18 August 2000 GST/HST Interpretation 31463 - Supply of Switching Services to ABM Owner/Operators

Excise and GST/HST Rulings Directorate Place de Ville, Tower A, 15th Floor 320 Queen Street Ottawa, ON K1A 0L5XXXXX XXXXX XXXXX XXXXXXXXXX

Case: 31463August 18, 2000

Subject:

GST/HST INTERPRETATION Supply of Switching Services to ABM Owner/Operators

Dear XXXXX:

Thank you for your facsimile transmission of May 31, 2000, (with attachments) to Mr. Duncan Jones further to your previous communications with the Canada Customs and Revenue Agency (CCRA) concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to your operations.

Interpretation Requested

Pursuant to your conversations with Mr. Jones, you would like to receive a written interpretation from the CCRA with respect to the switching services provided by your company to the owners and operators of automated banking machines (ABMs).

Interpretation Given

Analysis:

Based on the information originally provided,

-    Your company provides services to owners and operators of automated banking machines (ABMs);

-    The owners/operators of the ABM are not necessarily financial institutions (FIs);

-    The services provided can be summarized as the XXXXX[;]

-    The XXXXX route transactions to issuers for authorization and monitor devices in the network to ensure optimal performance. Based on the specific contract with each client, the company provides network access to various networks, including the Interac and Cirrus networks.) to facilitate switching transactions going from the client-owned (or operated) ABM to the cardholder's FI.

-    The client provides the ABM, but your company provides the access via its' XXXXX (switch software and associated systems necessary to permit the client to participate in client-selected networks);

-    Your company does not specifically bill the client for the use of the XXXXX — the transaction fee charges cover the use of the XXXXX and support services (i[.]e.: reporting, tracking and resolution of technical errors re: XXXXX, XXXXX non-performance, access issues, ABM operations and output);

-    The fixed price per transaction does not include any transaction fees charged by other Networks or regulatory agencies (Interchange fees). These fees are invoiced in addition to all other fees.

For example, you explained that a sample transaction would proceed as follows:

The Royal Bank is part of the Interac Network. If an operator of an ABM (your client) has network access to the Interac Network, then a Royal Bank client could go to this ABM operated by your client to withdraw cash from his/her account at the Royal Bank. The relay system in this case would route the transaction back to the Royal Bank system (issuer) for authorization of this withdrawal. Your company would then invoice the ABM operator a fixed price (transaction fee) for this one transaction.

Based on this information, you received advice to the effect that the services that you provide are exempt financial services. In fact, although the fee structure may give the appearance that the per transaction fee is for the financial service transaction being effected by the cardholder (customer of the ABM owner/operator), the agreements make clear that the fee is to allow the owner-operator to obtain the services necessary to allow the cardholder to access financial services.

Included in your facsimile transmission to Mr. Jones requesting clarification, you have provided a sample contract between XXXXX and a client (ABM owner/operator). The services are contracted for by virtue of a generic document entitled XXXXX which is supplemented by a client-specific XXXXX. The entire agreement consists of the combination of the XXXXX and XXXXX.

Of particular interest is the classification of XXXXX in XXXXX as a "Direct Connector Non Financial Institution (A direct connector institution (financial or non-financial) is licenced to use the software for direct connection with other members in the networks.) within the Interac Association," and the requirement that the client "ensure that its customers open a Settlement Account for Settlement ("Settlement" is defined as "The crediting and Debiting of accounts between Financial Institutions through the Canadian Payments Association.") purposes with a Settlement Account Financial Institution ("Settlement Account Financial Insitution (FI)" is defined as "A FI who is a member of the Canadian Payments Association which holds the Settlement Account for the Client's customer to facilitate settlement." "Financial Institution" is defined as "Any Canadian bank, trust company, credit union, caisse populaire, or financial services organization engaged directly or indirectly in providing financial services.") ..." Basically, this schedule sets out the role of XXXXX in relation to ABM operations, requires the ABM owner to set up a settlement account with a financial institution and to obtain membership in the Interac Network. By virtue of the provisions of this schedule, it appears XXXXX is not directly involved in providing that any potential financial services relating to the settlement of or access to accounts, and is not a party to any agreements arranging for these services.

