17 June 2002 GST/HST Interpretation 34567 - Application of the GST/HST to Convenience Fees

Dear XXXXX:

This letter is further to my telephone conversation on April 30, 2002, with XXXXX of your office concerning an interpretation issued on XXXXX XXXXX. This interpretation discussed the application of the GST/HST to fees paid to, or retained by XXXXX for transactions conducted through the XXXXX website. As I explained to XXXXX, we have reviewed that letter and have concluded that our interpretation of the tax status of certain of the fees retained by XXXXX is incorrect. This letter will replace the previous interpretation issued on this subject. We regret any inconvenience this may cause.

Interpretation Requested

In your request dated January 1, 2002, you asked whether convenience fees that are paid to XXXXX or that are retained by XXXXX for transactions conducted over the Internet, would be subject to GST/HST.

Based on the information provided in your letter and in a subsequent telephone discussion with XXXXX, we understand the following:

1) XXXXX entered into a three year Contract with XXXXX for an XXXXX and XXXXX implementation, XXXXX and on going operations.

XXXXX

2) XXXXX is responsible (at its own expense), for the development, establishment, maintenance, marketing and implementation of the XXXXX[.]

3) Under XXXXX will provide technology support and upgrading, help desk and support, XXXXX hardware and software installation, maintenance, testing and production operation, resource/staffing, interfacing to the XXXXX XXXXX, and training in the use and operation of the XXXXX. XXXXX will also be responsible for the costs associated with the maintenance of a dedicated communication link from the XXXXX.

4) The XXXXX is intended to be self-supporting. The XXXXX charges a convenience fee to each user who uses specific applications. In most cases, the convenience fee will be visible so that the charge will be clearly identified XXXXX on the billing that the user will be able to view on the XXXXX browser. Charges appear on the user's credit card invoice.

XXXXX

5) XXXXX fee to the XXXXX with respect to providing the XXXXX design and operations will be equal to the amount charged by the XXXXX as convenience fees.

6) Users are, or will be able to process the following services via the XXXXX:

XXXXX

This service does not include integration with the payment gateway.

XXXXX

The amount charged to the users includes both the XXXXX and the convenience fee of XXXXX per transaction. The XXXXX is charged a XXXXX service fee by XXXXX for these transactions.

Online Store Sales: Users will be able to purchase retail products using the XXXXX (XXXXX). The store includes functions and user interface for the catalogue, shopping basket, checkout and integration with the payment gateway. Both the GST and the XXXXX Retail Sales Tax (where applicable) will be charged and collected from the user on each sale transaction. Consideration charged to users will exceed the direct cost of the good. A XXXXX convenience fee on the gross sale amount is included in the consideration charged to users. The fee is not visible to the users.

XXXXX

For the purposes of this interpretation, we will assume that XXXXX is an agent of XXXXX and not of the XXXXX. XXXXX. The transaction is processed by XXXXX who remits the XXXXX portion of the charge to the XXXXX and retains the convenience fee portion as its service fee. The convenience fee is XXXXX per transaction and is combined with the payment XXXXX that is charged to users' credit cards.

The XXXXX website explains the XXXXX service fee as follows:

XXXXX XXXXX Clients encountering problems or requiring information in respect of online transactions deal with XXXXX and not that of XXXXX.

7) Under the terms of the Contract, it is expressly agreed that XXXXX is an independent Contractor. It may become an agent XXXXX, only by express written consent. This has not taken place.

XXXXX will not pledge any assets of the XXXXX in its care, custody or control or cause any type of lien to attach to such without the express written permission of the XXXXX. XXXXX and any of its subcontractors, agents, officers and employees shall act in an independent capacity and not as officers or employees of the XXXXX.

The Contract indicates that there is no partnership or joint venture between XXXXX or any subcontractor and the XXXXX. Neither party has any authority to bind the other for the performance of any Contract or otherwise obligate the other party, except as specifically set forth in the Contract.

8) An XXXXX comprised of between XXXXX of the XXXXX or their delegates is responsible for setting the policy direction of the XXXXX and for other matters relating to the Contract. Its functions include:

-    determining what information and data will be part of the XXXXX;

-    reviewing and/or developing the high level overall plans embracing the general goals and acceptable procedures with respect to the XXXXX;

-    setting and approving fees for use of the XXXXX;

-    determining the overall direction of the project;

-    setting the service levels for the XXXXX and approving XXXXX Agreements;

9) The XXXXX must review all convenience fees prior to their implementation and may approve or reject such fees in its sole and unfettered discretion in writing. XXXXX has the right to request or recommend changes, including a reduction of fees on an interim basis as an inducement to increase usage of the XXXXX.

Interpretations Given

It is our view that the convenience fee XXXXX paid by the XXXXX to XXXXX for transactions related to XXXXX is consideration for supplies to the XXXXX of services related to establishing, administering and operating the website. As no exemption applies to these services, they will be taxable.

The XXXXX convenience fee charged to individuals to accept and process payments XXXXX is consideration for an exempt financial service supplied by XXXXX to those individuals. The acceptance and processing of payments and the depositing of payments into the XXXXX account is an exempt financial service, even if the provider is not a listed financial institution.

Section 1 of Part VII of Schedule V to the Excise Tax Act ("ETA") exempts a supply of a financial service that does not fall under the zero-rating provisions in Part IX of Schedule VI.

Based on the information provided, we consider that the service provided by XXXXX falls under paragraph (a) of the definition of "financial service", "the exchange, payment, issue, receipt or transfer of money, whether effected by the exchange of currency, by crediting or debiting accounts or otherwise".

The XXXXX payment is not excluded under paragraph (n) from the definition of "financial service" as this payment is not being made for any purpose other than as consideration for the acceptance and processing of payments for XXXXX.

In addition, the service by XXXXX to these individuals will not be excluded from the definition of "financial service" by paragraph (t) as it is not a prescribed service under the Financial Services (GST/HST) Regulations, since the service provided to the individual by XXXXX is "solely the making of a payment". See paragraph 4(2)(b) of these Regulations.

The GST/HST will apply to consideration paid by consumers for online goods. No portion of this fee is separately identified as payment for the service of accepting and processing the payment. Therefore no part of the payment is consideration for an exempt financial service provided by XXXXX to the consumer. When XXXXX subsequently retains the XXXXX convenience fee from amounts due to the XXXXX, this will be consideration for its supplies of taxable administrative and technical services to the XXXXX.

These comments represent our general views with respect to the subject matter of your letter. Proposed amendments to the ETA, 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 Canada Customs and Revenue Agency with respect to a particular situation.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at 952-9590.

Yours truly,

Elaine Bonnah
Municipalities and Health Care Services Unit
Public Service Bodies and Governments Division
Excise and GST/HST Rulings Directorate