31 March 2000 GST/HST Interpretation 7496/HQR0001102 - The Sale of a Customer List of an Insurance Business

Dear XXXXX

Thank you for your letter of March 6, 1998 (with attachments) concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to the facts outlined therein. We apologize for the delay in responding to your enquiry.

Statement of Facts

The facts presented in your letter are as follows:

Situation 1

•   XXXXX a non-registrant, is in the general insurance business (selling property insurance, autopac, etc.)[.]

•   Insurance Broker B (B), a non-registrant, is in the general insurance business (selling property insurance, autopac, etc.)[.]

•   A is selling its general insurance business to B and ceasing business[.]

•   The purchase and sales agreement consists of the sale of goodwill XXXXX and the sale of some equipment XXXXX[.]

•   The goodwill consists essentially of a customer list (and related customer files) which relate to A's insurance business[.]

Situation 2

•   Insurance Broker A (A), a non-registrant, is in the general insurance business and the life insurance business[.]

•   Insurance Broker B (B), a non-registrant, is in the general insurance business[.]

•   A is selling the general insurance portion of its business to B[.]

•   The purchase and sales agreement consists of the sale of goodwill XXXXX and the sale of some equipment XXXXX[.]

•   The goodwill consists essentially of a customer list (and related customer files) which relate to the general insurance portion of A's business[.]

Interpretation Requested

Will the GST/HST apply to the sale of the customer list from A to B in the situations outlined above?

Interpretation Given

Based on the information presented in the situations outlined above, it is our opinion that the supply of a customer list and related customer files is a supply to which GST/HST is applicable.

Subheading

Insurance agents and brokers are considered listed financial institutions under section 149 of the Excise Tax Act (ETA), provided their principal business consists of sale, renewal, transfer or arranging for the placement of insurance policies and other financial products and services. Pursuant to Part VII of Schedule V to the ETA, supplies of financial services are exempt from tax. The supply of assets of a business is a separate supply and not the supply of exempt financial services. The supply of assets of a business is generally subject to tax unless the supply is relieved from tax by a specific provision of the ETA. Section 165 of the ETA imposes a tax on every recipient of a taxable supply and pursuant to subsection 221(1), the person making the supply (i.e. vendor) is responsible for collecting the tax.

Generally, goodwill is recognizable as an asset only upon acquisition of a business, as a going concern, in excess of the value of the net assets. Whereas a customer list may be sold separately, goodwill cannot and may only be sold with the business. Your question specifically asks whether tax is payable on the sale of the customer list from A to B in two situations. A customer list is considered to be intangible personal property for the purposes of the GST/HST.

Subsection 167(1) of the ETA is a relieving provision which provides a general rule whereby no tax is payable in respect of a supply of a business or part of a business, as long as the parties to the transaction meet certain conditions (with some exceptions):

•   the supplier must supply a business or part of a business that was established or carried on by the supplier or that was established by another person and acquired by the supplier, and

•   the recipient is acquiring, under the agreement for the supply, ownership, possession, or use of all or substantially all (90%) of the property that can reasonably be regarded as being necessary for the recipient to be capable of carrying on the business or part as a business.

Policy P-167 discusses the meaning of the definition of "business" found in subsection 123(1) of the ETA. Generally, the assets of a business include real property, equipment, inventory and intangibles. The supply of one or more individual assets is not considered a supply of a business or part of a business for purposes of the joint election under section 167. Furthermore, no one type of property, regardless of its value, is determinative that there is a supply of a business. Policy P-188, Supply of a Business or Part of a Business for the Purposes of the Election under Subsection 167(1), outlines the conditions to be met in order to determine a person's eligibility to use this election.

Subsection 167(1) may apply where the supply of a business is between persons who are non-registrants. The election is not available in situations where the supplier is a registrant and the recipient is a non-registrant. Should the supplier exceed the small supplier threshold (as provided in section 148 of the ETA), becoming a registrant while the recipient remains a non-registrant, the election would not be available. Consequently, the supplier and recipient may rely on section 167.1 as it is not elective and applies to exclude the consideration attributable to goodwill of the supply of a business or part of a business in calculating the tax payable in respect of the supply, whenever the conditions set out therein have been fulfilled.

Whether the supplies contemplated in Situation 1 or Situation 2 are the supply of a business or part of a business is a question of fact. We cannot establish such a supply given the information provided. In addition, it does not appear that the supply of a client list and some equipment can be reasonably regarded as being substantially all the assets necessary for the purchaser (B) to be capable of carrying on the business or part as a business. Therefore, the conditions of section 167 or section 167.1 do not appear to have been met, and subsequently tax relief would not appear to be available in either fact situation.

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%. The supply of assets of a business to persons in a participating province, to the extent that they are taxable supplies (which are not zero-rated), tax must be collected at the harmonized rate.

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.

For your convenience, find enclosed a copy of section 1.4 of Chapter 1 of the GST/HST Memoranda Series, as well as Policy Statement P-188, Supply of a Business or Part of a Business for the Purposes of the Election under Subsection 167(1).

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 957-8226.

Yours truly,

Indra Singh
Technical Officer
Corporate Reorganizations Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate

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