Tax Status of Supplies

The services are described in the XXXXX and in XXXXX. XXXXX specifies fees for the services provided by XXXXX (pursuant to the agreement provided). The tax status of the supplies are as follows:

1. ABM Transaction Fee — taxable

This fee is for the supply of XXXXX support services provided pursuant to XXXXX XXXXX, as follows:

XXXXX shall provide a single point of contact for Client for the reporting, tracking and resolution of the following problems:

Technical errors related to the XXXXX and related documentation errors;

XXXXX non-performance;

Problems accessing the XXXXX [(]"XXXXX " is defined as "The Hardware and Switch Software located at a XXXXX site that has the ability to drive and monitor ABMs which includes the handling of security and authentification processes, route Transactions to ensure that they are properly processed and provide support and reporting for settlement and associated transaction fees.") from Client ABM's;

ABM operations and operational exceptions;

Output.

and

The supply of the XXXXX: "Our company provides the switch software and associated systems necessary to permit the Client to participate in Client-selected networks. We do not specifically bill the Client for use of this, rather it is covered by the transaction fee charges."

Therefore, the transaction fee charges cover switch software and associated systems necessary to permit the client to participate in client-selected networks. These are information technology (IT) and IT support services which are required to support clients linked to the XXXXX. As there is no specific exempting provision, the per transaction fee is subject to GST.

2. XXXXX will charge the Client for all telecommunications ("Telecommunications Service" is defined as "Services and related equipment supplied by a publicly switched telephone company that are required to transmit Data on Telecommunications Equipment.") service fees, plus an administration fee of 18%. — Taxable

The supply of telecommunications services is taxable, therefore the total fee is for a taxable supply.

3. Fees for Output ("Output" is defined as "Data which results from XXXXX performing XXXXX Services as provided for in an XXXXX.") services — Taxable

XXXXX will charge a monthly fee for each set of reports as described in XXXXX XXXXX.

Output includes:

Daily reports:

Connector transaction details - acquirer

Connector performance report

Connector settlement report

Monthly reports:

Connector transaction detail - acquirer history

These reports are in respect of the transactions of cardholders carried out at the client's ABM. They are provided to the ABM owner/operator for administrative purposes relating to the administration of the agreement and payments as between it and XXXXX. They are not financial services under sub. 123(1) and are taxable services.

4. Fees for Operation and Management services — Taxable

"Operational and Management Services" are set out at XXXXX as comprising of: system and hardware monitoring, ABM monitoring and management, supply of dial-up access for dial-up ABMs, and connection monitoring. For these services, XXXXX will charge a monthly fee for each ABM connected to the XXXXX.

These are supplies of IT services and as such are taxable supplies.

5. Fee for Dial-up ABM connection and limited monitoring — Taxable

XXXXX will charge a monthly fee for each Dial-up ABM connected to the XXXXX.

XXXXX states that "XXXXX shall provide the Client with dial-up access at a XXXXX site for each of its ABMs that require this service. Dial-up ABMs will not be monitored by XXXXX, as defined in XXXXX above, however, XXXXX will provide limited monitoring of the connection in the XXXXX." The supply described is one of IT services and is taxable.

6. ABM Install Fee — Taxable

XXXXX will charge a one-time Install ("Install" is defined as "The process of finalizing the Telecommunications Service connections and all XXXXX initiation procedures between an ABM and the XXXXX to set the ABM into production.") fee for each ABM connected to the XXXXX. ABM moves or relocations are considered to be new Installs. The installation of ABMs (inital or pursuant to moves) is a supply of IT services and is taxable.

