within paragraph (l) of the financial service definition of the Excise Tax Act (the "Act").

•   Ltd. is a financial institution under paragraph 149(1)(b) of the Act.

•   Inc. is a non resident and is not registered for GST purposes.

•   Ltd.'s supply qualifies as a zero rated supply under Part IX of Schedule VI of the Act.

Our Comments:

Swap transactions (of payment obligations) are used to hedge against changing prices of the underlying property or financial instrument. It is our understanding that a swap is a bilateral agreement, frequently between a commercial entity involved with commodities or subject to interest rate, currency, or equity price fluctuation, and a financial intermediary, whereby cash payments are exchanged periodically between the parties based upon changes in the prices of the underlying assets or index as determined by an agreed upon formula. Hence, a swap transaction can be viewed as an agreement to pay an amount between the parties concerned. TIB B-[0]60 provides that an "interest rate swap" transaction which provides for the exchange of interest rate payments (fixed versus floating) qualifies as a financial service under subsection 123(1) of the Act.

On the basis of the above, a person who "arranges for" the entering into such as a swap transaction between two parties will be considered as providing a financial service by virtue of paragraph (l) of the financial service definition of the Act.

However, in the case at hand we are not able to determine if the services provided by Ltd. of "linking up" a perspective Canadian business partner with Inc. can qualify as the services of "arranging for" the supply of a financial service (swap transaction) as described in paragraph (l) of the financial service definition without the details of the responsibilities and obligations of Ltd pursuant to any agreement. The term "arranging for" is not defined in the Act. It is our position that the service of "arranging for" the supply of a financial service (such as the swap transaction) generally refers to the activities of an intermediary, such as a broker, a salesperson or a dealer, of bringing together in an active manner two parties (a supplier and a recipient of the financial service) for the supply of the financial service by one party to the other. In Policy Statement P-092, the Department has expressed the view that, in the context of a group insurance policy, the term should apply to "services provided by licensed insurance brokers directly to the buyer or the seller with the view of bringing them together to transact..... where a clear nexus between their activities and the provision of the insurance policy can be established". The activities of referring or introducing one party to the other for the supply of a financial service will not be an "arranging for" service. An advertising service or a marketing service will also not qualify as an "arranging for" service.

Hence, whether Ltd.'s service can qualify as an "arranging for" service" can only be determined based on a detailed review of the Ltd.'s activities/responsibilities in this matter. (e.g. a review of the any contractual agreement between Ltd. and Inc.)

In the event that Ltd.'s responsibilities and obligation did qualify as an "arranging for" service as discussed above, Ltd. would be considered as providing a "financial service" to Inc. under paragraph (l) of the financial service definition. Under this circumstance, and provided that Ltd. qualifies as a financial institution under the Act, we would agree that the supply of Ltd.'s service to Inc., a non resident, would qualify as a zero rated supply by virtue of section 1 Part IX, Schedule VI of the Act, and the exceptions contained therein would not apply.

We trust our comments will be of assistance to you in preparing your reply to XXXXX. Should you wish to discuss this case further, please do not hesitate to contact the undersigned.

Phil Tang
Rulings Officer
Financial Institutions and Real Property Division
GST Rulings and Interpretations