12 November 1998 GST/HST Interpretation HQR0001392 - Administration Services Provided to Mutual Fund Sales Associates

Dear XXXXX

I refer to your e-mail message of October 14, 1998, requesting that I review your draft reply to XXXXX[.] As your draft reply referred to specific contracts, I requested that these documents be forwarded to me in order that I may provide a more detailed reply to you. These documents were received via facsimile on October 15, 1998 and consist of an agreement between XXXXX[.]

Statement of Facts

Our understanding of the facts is as follows:

•   XXXXX is a registered mutual fund dealer with approximately XXXXX sales associates that solicit applications for the purchase of mutual fund securities, life and disability plans and other securities or financial products.

•   XXXXX is the manager and trustee of certain mutual funds.

•   XXXXX has retained XXXXX as transfer agent of the mutual funds managed by XXXXX[.] Pursuant to the Broker/Dealer Service Agreement XXXXX (the "Broker") authorizes and directs XXXXX upon receipt of a wire order instructing XXXXX to redeem or purchase any securities of mutual funds managed by XXXXX registered in the name of the Broker and upon receipt of a copy of the Net Settlement Report signed by an authorized officer of the Broker to redeem or purchase any such securities referred to therein without any other documentation or authorization.

•   Upon completion of the processing of the redemptions and purchases referred to in the wire order and the Net Settlement Report, where net proceeds of all redemptions less any applicable redemption fees exceed purchases, a cheque for settlement will be forwarded to the Broker.

•   If purchases exceed the net proceeds of all redemptions (including applicable redemption fees), a cheque for settlement of the net amount will be forwarded to XXXXX and will be payable to XXXXX[.]

•   Net Settlements cannot be used for the redemption of securities registered in the clients name.

•   The agreement between XXXXX (the "Broker") and the sales associate (the "Associate") includes:

•   The Broker hereby appoints the Associate to solicit applications for the purchase of: Mutual Fund Securities; other Investment Products; Life and Disability Insurance Plans, for which the Broker may now or hereafter act as distributor.

•   The Associate shall, in the conduct of his/her business, pay all the costs and expenses arising out of his/her business. He/She shall not have any authority, or power, to bind the Broker and shall not hold out to anyone that he/she has such authority.

•   Application for the purchase of Mutual Fund Securities; other Investment Products; Life and Disability Insurance Plans shall be subject to acceptance by the Broker. The Associate shall promptly report and remit to the Broker all monies received by him/her on account of the purchase of Mutual Fund Securities; other Investment Products; Life and Disability Insurance Plans and, in the event of his/her failure to do so, all his/her rights hereunder, including accrued commissions, shall forthwith terminate.

•   While this agreement remains in force, the Broker shall pay to the Associate commissions in accordance with the Commission Schedule in full satisfaction of all claims to remuneration by him/her. Such commission shall be payable only upon receipt by the Broker of full payment in cash for Securities, other Investments and Life and Disability Plans sold by him/her. Payments, if any, made by the Broker to the Associate or for his/her account in excess of commissions so payable, shall be deemed an advance against future commissions. The amount of such excess shall, in any event, be due and payable to the Broker upon the termination of this Agreement. The Broker shall have the right at all times to set off the amount of any such excess against any amounts howsoever due or payable by the Broker to the Associate.

•   Schedule 1 to the Agreement between XXXXX and the Associate is a "Commission Schedule" which includes:

•   The commission schedule set out hereunder is predicated on the Dealer Agreement that XXXXX (Herein referred to as the "Dealer") has with each of the Mutual Fund Companies; other Investment Companies; Life and Disability Companies that they represent.

•   Commission is hereby defined as all gross revenue paid to the Dealer from the Mutual Fund Companies; other Investment Companies; Life and Disability Companies that is attributed to the Associate. This includes all initial commissions paid at the time of the sale and all service fees and renewal fees.

•   Under Option 2, the commission payable to the Associate will be 100% of the commission received by the Dealer on sales attributed to the Associate. In this case, the Associate agrees to pay the Dealer the sum of XXXXX per month as the Administration Fee (the "Fee") for administering the Associates' sales orders and collecting and distributing the commission on the same. The Associate agrees that the Fee is for monitoring and administering product sales only and does not cover other office expenses including, but not limited to, rent, secretarial, photocopying, telephone, business cards, mail and courier costs. The costs for such items is to be borne by the Associate. An extra fee may be levied if a problem arises that results in excessive processing time and is not the fault of the Dealer.

In a facsimile message dated November 25, 1997, XXXXX further explained the services provided to the "agents" as being required under XXXXX[.] He indicates that the service consists of:

•   XXXXX must review each transaction to ensure that it meets the requirements of XXXXX as well as the stated investment requirement of the investor.

•   XXXXX must maintain copies of all sales related paperwork containing investors signature in a prescribed format for each agent.

•   Processing sales orders to the mutual fund companies, receiving commissions from the fund companies and disbursing commissions to the agents.

XXXXX prescribed individual daily sales blotters for each agent's transactions.

XXXXX concludes his facsimile message by stating that since the services rendered relate to protecting the investor from inappropriate investments and part of the financial service of "arranging for" and administering the transfer of ownership of a financial instrument, the services would constitute an exempt supply under paragraph 123(1)(l) of the definition of financial service in the Excise Tax Act (the "Act").

Issue

What is the tax status of the service provided by XXXXX to the agent/associate?

Response

The service provided by XXXXX to the agent/associate is subject to the GST at a rate of 7%.

Analysis

The service provided by XXXXX to the Associate is an administrative service consisting of the processing and filing of documents pertaining to the redemption and purchase of mutual fund securities and other financial products and the collection and distribution of commissions. The service does not fall within paragraph 123(1)(l) of the definition of financial service in the Act. XXXXX is not "arranging for" a financial service, rather it is providing a taxable administrative service to the Associate. Pursuant to subsection 165(1) of the Act, the supply of the service by XXXXX to the Associate 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 957-8222.

Yours truly,

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