14 May 1999 GST/HST Interpretation HQR0001500 - Exempt Financial Services

Comments

We have reviewed your memorandum dated January 19, 1999, as well as the attached correspondence from XXXXX (the Bank) and the XXXXX (the Agreement) dated XXXXX. XXXXX XXXXX[.]

We agree with the position taken by XXXXX that the services provided by the XXXXX as one of the XXXXX is a single supply similar to the services provided by a full service broker or investment dealer and that these services are considered to be exempt financial services under paragraphs (d) and/or (l) of the definition of "financial service" under subsection 123(1) of the Excise Tax Act (ETA).

In determining that the services provided under the Agreement is a single supply and not multiple supplies, we reviewed policy statement P-177R "Single and Multiple Supplies". The policy discusses three main factors which should first be considered when determining whether there is a single supply or multiple supplies.

1. Whether some elements are inputs or themselves supplies.

XXXXX states that the XXXXX are to provide XXXXX with XXXXX for the purpose of facilitating the distribution of the XXXXX XXXXX defines XXXXX XXXXX as "the provision of Personnel, branch offices, computer services and other necessary services of the XXXXX to permit the sale of XXXXX XXXXX [a]nd continuing customer service". Personnel is also defined in the Agreement, in part, as "persons who are engaged by XXXXX to distribute XXXXX and provide customer service to investors in respect of such Funds".

2. The provisions of the terms of the agreement.

As stated above, the term XXXXX is specifically defined to include the provision of customer service. The intent of the parties is that XXXXX will be provided by the XXXXX. There is no indication that there are separate supplies of customer service being made. It is one supply of the XXXXX which by definition includes customer service. As stated in the XXXXX incoming letter and in Article 5.1 of the Agreement, the XXXXX receives compensation in the form of a fee computed based upon the month-end spot balance outstanding each month for each mutual fund managed by XXXXX.

3. The number of suppliers and/or recipients.

There are three suppliers (XXXXX[)] and one recipient.

Additional questions can be used to determine the nature of the supply. If the recipient did not receive all of the elements, would each element, in itself, and in the context of this transaction, be of any use to the recipient? In this case, the only reason the XXXXX are providing customer service is because they are distributing the funds. If they were not distributing the funds, they would not be providing customer service associated with the distribution of the funds. For this same reason, the provision of each element is contingent on the provision of another element. That is, the provision of the customer service is contingent on the distributing of the mutual fund units. Is the recipient made aware of the specific elements that are part of the package? The term XXXXX is defined to include a variety of elements however the services provided are stated to be XXXXX and the various elements encompassed by that term are not identified as separate services to be provided. In conclusion, the Department's position is that there is a single supply of XXXXX being provided.

As stated in the incoming memorandum, the XXXXX agrees that the fees of distribution are for an exempt supply however, the XXXXX believes that since the weighted average paid to investment dealers is XXXXX of the fees paid to the XXXXX, them the remaining percentage XXXXX is attributed to customer service which is a taxable supply. The XXXXX feels that since there is a mixed supply and since the taxable portion is over XXXXX should apply to make the whole supply taxable.

The XXXXX believes that the services provided by the XXXXX differ from the services provided by investment dealers in that they feel that investment dealers are primarily providing a service of distribution of mutual fund units whereas the XXXXX s that of providing customer service and related functions. The Department's position is that the services provided by the XXXXX as outlined in the Agreement do not differ from those provided by investment dealers and are considered to be exempt, consistent with the position taken by XXXXX as outlined in the incoming memorandum.

Section 139 applies where there is more than one supply for a single consideration. Since we have determined that there is only a single supply being made, section 139 cannot apply.

Should you have any questions please feel free to contact me at (613) 952-9577 or Duncan Jones at (613) 952-9210.

Marilena Guerra
A/Senior Technical Analyst
Financial Institutions and Real Property Division
GST/HST Rulings and Interpretations Directorate
Policy and Legislation Branch