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XXXXX
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File: 11590-5
XXXXX
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This is in reply to your memo of June 25 ,1996 concerning the tax status of certain "processing fee" charged by XXXXX XXXXX. XXXXX[.]
Facts:
The facts of the situation, as described by XXXXX representative, are as follows:
• A shopper at aXXXXX will pay for his/her purchases using the XXXXX credit card[.]
• The XXXXX obtains authorization for the charge from XXXXX (a financial institution) and accepts the voucher, and passes on the voucher to XXXXX The voucher amount is applied by XXXXX to the XXXXX account with XXXXX (e.g. used to off set its merchandise purchases from XXXXX[.]
• The voucher is passed on to XXXXX by XXXXX for payment. The voucher amount is applied by XXXXX to XXXXX account with XXXXX[.]
• XXXXX receives payment for the voucher amount from XXXXX and applies this amount to its account with the XXXXX, and it also charges the XXXXX a specific processing fee.
In a telephone conversation with Phil Tang of my staff, you advise that you are not able to secure any agreement between XXXXX and the XXXXX covering the charge of the processing fee by XXXXX[.] You also indicate that XXXXX cannot be said to be "at risk" in respect of the vouchers since it does not acquire ownership of the vouchers. (Page 4 of XXXXX letter states that XXXXX customer XXXXX ultimately assumes the risk on the XXXXX charges. If the charges are not valid XXXXX will be required to collect these amounts from its customer.
XXXXX Position (Letter dated XXXXX 26, 1996):
(i) The service supplied by XXXXX to the XXXXX is a financial service. XXXXX service is "to allow the shoppers at its customers' place of business to pay for their merchandise by using a XXXXX account that XXXXX is responsible for maintaining. There is a transfer of money in the form of a debt security from the shopper to XXXXX who in turn credits the customers' accounts for the amount of the purchase". This service would be included in paragraph (a) or (d) of the financial service definition in the Excise Tax Act (the "Act"). Also, this service would not fall under subsection 4(2) of the Financial Services (GST) Regulations because the service is "an exchange or transfer of money" from the shopper to XXXXX subsection 4(2) would only apply where the conditions of paragraph (a) or (b) would be met.
(ii) In the event that the service charge by XXXXX is not considered to be for a financial service, the charge is exempt under section 178 of the Act as XXXXX would be considered to be acting as agent in "collecting the money" from XXXXX for the XXXXX[.]
Our Comments:
Based on the information provided and your assertion that XXXXX is not at risk as it does not acquire ownership of the vouchers, it is our view that the processing fee charged by XXXXX against the XXXXX is consideration for a processing/collection service. This service does not qualify as a "financial service" as defined in the Act. Our view is based on the following:
• The amount (processing fee) charged by XXXXX is not for "allowing the shoppers to pay for their merchandise by using a XXXXX account that XXXXX is maintaining" (as alleged by XXXXX In our view, XXXXX is not maintaining the XXXXX account for (the benefit of) the XXXXX, and it is not providing this service of maintaining the XXXXX account to the XXXXX.
It is our view that XXXXX is keeping the account for its own benefit. XXXXX may apply the voucher amount collected from XXXXX to its trade receivable accounts with the XXXXX for its own operational use. Based on the information provided, the true nature of the transaction, in our view, is that the XXXXX hands over the credit card voucher to XXXXX and asks XXXXX to collect the voucher amount for it from XXXXX (since XXXXX has an agreement and an account with XXXXX[).] Keeping an account with XXXXX or an account with the XXXXX is only a part of its own operational activities. It is not a service provided to the XXXXX - XXXXX cannot be said to be providing the service of "an exchange or transfer of money" to the XXXXX (though a credit card voucher may qualify as "money" for GST purposes). Again, the nature of the arrangement is that XXXXX is engaged by the XXXXX to "collect the voucher amount" from XXXXX[.] Though, to provide this debt collection service, XXXXX must take the voucher from the XXXXX and bring it to XXXXX for payment; it may also receive the money from XXXXX as payment for the voucher amount. However, it would not be correct to say that XXXXX is merely providing the service of accepting the voucher or receiving the money for the XXXXX. XXXXX collection service clearly goes beyond the mere taking of the voucher from the XXXXX or receiving an amount from XXXXX - XXXXX is not a person "at risk" as defined in the Financial Services Regulations; and it is also not "an agent salesperson or broker who transfers ownership of the instrument for a person at risk" as described in the Regulations. Hence, even if its collection service qualified as a financial service under paragraph (a) or (f) of the financial service definition, such a service would still be excluded from the definition under paragraph (t) by virtue of the Financial Services Regulations.
• We do not think that section 178 of the Act would be of much help to XXXXX in this circumstance. This section only applies where a person incurs an expense in the making of a supply of a service to a recipient and is reimbursed for such expense by the recipient. As a general rule, the reimbursed amount is treated as being part of the consideration for the supply of the service. Since the collection service supplied by XXXXX is a taxable service, any reimbursed amount would be treated as part consideration for the collection service, and subject to GST. Further, this section will have application only if the expense was not incurred by the person as agent of the recipient. (Page 4 of XXXXX letter states that an agency relationship exists between XXXXX and the XXXXX).
In conclusion, it is always our position that the service of collection of debts on behalf of another person will not qualify as a financial service, and accordingly is a taxable supply. This position is supported by the Department of Finance Press Release issued on August 20, 1990.
We trust our comments above will be of assistance to you in preparing a reply to XXXXX[.] Should you wish to discuss the file further please do not hesitate to contact Duncan Jones at (613) 952-9210 or Phil Tang at (613) 954-1433.
J. Sitka
A/Director
Financial Institutions and Real Property Division
GST Rulings and Interpretations
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