27 October 1999 GST/HST Interpretation HQR0001895 - GST/HST Status of Certain Supplies Made by Suppliers of Mergers and Acquisition Services

Dear XXXXX

Thank you for your letter of July 22, 1999 concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to certain supplies made by suppliers of merger and acquisition services to their customers.

Our understanding of the background and facts is as follows:

•   Technical Information Bulletin B-063 lists Merger and Acquisition Fees as a taxable item and describes them as: "Clients are provided with professional advice and research in the course of a contemplated merger or acquisition."

•   However, merger and acquisition services are not restricted to advice on contemplated transactions. Suppliers of these services in many cases provide services to their clients that also involves the selling of either assets or shares of companies owned by their clients.

•   The suppliers actively solicit for and negotiate with potential buyers of the assets or shares. Given that the value to the clients is a successful consummation of a sale of the assets or shares, compensation for the services rendered by the suppliers usually is contingent upon closing the sale. Fees are only paid after a sale has been consummated, sometimes based on pre-determined threshold target selling prices. If no sale is consummated, then no fees or very minimal fees are paid. The contingent fees are generally referred to in the industry as "success fees".

•   The sample Letter of Agreement (Agreement) between XXXXX identifies the services to be provided by XXXXX which will be to "assist XXXXX in identifying Purchasers and in analyzing, structuring, negotiating and effecting proposed Sale Transactions on the terms and conditions of this letter agreement."

•   The Agreement defines the term Sales Transaction to mean, "whether effected in one transaction or a series of transactions,

a) any merger, reorganization or other business combination pursuant to which the business of XXXXX is combined with that of one or more Purchasers;

b) the acquisition, directly or indirectly, by one or more Purchasers of more XXXXX of the then outstanding capital stock of XXXXX by way of a negotiated purchase or other means;

c) the acquisition, directly or indirectly, by one or more Purchasers of all or a substantial portion of the assets, of or any right to all or a substantial portion of revenues or income of, XXXXX by way of a negotiated purchase, lease, license, exchange, joint venture or other means; or

d) the acquisition, directly or indirectly, by one or more Purchasers of control of XXXXX otherwise than through the acquisition of XXXXX capital stock."

•   For purposes of the interpretation we have been asked to assume that a success fee was earned by XXXXX as sold through the sale, by XXXXX[.]

•   It should also be assumed that XXXXX is a Canadian resident person and both XXXXX are GST/HST registrants.

•   The fee structure, XXXXX of the Agreement, is three part. There is an initial fee of XXXXX payable in cash on the date of the Agreement; an additional fee of XXXXX payable upon execution of a definitive agreement; plus additional amounts calculated as percentage amounts at closing.

Interpretation Requested

1. Do the services of XXXXX fall within the ambit of paragraph (l) in the definition of "financial service" in subsection 123(1) of the Excise Tax Act (ETA)? More specifically, has XXXXX arranged for the transfer of ownership of the shares of XXXXX in context to paragraph (l)? If yes, please confirm that the services of XXXXX are exempt supplies for GST/HST purposes.

2. Does the interpretation depend on the degree of effort involved in each of the different services performed by XXXXX as outlined in the Agreement? In particular and assuming the various services described in the Agreement typically are supplied together in one form or another, could section 139 of the ETA apply to deem the supply of each service to be a supply of a financial service?

3. How would the GST/HST apply if the sale is not consummated? In that event, the XXXXX fee remains payable. Would the GST/HST status of this initial fee be based on the overall intention of the contract which is the endeavour to arrange for a sale of shares, or would this fee be viewed as a separate/taxable retainer or other signing fee? In any event, please confirm that GST/HST status of this fee and provide detailed support for the interpretation taken.

4. The three-part payment schedule is time sensitive: up front, contingent on signing and contingent on consummation. Does the GST/HST status of these fees change based on this payment structure? Are the fees separable and taxed based on specific activities to which they relate, or are the fees viewed in unison as separate payments for the same endeavour?

5. If the sale of XXXXX was achieved through a sale of specific assets as opposed to shares, would GST/HST apply to the success fee (including the non-refundable "signing fee") earned by XXXXX assuming that the assets sold are not financial instruments? If so, would the up front fee also be taxable even if the ultimate structure to sell assets (as opposed to shares) was not known until long after the initial fee was paid? Please outline the GST/HST status of the fees in a situation where the nature of the ultimate sale (shares versus assets) is not known until the point of signing or even after signing. As such a scenario creates uncertainty for the parties to the Agreement from a GST/HST perspective, please outline as to how the GST/HST should be applied to the up front payment when the ultimate status of the services is not known until the transaction is complete (i.e., a sale is consummated involving shares or assets or no sale is consummated and the Agreement is no longer enforceable). As well, where GST/HST is determined to apply to the transaction, at which time would the GST/HST on the up front payment be considered collectible?

Interpretation Given

Based on the information provided, we provide the following responses to your questions.

