25 January 2001 GST/HST Interpretation HQR0001126/7520 - Transactions Generated by ABM Machines

Dear XXXXX,

This letter replaces the interpretation rendered to XXXXX on July 10, 1998.

Based on your letter and subsequent telephone discussions with Marilena Guerra, our understanding of your business and its operations were as follows:

XXXXX owns automated banking machines (ABM). XXXXX enters into a placement agreement with various merchants to install an ABM in the merchant's retail establishment. XXXXX is responsible for all costs associated with installing and servicing the ABM including providing customer service with respect to its use. The merchants make space available for the ABM, allow XXXXX's servicing agents access to ABM, provide custodial service, order a phone line dedicated to the ABM, and provide electrical power to the ABM. The merchant is compensated by XXXXX on a per transaction basis as outlined in the placement agreement.

Once the ABM is placed in the retail establishment, a customer can place his/her bank card (issued by their own financial institution) in the ABM and withdraw money. A customer is only able to withdraw cash from XXXXX's ABMs. No other financial transactions can be made through a XXXXX ABM. XXXXX receives XXXXX for every transaction. This fee consists of a XXXXX surcharge fee (paid to XXXXX by the customer) plus a XXXXX Interac fee (paid to XXXXX by the customer's financial institution). The customer is notified on-screen of the surcharge fee and is given the choice of proceeding with the withdrawal or canceling the transaction.

In June 1998, XXXXX's website was advertising that it was an Interac member. However, it appears from the Interac Association website that XXXXX is not an Interac member and the Association confirmed that XXXXX was never a member of Interac. Consequently, for the reasons explained below, the XXXXX Interac fee is paid directly to XXXXX by the switch provider, XXXXX, and not by the customer's financial institution.

Interpretation Requested

You have requested an interpretation regarding the tax status of the services provided by XXXXX for which it receives fees from two different parties.

Interpretation Given

The GST/HST is payable on all taxable supplies, made in Canada, by a registrant. The ETA defines taxable supply as a supply made in the course of a commercial activity, which by definition excludes an exempt supply.

Exempt supplies are not subject to the GST/HST. Suppliers of any exempt service are not considered to be engaged in a commercial activity for purposes of the GST/HST. As a result, they are not required to either register for, collect or remit the GST/HST, nor are they entitled to claim input tax credits. Consequently, any person providing an exempt service is not entitled to any credit or refund of the GST/HST paid on its purchases or expenses.

1) Surcharge fee of XXXXX paid to XXXXX by the customer (user of the ABM)

Based on the information provided, XXXXX is providing to the customer a supply of an exempt financial service pursuant to section 1 of Part VIII of Schedule V to the Excise Tax Act (ETA).

Subsection 123(1) of the ETA defines "financial service", in part, as

(a) the exchange, payment, issue, receipt or transfer of money, whether effected by the exchange of currency, by crediting or debiting accounts or otherwise,

(b) the operation or maintenance of a savings, chequing, deposit, loan, charge or other account.

Section 1 of Part VII of Schedule V to the ETA exempts the supply of a financial service that is not zero-rated in Part IX of Schedule VI to the ETA.

XXXXX is providing the cardholder with access to his/her bank account or charge account and allows the cardholder to withdraw cash from their account. ABM withdrawals are exempt financial services as stated in CCRA's GST/HST Memoranda Series, chapter 17.2 Products and Services of a Deposit-Taking Financial Institution as follows:

A-63       Automated banking machine (ABM) card

      Description: allows the processing of a deposit, withdrawal, bill
payment or transfer at an automated banking machine (ABM).

C-07       Automatic bank machine / credit card interchange

      Description: processes withdrawals/credit card payments drawn on
the accounts of clients of other financial institutions; cheque
encashment substitute.

Therefore, the services provided by XXXXX to the customer for which it receives a fee of XXXXX per transaction are exempt financial services.

2) Interac fee of XXXXX paid to XXXXX by XXXXX (switch provider)

In the Interac Network, the Interchange fees (also called Interac fees) are paid by the financial institutions for all of their clients' transactions at an ABM they do not own. According to the regulations of the Interac Association, these Interchange fees are paid to the acquirer of transactions, that is the entity that receives a payment request message for an issuer from the cardholder. In order to be an acquirer of transactions, one must be a member of the Interac Association. Usually, the switch provider is a member of the Interac Association and therefore an acquirer of transactions. In this case, since XXXXX is not a member of the Interac Association it cannot be an acquirer of transactions. As a result, the acquirer of the transactions is your switch provider, XXXXX, an Interac Association member, who pays to XXXXX a portion of the Interchange fees it receives directly from the financial institutions.

Based on the information provided, the Interac fee of XXXXX per transaction is not paid as consideration for the supply of an exempt financial service, and therefore is taxable at 7% pursuant to section 165(1) of the Excise Tax Act (ETA).

In fact, after an analysis of the "XXXXX" between XXXXX and XXXXX, XXXXX is not providing a financial service to XXXXX, but is providing a service of agreeing to "meet any required shared network standards including without limitation to Interac and other designated network standards". Consequently, the Interac fees paid to XXXXX for this service are taxable.

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 Canada Customs and Revenue Agency 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.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 941-2046 or Duncan Jones at (613) 952-9210.

Yours truly,

Nathalie Joly
Financial Institutions Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate

Encl.