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XXXXX
Nathalie Joly
Financial Institutions
Financial Institutions & Real Property Division
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June 05, 200134836
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This is in reply to your memorandum of September 15, 2000 to XXXXX with respect to XXXXX.
Background
• XXXXX is a Canadian corporation in the business of owning and operating ABMs in Canada. The company also provides processing assistance to owners of ABMs.
• An ABM is a kiosk located in public areas, such as restaurants and stores, for the purpose of providing customers of banks and other financial institutions the ability to conduct financial transactions. Services offered at ABMs include: deposits, withdrawals, and transfers between accounts. Customers use an ABM card to access the financial services offered by the machine and are generally charged a service fee for use of the machines.
• An ABM transaction generally involves five parties: the customer, the financial institution of the customer, a processor, an ABM owner and a merchant. Often, the ABM owner is also the merchant.
• There are a number of steps to complete an ABM withdrawal transaction:
1- Customers use an ABM card to access the machine and withdraw cash.
2- A processor reports the transaction to the customer's financial institution. The processor charges the financial institution for the amount of cash withdrawn. In addition, the processor charges the institution two fees:
• The first is a service fee for the customer's use of the machine. This fee is known as a surcharge fee.
• The second fee is a processing charge known as an interchange fee. The fee is compensation for facilitating and processing the transaction on behalf of the financial institution.
3- Following collection of the cash, surcharge fee, and interchange fee, the processor remits the surcharge and a portion of the interchange fee to XXXXX.
4- A processor also provides the merchant cash to restock the machine. XXXXX pays the ABM owner a portion of the surcharge and interchange fee. When the ABM owner is not the merchant, the owner pays a portion of the surcharge and interchange fee to the merchant.
Issues
1. What is the GST treatment of the surcharge fees paid by the customer to the ABM owner?
2. What is the GST treatment of the portion of the surcharge fees paid by the ABM owner to the merchant?
3. What is the GST treatment of the interchange fees paid by the financial institution card issuer to the processor?
4. What is the GST treatment of the interchange fees paid by the processor to the ABM owner, and paid by the ABM owner to the merchant?
Our comments
What is the GST treatment of the surcharge fees paid by the customer to the ABM owner?
We understand that this question was already answered by XXXXX in a letter dated March 6, 2001 addressed to XXXXX (case number 32789).
What is the GST treatment of the portion of the surcharge fees paid by the ABM owner to the merchant?
In situations where the merchant is not the ABM owner, the merchant receives a portion of the surcharge fees. Generally, the placement agreement between the ABM owner and the merchant provides that the merchant is responsible for providing the space, the electricity and the phone line for the ABM, and will receive once a month a portion of the surcharge fees based on the number of transactions as reconciled per the number of transactions at the ABM located in the merchant's place of business.
We consider this fee to be a rental fee and therefore, it is consideration for a taxable supply. The fact that the consideration is calculated on the number of ABM transactions is irrelevant. The merchant should be charging GST on this amount.
What is the GST treatment of the interchange fees paid by the financial institution card issuer to the processor?
When the financial institution card issuer pays an interchange fee to the processor, it is because the processor has rendered a service to the card issuer, which is obtaining a payment request message for the card issuer from the customer.
This service rendered by the processor is not a financial service pursuant to paragraphs (a), (b) or (l), but a service of processing and transfer of information. Contrary to XXXXX opinion, the processor is not arranging for a financial service as explained in the draft Policy Statement on the meaning of the term "arranging for" a financial service. The processor is not actively bringing together two (or more) persons for the supply of a financial service by one person to the other.
Therefore, the interchange fee paid by the financial institution card issuer to the processor is not paid as consideration for the supply of an exempt financial service, and is taxable at 7% pursuant to section 165(1) of the ETA.
What is the GST treatment of the interchange fees paid by the processor to the ABM owner, and paid by the ABM owner to the merchant?
Again, when the processor pays a portion of the interchange fee to the ABM owner, it is because the ABM owner has rendered a service to the processor.
After analyzing the agreement between the processor and XXXXX, there is one possible reason why the ABM owner would be entitled to receive a portion of the processor's interchange fee:
XXXXX Since this service does not qualify as a financial service pursuant to ETA subsection 123(1) of the definition of "financial service", the interchange fee that is paid to the ABM owner by the processor is taxable 7% pursuant to section 165(1) of the ETA.
As for the situation where the ABM owner pays a portion of the interchange fee to the merchant, the fee is also taxable because it is not paid as consideration for the supply of an exempt financial service as explained above.
Should you wish to discuss this file further, please do not hesitate to contact me at (613) 941-2046.
Yours truly,
Nathalie Joly
Financial Institutions Unit
Financial Institutions & Real Property Division
Excise and GST/HST Rulings Directorate
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