1. The Agreement identifies the services to be provided by XXXXX which will be to "assist XXXXX in identifying Purchasers and in analyzing, structuring, negotiating and effecting proposed Sale Transactions on the terms and conditions of this letter agreement." In this regard, XXXXX proposes to undertake certain activities on XXXXX XXXXX behalf as outlined in the Agreement. The services provided by XXXXX as outlined in the agreement are generally not considered to be "financial services" as that term is defined in subsection 123(1) of the ETA. However, paragraph (l) of the definition of "financial services" includes "arranging for" any of the financial services included in paragraphs (a) to (i). As outlined in policy statement P-092 - "Arranging for" as it Applies to Group Insurance, the provision of the "arranging for" services involve an exchange, issuance, or transfer of money or financial instruments on behalf of other persons. This applies to services provided by a person directly to the buyer or the seller with a view to bringing them together to transact, or by persons when they are acting as agents, salespersons, or brokers where a clear nexus between their activities and the provision of the financial service can be established. In this regard, the activities undertaken should be such that they are clearly connected to the actual provision of the financial service and do not merely lead to facilitating the supply of the financial service. In the proposed scenario, XXXXX through a sale of its shares in XXXXX. Since the selling of shares is considered to be a financial service and XXXXX has "arranged for" the transfer of ownership of the shares from the seller to the purchaser, XXXXX has provided a financial service to XXXXX[.] Section 1 of Part VII of Schedule V to the ETA exempts a supply of a financial service from GST/HST.

2. As described above, determining that XXXXX is in fact "arranging for" a financial service does depend on the degree of effort involved in bringing the buyer and seller together to transact. Section 139 sets out conditions under which the supply of a number of separable financial services, non-financial services, and non-capital properties for a single consideration are treated as a supply of financial services only. The provision requires that the financial services be related to the other services and properties and that it is the normal practice of the supplier to combine these or similar services and properties. The rule does not apply if the supply includes a capital property. In order to apply section 139, we must first determine whether there is one or more supplies being provided under the Agreement. Policy statement P-077R - Single and Multiple Supplies outlines factors to consider in determining whether a the supply of the various services outlined in the Agreement is considered to be a single supply or multiple supplies. It is the Department's position that there is one supply of financial advisory services being provided under the Agreement, therefore section 139 would not be applicable. As outlined in the response to question #1, the services provided which result in a Sales Transaction are generally not considered to be financial services unless the provision of these services results in the "arranging for" a financial service (which is the case when the resulting transaction is a transfer of ownership of financial instruments).

3. A deposit is an amount given by a recipient as security for the performance of an obligation by the supplier. This amount may or may not be refundable. The initial fee of XXXXX is considered to be a nonrefundable deposit and as such, under subsection 168(9), the deposit is not considered to be consideration paid for the supply until the supplier applies the deposit as consideration for the supply. If a Sales Transaction is consummated, the XXXXX is applied to the calculation of the total consideration (the success fees) outlined in the Agreement. If the Sales Transaction was an exempt financial service, then the consideration is exempt of tax. In the event that the sale is not consummated, at the end of the period during which XXXXX is retained, the XXXXX becomes the consideration for the taxable supply of financial advisory services, a taxable supply, and the tax becomes payable at that time. The tax status is not based on the overall intention of the contract. Also, it should be noted that the overall intention of the contract is not to arrange for a sale of shares, it is to arrange for a sale by any of the four means described in the agreement, not all of which would result in a financial service being provided.

4. As we have described above, the fees are payments for one supply. The fees are not separated and taxed based on specific activities to which each fee relates. The initial XXXXX is a nonrefundable deposit applied as consideration for the supply at the time the Sales Transaction is consummated. Similarly, the XXXXX paid after the execution of a definitive agreement to effect a Sales Transaction is a refundable deposit applied as consideration for the supply at the time the Sales Transaction is consummated. Subsection 168(1) states that "tax under this Division in respect of a taxable supply is payable by the recipient on the earlier of the day the consideration for the supply is paid and the day the consideration for the supply becomes due." Therefore the deposits are applied to the consideration due upon the closing of the Sales Transaction and tax is payable on the earlier of the day the consideration for the supply is paid and the day the consideration for the supply becomes due.

5. If the sale of XXXXX was achieved through a sale of specific assets (assuming that the assets are not financial instruments) as opposed to shares, the "arranging for" services provided by XXXXX would no longer be considered exempt since they are not agreeing to provide or arranging for a financial service referred to in any of paragraphs (a) to (i) of the definition of "financial service". We confirm that the fees paid would be consideration for a taxable supply. As explained above, the consideration is due upon the closing of the Sales Transaction and tax is payable on the earlier of the day the consideration for the supply is paid and the day the consideration for the supply becomes due.

The foregoing comments represent our general views with respect to the subject matter of your letter. Proposed amendments to the Excise Tax Act, if enacted, could have an effect on the interpretation provided herein. These comments are not rulings and, in accordance with the guidelines set out in section 1.4 of Chapter 1 of the GST/HST Memoranda Series, do not bind the Department with respect to a particular situation.

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
Senior Technical Analyst
Financial Institutions Unit
Financial Institutions and Real Property Division
GST/HST Rulings and Interpretations Directorate