7. ABM Install Penalty — Additional consideration for a supply — Taxable

XXXXX shall charge the Client an ABM Install penalty if the Client does not provide XXXXX with the proper notice for cancellations, moves, relocations or disconnects as set out in XXXXX and XXXXX. The penalty fees are outlined in the agreement and are in the amount of the telecommunications fee, plus an administration fee. These fees may be considered necessary to cover the company's administrative costs in relation to the taxable supply of installation and as such would be taxable.

8. ABM Certification — Taxable

"Certification" is defined as "[T]he XXXXX managed process of preparing and testing an ABM to ensure it meets the Interac Association's regulations and operating specifications and can sucessfully interface with the XXXXX." This is a supply of IT services and is taxable.

9. ABM Recertification — Taxable

"Recertification" is defined as "[T]he process, due to ABM or Network upgrades or changes, whereby XXXXX must complete Certification on an already certified ABM." This is a supply of an IT service and is taxable.

Fees for Optional White Label Services

10. Network Connection Setup — Taxable

This fee is charged for connecting the client's ABMs to client-selected Networks (Interac and/or Cirrus). This is a supply of IT services and is taxable.

11. Activation and Setup of the ABM Surcharge Feature — Taxable

XXXXX will charge a one-time fee for activation and setup of the ABM Surcharge feature chosen by the client (choice of fixed rate or percentage) and a fee for making changes to the amount of the Surcharge as requested by the client. This is done by virtue of a supply of IT services and is taxable.

12. Customized ABM Attractor or Marketing Screens — Taxable

XXXXX will provide to the Client, at XXXXX then current rates, customized ABM attractor or marketing screens as specified by the client. This is accomplished by virtue of a supply of IT services and is taxable.

13. ABM Enhanced Features — Taxable

ABM enhanced features would include custom ABM screens, multi-language support or multi-denomination dispensing, as specified by the client. This is accomplished by virtue of a supply of IT services and is taxable.

14. Client-Requested Replacement Administration Card —Taxable

Administration Card" is defined as "[A]n ABM card used by ABM administrators and servicers to balance ABMs, adjust the amount of cash in the cassettes, perform balance inquiries and place ABMs into service mode to replenish cash, empty depositories, replenish receipt paper and perform any other administrative functions." This is a supply of a product that does not fall under any specific exempting provisions and is taxable.

15. Client-Requested Additional Copies of XXXXX Services Manuals — Taxable

Publications are taxable products. This is the supply of a taxable product.

16. Termination Fees — Taxable (per s. 182 ETA, where payable)

The agreement sets out a Minimum Amount payable and defines "Minimum Amount" as "The amount specified in an XXXXX which represents a pre-agreed genuine estimate of liquidated damages payable in the event of an early termination by the Client of the XXXXX or any XXXXX."

The potential payment from the client to XXXXX, if made, would be deemed to be consideration plus tax in respect of a taxable supply, under section 182.

Other fees/issues:

XXXXX deals with timing and interest, as well as setting a minimum fee per Contract year of XXXXX. Services provided pursuant to contract are taxable, therefore, this amount would be subject to tax.

The foregoing comments represent our general views with respect to the subject matter of your letter. It should be noted that, the documentation provided indicates that the XXXXX are client-specific. Services provided by XXXXX by virtue of other XXXXX may be so essentially different that they have a different tax status. 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 Canada Customs and Revenue Agency with respect to a particular situation.

For your convenience, find enclosed a copy of section 1.4 of Chapter 1 of the GST/HST Memoranda Series.

Should you have any further questions or require clarification on the above or any other GST/HST matter, please do not hesitate to contact me at 613-952-9262.

Yours truly,

Sheena France
Financial Institutions Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate

c.c.:
Encl.:
Legislative References:	123(1), 182(1)
Authority:
Reference:
NCS Subject Code(s):	I-11643-2, 11595-1

b.c.c.:	Assistant Director, Verification & Enforcement
b.c.c.:	H.Q. Quality Assurance
b.c.c.:	hard copy - R/F GST/HST