31 March 2000 GST/HST Interpretation 25522 - Tax Status of Fees Under a Merger

We have reviewed your request submitted to our office on December 14, 1999, and would like to provide you with the following comments in regards to whether the GST/HST is collectible under the Excise Tax Act ("the ETA") on a commitment fee and a non-completion fee which were paid by XXXXX XXXXX under a merger proposal by XXXXX.

We understand from the information provided that XXXXX tabled a merger offer to XXXXX which consisted of a letter agreement, signed and dated XXXXX (the document providing for the payment of the two fees in question), and an arrangement agreement (the document setting out the terms under which XXXXX would acquire the shares of XXXXX nd also for the payment of the non-completion fee). Under the merger offer each XXXXX common share would be exchanged for a) XXXXX subordinate voting share of XXXXX or XXXXX per share or a combination of both, b) XXXXX participating equity share of XXXXX, and c) a note of XXXXX exchangeable for one common share of a company which will hold XXXXX XXXXX existing XXXXX properties. The maximum amount of cash payable to XXXXX shareholders on the share exchange will be limited to XXXXX of the total consideration.

XXXXX of the letter agreement states that the commitment fee is payable by XXXXX XXXXX to XXXXX on execution of the agreement, and is "equal to XXXXX multiplied by the number of outstanding common shares of the Company (on a fully diluted basis)". XXXXX provides that the fee will generally be retained by XXXXX for its own use regardless of whether the merger is effected. XXXXX is only required to repay the fee to XXXXX XXXXX should it fail to meet certain obligations, or the merger offer is disallowed under the XXXXX[.] In the submission it is indicated that the fee paid was XXXXX of the letter agreement provides that XXXXX XXXXX will pay XXXXX a non-completion fee "equal to XXXXX multiplied by the number of outstanding common shares of XXXXX (on a fully diluted basis)" where the arrangement agreement does not become binding between the two companies and a competing offer or an alternative company transaction is announced, commenced or made within six months after the date of the letter agreement, and thereafter completed. Further, XXXXX of the arrangement agreement also addresses the circumstances of the alternative offer and provides for the payment of the non-completion fee to XXXXX if that agreement is terminated in accordance with XXXXX and a competing offer or alternative company transaction is announced, commenced or made at any time before the termination date and thereafter completed. The arrangement agreement terminates under XXXXX where notice of an alternative offer is given to XXXXX under XXXXX of the agreement and XXXXX does not deliver an amended offer to XXXXX under XXXXX or the XXXXX Common Shareholders do not approve an amended offer by XXXXX, or a competing offer is completed.

Subsequent to the merger offer, XXXXX accepted an offer from XXXXX XXXXX, and thus was required pursuant to the merger offer to pay XXXXX the non-completion fee. In the submission it is indicated that the fee paid was XXXXX[.] The sale and the purchase of shares, (a share being a financial instrument under paragraph (b) of the definition of financial instrument in subsection 123(1) of the ETA) fall under paragraph (d) of the definition of financial service in subsection 123(1) of the ETA "... (d) the issue, granting, allotment, acceptance, endorsement, renewal, processing, variation, transfer of ownership or repayment of a financial instrument". Specifically, the sale and also the acquisition of shares fall within the ambit of paragraph (d) under the transfer of ownership of a financial instrument, and as such both are supplies of financial services. Paragraph (l) of the definition of financial service includes "the agreeing to provide, or the arranging for, a service referred to in any of paragraphs (a) to (i)" as a financial service. The definition in Black's Law Dictionary (1979) of the word "provide" is "To make, procure, or furnish for future use, prepare. To supply; to afford; to contribute". Therefore, the activity of agreeing to make the supply of a financial service (e.g., selling shares or acquiring shares) is also the supply of a financial service.

The merger offer under review, although in and of itself not a financial instrument, is a proposal where the purchaser, XXXXX, agrees to acquire financial instruments (i.e., the shares of XXXXX XXXXX agrees to pay the commitment fee to XXXXX generally regardless of whether XXXXX actually acquires XXXXX shares. Pursuant to paragraphs (d) and (l) of the definition of financial service in subsection 123(1) of the ETA, XXXXX is making an exempt supply of a financial service in agreeing to provide the financial service of acquiring the shares of XXXXX[.] Accordingly, GST/HST is not payable on the commitment fee in question as it is consideration for the exempt supply of that financial service.

XXXXX also agrees to pay the non-completion fee should the agreement terminate generally where a competing offer is completed. The non-completion fee was paid by XXXXX as a consequence of the termination of the arrangement agreement pursuant to the provisions of XXXXX of that agreement. The non-completion fee is not directly linked to the supply of property or services by XXXXX to XXXXX in return for the payment. Therefore, the payment of the non-completion fee in question is not consideration for a supply.

Subsection 182(1) does not apply to the payment of the non-completion fee since this subsection only applies to an amount paid as a consequence of a breach, modification or termination after 1990 of an agreement for the making of a "taxable supply"; the arrangement agreement is an agreement for the making of an exempt supply of a financial service. Accordingly, GST/HST is not payable on the non-commitment fee in question.

We thank you for bringing this matter to our attention and hope our comments will be of assistance to you. Should you have any questions regarding the information above, please do not hesitate to contact me at (613) 952-9213.

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