21 December 1999 GST/HST Ruling 8177/HQR0001783 - Arranging For Services

Dear Sir:

Thank you for your letter of April 27, 1999 (with attachments), concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to the transaction(s) described below.

Statement of Facts

Our understanding of the facts, the transaction(s), and the purpose of the transaction(s) is as follows.

The XXXXX offers credit card services to merchants who accept credit card payments from their customers. Merchants signing up for this service agree to deposit XXXXX credit card sales proceeds into a XXXXX account. The deposit can be made by manually depositing the credit card vouchers at a XXXXX but is usually done by transferring the information electronically to XXXXX using point of sale terminal devices that can be purchased from various suppliers or leased from XXXXX[.] The merchants receive the benefits of immediate deposit into their bank accounts for the amount of the credit card transactions and as long as minimum authorization procedures are met, shelter from any loss experience caused by non-payment by the credit card holder or fraudulent use of the credit cards. For these benefits the merchant pays XXXXX a negotiated percentage of the total credit card proceeds referred to as the "merchant discount rate."

XXXXX has entered into an agreement with a non-related third party corporation, XXXXX to solicit merchants to accept XXXXX card payments and to process these payments through XXXXX[.]

Transaction(s)

Pursuant to an agency agreement entered into between XXXXX and XXXXX on September 15, 1995, XXXXX performs the following functions:

•   attracts merchants for financial services being offered by XXXXX

•   provides merchants with information and promotes financial services

•   negotiates rates with merchants

•   assists in completion of application documentation

•   forwards vetted documents to XXXXX

•   advises merchants if applications accepted or rejected

•   delivers promotional material to accepted merchants

•   responds to enquiries from the merchants

•   is compensated based on the rates it negotiates and the usage of financial services by merchants.

XXXXX is compensated based on the terms of Schedule B of the September 15 agreement. XXXXX is compensated based on the amount of the negotiated discount rate and the total amount of usage. XXXXX also arranges for the rental of the point of sale terminal equipment if the merchant does not own the equipment or does not acquire the equipment from another source. The rental of equipment is not the objective of XXXXX selling effort as this equipment is leased directly or purchased direct by the merchant from the bank. Pursuant to Schedule B of the September 15, 1995 agreement, XXXXX receives no compensation for point of sale terminal rentals.

Ruling Requested

The services provided by XXXXX as listed above in the section titled "Transactions", meet the criteria to be considered exempt financial services pursuant to paragraph (l) of the definition of financial services.

Per your fax of October 21, 1999 and our various discussions of this situation you have provided additional information in respect of the services performed as well as expanding your rationale as to why the services described should be considered as exempt financial services.

You state that there are two additional items that were not made clear in your letter of April 27, 1999. When a merchant agrees with XXXXX to become a XXXXX and accepts the terms negotiated with XXXXX the merchant must open a XXXXX bank account. The bank account is a pre-requisite to becoming a XXXXX XXXXX since the account must be in place before any XXXXX payments can be processed. Technically, therefore, the agreement negotiated by XXXXX with the merchant on XXXXX behalf involves the establishment, operation and maintenance of a bank account. It can be concluded that the fee paid to XXXXX is, in fact, for establishing this account relationship, between the merchant and XXXXX[.] The establishment of the account relationship also involves the provision of a credit facility to the merchant. Once the XXXXX account relationship is established a merchant is entitled to obtain immediate cash for the XXXXX transactions processed by the merchant. This requires a credit facility because there is limited control over the authenticity of the XXXXX transactions as they are processed. The final validation takes place only after the XXXXX bill is sent to a customer and the bill is acknowledged.

You believe these two additional factors not identified earlier, effectively link the "arranging for" services performed by XXXXX to paragraphs (b) and (d) of the definition of a financial service.

Ruling Given

Based on the facts set out above, we rule that the services provided by XXXXX to XXXXX are not exempt financial services and are subject to the GST at the current rate.

On April 1, 1997, the harmonized sales tax (HST) replaced the goods and services tax (GST) and the provincial sales tax (PST) in the three participating provinces of Nova Scotia, New Brunswick and Newfoundland with a harmonized tax rate of 15%. For example, goods that are delivered or made available in a participating province are subject to HST and Goods that are delivered or made available in a participating province are subject to the HST to the extent that they are taxable supplies (which are not zero-rated), tax must be collected at the harmonized rate[.]

This ruling is subject to the general limitations and qualifications outlined in section 1.4 of Chapter 1 of the GST/HST Memoranda Series. We are bound by this ruling provided that none of the above issues is currently under audit, objection, or appeal; that there are no relevant changes in the future to the Excise Tax Act, or to departmental interpretative policy; and that you have fully described all necessary facts and transaction(s) for which you requested a ruling.

Explanation

It is the Department's position that the services in question are taxable because they are substantially all marketing and promotional services, the purpose of which is to expand the number of available locations for XXXXX credit card program. Although there may be components of financial services in the duties performed by XXXXX these appear to be incidental to the overall component of taxable services in the mix.

As per the Agency Agreement the XXXXX has appointed XXXXX as agent on its behalf to sell certain XXXXX merchant services to merchants. Under this agreement XXXXX is required,

2. to perform the following duties:

a) Solicitation: Contact merchants identified within three business days of a referral with a view to selling the services.

b) Fees: Quote fees and service charges for services in accordance with guidelines established by XXXXX may bind XXXXX in respect of fees for the first year of an agreement.

c) Administrative: Arranges for completion of all necessary forms and agreements and forwards these to XXXXX[.] Delivers all point of sale materials which merchants are required to display. Communicates to merchants if XXXXX has approved their application. Responds to all rate reviews requested by merchant within first 12 months of the agreement.

d) Other: Perform such other duties as in connection with the Services as may be reasonably required by XXXXX[.] All of the above noted duties are performed for a single consideration, a fee determined by Schedule "B" of the agreement.

The preponderance of these duties are clearly marketing and promotional services and do not fall within paragraph (l), "arranging for", of the definition of financial services. While some of these duties i.e. arranging for the opening of a bank account, arranging for a "credit facility" may have elements of financial services, i.e. (b) or (d) of the definition, they are qualitatively and quantitatively incidental to the marketing and promotional activities of XXXXX[.] The consideration for these "financial services", if they were billed separately, would have to be more than 50% of the total of all amounts each of which would be the consideration for a service or a property if that service or property were supplied separately, as per subsection 139(d) of the ETA, in order for all the services to be deemed to be financial services. In this case these services do not meet this requirement.

On November 1, 1999, Revenue Canada became the Canada Customs and Revenue Agency (CCRA).

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at 613-952-8811.

Yours truly,

John Nowak
Financial Institutions Unit
Financial Institutions & Real Property Division
GST/HST Rulings and Interpretations Directorate