12 July 2000 GST/HST Interpretation 28996 - Credit Card Commission

Thank you for the information provided with respect to the credit advance operations at XXXXX and your questions concerning the application of the GST to the transactions between XXXXX and XXXXX (XXXXX).

Statement of Facts:

Based on the information provided, our understanding of the facts is as follows:

•   A patron requests a cash advance from their credit card;

•   XXXXX provides a service to the patron of processing the cash advance through an approved credit card;

•   XXXXX gives the patron the cash per this transaction;

•   The cashier at the XXXXX at the XXXXX follows the instructions set out in the "XXXXX Agreement";

•   XXXXX reimburses XXXXX for the funds advanced to the patron, plus a commission fee per transaction. The commission fee is set out at XXXXX of the agreement;

•   The XXXXX is an agreement between XXXXX and XXXXX with operations at XXXXX;

•   XXXXX considers the acceptance of a patron's credit card in order to obtain a cash advance to be an exempt financial service per para. 123(1)(i) of the definition found in the Excise Tax Act (ETA), and has therefore not been charging or remitting GST on this supply.

•   XXXXX is proposing to assess the GST unreported on these transactions (XXXXX XXXXX and the XXXXX XXXXX are making similar supplies and may also be impacted).

Interpretation Requested:

The issues as outlined by you are as follows:

1. XXXXX obtains a commission for the processing of cash advances through a patron's approved credit card. We would like to confirm that these commissions are a taxable supply and subject to GST collectible at 7%.

2. XXXXX XXXXX XXXXX processes cash advances on patron's credit cards for a transactional fee. We would like to determine whether the fees charged by XXXXX are considered to be a taxable supply at 7%.

Our Comments:

The principal issues in this case are: 1) whether the role of XXXXX in the provision of credit card cash advances by XXXXX is one of supplying a financial service and 2) whether the credit card cash advance services supplied by XXXXX to XXXXX patrons are financial services.

The services provided by XXXXX for which it receives consideration are administrative in nature and do not constitute a financial service. Even if they did, they would be excluded from the exemption by virtue of the Financial Services (GST) Regulations (Regulations) since XXXXX is not a "person at risk" as that term is defined in the Regulations.

The service of providing funds as a credit card cash advance is an exempt financial service. The fee charged by XXXXX for providing this service is exempt from GST under section 1 of Part VII of Schedule V to the ETA. Accordingly, XXXXX is not required to charge GST on fees for such services, nor is it entitled to claim input tax credits (ITCs) for GST paid or incurred on property or services acquired or imported for use in that business.

1. Status of Supply from XXXXX to XXXXX XXXXX:

The fee in question is paid as a result of the terms of XXXXX of the agreement between XXXXX and XXXXX XXXXX. This section states that, "XXXXX shall make a per transaction commission payment to the XXXXX per XXXXX for each XXXXX XXXXX transaction completed during the term of this agreement." In essence, a fee will be paid to XXXXX for each cash advance authorized by XXXXX and properly processed by XXXXX.

The preamble sets out that the intention of the parties is "to enter into an agreement, under the terms of which XXXXX shall become a supplier of XXXXX at the XXXXX." Upon reading the terms of the agreement, it is clear that the amounts paid by XXXXX to XXXXX are consideration for the supply of: a) granting permission to XXXXX to become the sole supplier of XXXXX at XXXXX; b) processing authorized cash advance transactions on behalf of XXXXX and in accordance with the agreed upon procedures; and c) displaying the XXXXX service fee structure.

The parties are under the impression that the fee is paid for providing an exempt financial service under paragraph 123(1)(i), "any service provided pursuant to the terms and conditions of any agreement relating to payments of amounts for which a credit card voucher or charge card voucher has been issued." The intention of this paragraph is to exempt supplies made pursuant to the primary agreements as between the credit card issuer and client (credit card holder) or the credit card issuer and a retailer who has agreed to accept the use of the issuer's credit cards. XXXXX is not a party to the agreements by virtue of which payment is received for the credit card vouchers.

It is of note that this agreement includes a guarantee clause at XXXXX whereby XXXXX guarantees payment on all XXXXX payment instruments where the transaction and payment instrument have been properly completed. By virtue of this clause XXXXX is providing a financial service to XXXXX (123(1)(e) — a guarantee in respect of a financial instrument); however, the status of the supply made by XXXXX is not affected by this. Although the agreement contains a clause that essentially guarantees reimbursement of amounts advanced by XXXXX to patrons following the agreed upon procedures, the overall scheme of the agreement is not such that it could be properly qualified as an agreement "relating to payments of amounts for which a credit card voucher has been issued" as described under paragraph (i) of the definition. In substance, this clause facilitates the workability of the contract only — it is nowhere represented (nor would such representation be accepted) that XXXXX receives the commission for advancing the funds to be reimbursed under the agreement.

