25 August 1998 GST/HST Ruling HQR0001269 - REQUEST Tax Status of Trailer Fees in Conjunction with Advance Income Tax Ruling

                                                                        Case: HQR0001269
File: 11590-5

Dear XXXXX

Thank you for your letter of July 22, 1998, concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to the proposed transactions described below.

Statement of Facts

Our understanding of the facts, the proposed transactions, and the purpose of the proposed transaction(s) is as follows:

1. The XXXXX (the "Trustee") is a corporation incorporated under the laws of Canada, and registered and licensed under the laws of Canada to carry on the business of a trust company.

2. XXXXX is a corporation incorporated under the laws of Canada, and is a directly held wholly-owned subsidiary of the Trustee.

3. For reasons noted below, XXXXX wishes to make available to its investors investment opportunities in third party mutual funds via its current trust arrangements (the "Trusts" that support group RRSP's, DPSP's and EPSP's). The legal unit holder of record for the Trust assets will be the Trustee.

4. The assets of each Trust are held in trust for Investors, and reports of investment results are made to Investors, by the Trustee. The investment activities of each Trust are managed by XXXXX except for third party mutual funds, which will be managed by third party mutual fund managers.

5. In the case of certain Investors which are registered pension plans ("RPPs"), registered retirement savings plans ("RRSPs") or deferred profit sharing plans ("DPSPs") (collectively, "Plans"), the Trustee also acts as the administrator thereof.

6. In exchange for selling these third party mutual fund investments to its Investors, XXXXX will receive a trailer fee, i.e. regular payments from the third party fund managers for the ongoing service to be provided to investor accounts.

7. XXXXX proposes to share the trailer fee with the investors by allocating the participant accounts with their share of the trailer fee for reinvestment in additional mutual fund units. The purpose of which is to create pricing flexibility with the third party mutual fund investments where it does not exist via the prospectus and money manager directly. It is anticipated that the trailer fee sharing distributions would occur on a quarterly basis.

8. The interest of all Investors would continue to be described by reference to units of the Trust, with the primary income allocation made pro rata based upon the investors' respective holdings of such units as outlined above.

9. Neither the Plan Administration Fee nor any other aspect of the legal relationship between the Trustee and the Plans would be altered by the proposed arrangement.

Ruling Requested

You have requested that we confirm the following rulings. Please note that we will only itemize the ruling requested with respect to the ETA.

Rulings (i) to (vi) and (viii) - Income Tax Act ruling (vii)

The trailer fee allocation is a return earned by the investor from investment of its assets, it should be regarded as a GST exempt transaction dealing with financial instruments.

Ruling Given

Section 1.4 of the GST/HST Memoranda Series issued by Revenue Canada sets out the limitations and qualifications necessary for the Department to provide an advance ruling. Since your request relates to a hypothetical situation, we cannot provide an advance ruling. However, as discussed and agreed with you, we will provide an interpretation based on the facts provided.

Interpretation Given

The mutual fund trailer fee is consideration for the supply of an exempt financial service and is not subject to GST/HST. Enclosed is a copy of Policy Statement P-119 - "Trailer Commission Servicing Fees" discusses the Department's position with respect to the GST/HST treatment of mutual funds servicing fees paid by fund managers to investment dealers.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 952-9577 or Duncan Jones at (613) 952-9210.

Yours truly,

Marilena Guerra
Rulings Officer
Financial Institutions and Real Property Division
GST/HST Rulings and Interpretations Directorate
Policy and Legislation Branch