15 December 1998 GST/HST Interpretation HQR0001415 - Application of the GST/HST to Management Fees Charged to

Dear XXXXX

I refer to your facsimile and email messages of October 30, 1998 regarding the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to investment management services provided by XXXXX with respect to XXXXX (the "Plan").

During our telephone conversations regarding this matter, you advised that the original contract was between XXXXX and XXXXX[.] I understand that XXXXX now has responsibility for products originally supplied by XXXXX[.] You also advised that the original contracts are not available for review, however, you still request our comments based upon the information that was obtained.

Statement of Facts

Our understanding of the facts is as follows:

•   XXXXX is funded through a contract for insurance. The contract for insurance includes various segregated funds.

•   Investment management fees (IMFs) are charged by XXXXX for the management of the assets that make up a particular fund. The fees cover the following:

•   transaction cost when buying or selling a security

•   legal and registration fees incurred when arranging a mortgage

•   default risk on bonds and mortgages to cover those instances where payee defaults

•   administrative costs of managing the funds

•   profit to the investment management company

•   Each policy has one of two types of IMFs that are charged under that policy:

•   the IMFs are built into the rates or unit value - IMF included

•   the IMFs are calculated on a monthly basis are charged to the plan - IMF separate.

•   Under XXXXX the IMF is charged to the plan. Units are sold with the proceeds applied to the amount of XXXXX[.]

•   The chairperson of the Plan receives a summary of transactions that identifies the dollar amount attributed to the IMF and the number of units that were deducted from the plan.

Issue

Who is the recipient of the supply of the investment management service? If the recipient is XXXXX XXXXX[.]

Response

The recipient of the supply is the segregated fund and not XXXXX[.] The supply of the investment management service is subject to the GST at a rate of 7%.

Analysis

Section 131 of the Excise Tax Act (the "Act") provides:

For the purposes of this Part, a segregated fund of an insurer shall be deemed to be a trust that is a separate person from the insurer and that does not deal at arm's length with the insurer and

(a) the insurer shall be deemed to be a trustee of that trust; and

(b) the activities of the segregated fund shall be deemed to be activities of the trust and not activities of the insurer.

In this case, the IMF is paid through the sale of units from the segregated fund. The amount charged to and paid by the segregated fund is for services provided to the segregated fund. Given that the Act defines a segregated fund to be a trust that is a separate person, the segregated fund is the recipient of the supply of the investment management service. Therefore, the Indian exemption is not applicable to this situation.

The investment management service is excluded from the definition of financial service pursuant to paragraph 123(1)(q) of that definition. The supply of the investment management service is subject to the GST at a rate of 7%.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 957-8222.

Yours truly,

Tim A. Krawchuk
Rulings Officer
Financial Institutions Unit
Financial Institutions and Real Property Division
GST/HST Rulings and Interpretations Directorate