GST/HST Rulings and Interpretations
Directorate
Place Vanier, Tower C, 10th Floor
25 McArthur Road
Vanier, Ontario
XXXXX K1A 0L5
|
XXXXX
|
Case: HQR0000879
XXXXX File: 11590-8
|
|
Subject:
|
GST/HST INTERPRETATION
Application of the GST to Surrender Charges
|
Dear XXXXX
Thank you for your memorandum of September 25, 1997 regarding the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to surrender charges levied by the XXXXX . As we agreed, we delayed providing our reply to you pending a review of the correspondence submitted by the XXXXX representative.
I understand that the XXXXX is a fraternal benefit society which provides insurance policies as regulated by the provincial legislation of the provinces in which it operates. Through its insurance agents, the XXXXX provides units in the XXXXX
The XXXXX has filed a Notice of Objection (NOO) with respect to surrender charges and other matters. In their NOO, the XXXXX did not indicate their rationale for considering the supply of the surrender service to be exempt from the GST.
On May 14, 1998, the XXXXX representative, XXXXX wrote to you advising that when units in the segregated fund are cancelled the proceeds are credited to the unit holders who are then debited for the surrender charges. XXXXX position is that it is the unit holder who is bearing the cost of the surrender charges for services being provided to them. XXXXX concludes that the surrender charges are for services falling within the definition of financial services. Specifically, he quotes paragraph (d) of the definition of financial service in addition to the service of arranging for as provided in paragraph (l) of the same definition.
On May 27, 1998, you advised me that you spoke with the auditor who had issued the assessment to the XXXXX The auditor advised you that the amounts assessed were amounts that were deducted from the segregated fund. He further explained that these deductions were identified in the corporate accounting records of the XXXXX as being taken from the segregated fund.
Interpretation Requested
What is the tax status of the supply of the surrender service where the consideration for the service is taken from the segregated fund?
Interpretation Given
The supply of the surrender service is subject to the GST at a rate of 7%.
Analysis
In your memorandum you state that the surrender charges are levied by the registrant XXXXX to the unit holder in consideration of the unit holder receiving the right to liquidate all or part of their investment in the fund prior to the maturity date. You further state that this does not appear to constitute consideration for a service rendered to and paid for by the fund; rather, the unit holder initiates this "service" by signing a written request for surrender and the unit holder in essence pays for this right in the form of reduced proceeds from the investment. You conclude that in this case, the literature supports the position that the fee is with respect to an agreement between the registrant and the unit holder, and not the fund, and as such, the surrender charge does not fall within paragraph (q) of the definition of "financial service" in subsection 123(1) of the Excise Tax Act (the "Act").
As we discussed during our telephone conversations, we cannot agree that the surrender charge constitutes consideration for the unit holder receiving the right to liquidate all or part of their investment in the fund prior to the maturity date. We take this position since the right to liquidate all or part of the investment is always available to the unit holder. With respect to whom the service is supplied, the definition of recipient in subsection 123(1) of the Act states that the person who is liable to pay the consideration is the recipient of the supply of the property or service. In this case, it is the segregated fund that is liable to pay the consideration since the consideration for the surrender service is deducted from the segregated fund. As the Act defines a segregated fund to be a trust that is a separate person from the insurer, the segregated fund is the recipient of the supply of the surrender service. The surrender service provided to the trust is excluded from the definition of "financial service" pursuant to paragraph (q) of that definition. Therefore, the supply of the surrender service is subject to the GST at a rate of 7% pursuant to subsection 165(1) of the Act.
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 & Real Property Division
GST/HST Rulings and Interpretations Directorate
Legislative References: ss. 123(1) definition of "financial service" and "recipient", s. 131
Email this Content