The services outlined above are not financial services under paragraph 123(1)(i) or (l) of the definition of financial service. They are administrative services that "relate" to the processing of credit card cash advances.

In any case, if it were to be determined that this paragraph were large enough to encompass such transactions, this supply would be excluded from the definition of a financial service through paragraph (t) of the Regulations which provides that the processing of information and any administrative service as a "prescribed service" unless supplied by a person at risk. XXXXX is not a person at risk by virtue of this agreement.

2. Status of Supply from XXXXX XXXXX XXXXX to XXXXX Patrons

Background Information and Assumptions:

Very little information relating to XXXXX XXXXX XXXXX has been provided. The agreement sets out that XXXXX provides the authorization for each transaction. In addition, based on the transactions as described, it would appear that XXXXX XXXXX XXXXX has entered into agreements with credit card issuers (either directly or through another intermediary/ies) by virtue of which the issuers reimburse XXXXX XXXXX XXXXX for the credit card vouchers. If this is so, the issuers hold the accounts and XXXXX XXXXX XXXXX acts as an intermediary in the credit transaction. Usually such agreements include a clause whereby the issuer reimburses the voucher amount less a percentage for the service.

The fees set out at XXXXX to the agreement likely incorporate this percentage (usually between XXXXX and XXXXX), the commission paid to XXXXX, other expenses and profit; however, this is difficult to determine given that service fees increase in XXXXX increments (from XXXXX to XXXXX) based upon the "principal amount" of the cash advance ranging from XXXXX to XXXXX, whereas the commission amounts to be paid to XXXXX (XXXXX, XXXXX or XXXXX per advance supplied) is divided into three increments (XXXXX, and over XXXXX). Since there is a sliding scale involved, it appears that XXXXX XXXXX XXXXX takes a loss on transactions involving cash advances for amounts under XXXXX (pays higher commission than it receives in service fees), but that service fees quickly outpace commission as the amounts advanced increase. This fee structure is important in that it demonstrates that the service fee amounts are not simply reimbursement for the XXXXX charged by credit card issuers for the service of cashing in vouchers, which distinguishes this arrangement from that in the "Skylink" (Skylink Voyages Inc. v. The Queen [2000] 2823 ETC. The judge found that since the fee charged by Skylink was simply reimbursement for the fees charged it by the issuers and were exempt as "arranging for" "the repayment of a financial instrument" (see paras. 123(1)(l) and (d)). Skylink's business profit was earned based on commissions from the airlines for ticket reservations. Had the judge determined that the fees were actually how Skylink made its profit, the tax results would have been different.)

Analysis:

The service provided by XXXXX to XXXXX patrons is simply a "credit card cash advance service" for which a fee is charged. This supply would properly fall within paragraph 123(1)(g) "the making of any advance, the granting of any credit or the lending of money" as between XXXXX and XXXXX 's patrons.

While it has been determined that this service fits within paragraphs (a) to (m) of the definition of a financial service, it is necessary to review paragraphs (n) to (t) for a possible exclusion. If the service of providing credit card cash advances is to be excluded it will be through paragraph (t) of the Regulations.

As noted above, the Regulations prescribe "any administrative service, including an administrative service in relation to the payment or receipt of dividends, interest, principal, claims, benefits or other amounts, other than solely the making of the payment or the taking of the receipt" at paragraph 4(2)(b) as a "prescribed service" unless supplied by a person at risk.

Providing the authorization and performing the attendant tasks related to reimbursement of credit card vouchers as between XXXXX and the credit card issuer are not administrative services, therefore, they are not excluded from the exemption by virtue of para. 123(1)(t).

Proposed Amendment to the Legislation and Impact:

As you are aware, a proposed amendment was tabled in 1998 by virtue of which the definition may be amended as follows:

"person at risk", in respect of an instrument in relation to which a service referred to in subsection (2) is provided, means a person who is financially at risk by virtue of the acquisition, ownership or issuance by that person of the instrument or by virtue of a guarantee, an acceptance or an indemnity in respect of the instrument, but does not include a person who becomes so at risk in the course of, and only by virtue of, authorizing a transaction, or supplying a clearing or settlement service, in respect of the instrument.

When this amendment receives assent, it will be deemed to have come into force on December 31, 1990. The coming into force of this amendment will serve to clarify whether XXXXX is financially at risk and whether the services it provides are exempt financial services.

Sheena France
Financial Institutions Unit
Division
GST/HST Rulings and Interpretations Directorate