14 January 2000 GST/HST Interpretation 7697/HQR0001303 - Nominal Consideration for Input Tax Credits

Comment

This is in reply to your memo with respect to an ITC claim made by XXXXX[.]

Background

1[.] XXXXX[.]

2. Individuals who purchase XXXXX shares of XXXXX are currently eligible for a non-refundable, non-transferable 15% federal tax credit to a maximum credit of XXXXX and a similar provincial tax credit per year.

The XXXXX shares of XXXXX are qualified investments for XXXXX contributions. These shares may be issued to individuals or to trusts governed by an XXXXX under which the investor or his/her spouse is the annuitant.

XXXXX has made arrangements with a XXXXX pursuant to which an investor may establish an XXXXX with a trustee and have the XXXXX trust purchase the XXXXX[.]

3. Investors may take advantage of this arrangement by completing the applicable portion of the share subscription form, and will be charged a yearly XXXXX administration fee by XXXXX in the aggregate of XXXXX plus GST.

4. The market normally charges XXXXX a year for such a service.

5. XXXXX is claiming corresponding ITC's on inputs relating to the supply of the XXXXX administrative services to these investors. These consist of 100% ITC's on direct costs and 30% on selected indirect costs relating to the maintaining of their accounts.

Direct costs for which ITC's have been claimed are:

XXXXX

Issue:

Whether XXXXX should be denied the ITC claim.

Specifically, is the XXXXX administrative service supplied for nominal consideration? Through the interaction of subsection 141.01(4) and subsection 141.01(2), the inputs relating to the supply of the XXXXX administrative services would be deemed to have been acquired or imported for use otherwise than in the course of commercial activities. As a result, no input tax credits should be allowed.

Our Comments:

The term "nominal consideration" is not defined in the Act. There is a reference to the term "nominal consideration" in the definition of "direct cost" in the Explanatory Notes, however, it should be restricted to that definition only. It should not be expanded to apply to other parts of the Act.

It is our view that whether or not an amount charged for the making of a supply is "nominal consideration" can only be determined with reference to the value of the supply for which the consideration is being charged. If we do not know exactly what supply is being made by the supplier and its value, it will be difficult to determine if the amount charged is "nominal consideration".

In the instant case, the fund prospectus states on page 5 that "investors who participate in these arrangements will be required to pay XXXXX administration fees to the XXXXX in the aggregate amount of XXXXX plus GST". The prospective does not explain what "service" is being provided by XXXXX (i.e. what the investors are getting) in return for the payment of the annual fee. Under this circumstance, it is difficult to determine if the XXXXX fee charged can be said to be "nominal consideration". Our understanding of the usual XXXXX arrangement is that once an investor has completed the share purchase application form and paid the subscription amount, normally the XXXXX administrator will have nothing to do with the investor until the end of the year when the administrator sends out the annual fund statement to the investor. If this is also the case for the XXXXX arrangement, then the XXXXX annual fee charged to the investors does not appear to be "nominal consideration." In this case, the XXXXX administrative service would be a taxable supply for consideration and XXXXX would be eligible to claim ITC's on property or services acquired by it for use or consumption in making this supply pursuant to the provisions of section 169 of the Act.

However, since an XXXXX administrator usually only provides a very limited service to the investors (e.g. mailing of a fund statement once a year), the inputs (costs) acquired by the administrator for use in providing this service is also very limited. Therefore, it is recommended that the direct and indirect costs described be reviewed to determine if these costs (and to what extent) are in connection with the supply of the XXXXX administrative service to the investors. It is possible that some (or part) of these costs may relate to XXXXX other exempt supplies (issue of shares, investments, etc.), and the ITC claim should be restricted accordingly.

Should you wish to discuss this file further, please do not hesitate to contact me at (613) 954-1433.

Phil Tang
Specialty Tax Unit
Financial Institutions and Real Property Division