17 December 2003 GST/HST Ruling 40640[1] - Arranging for a Financial Service

Please note that the following documents, although correct at the time of issue, may not represent the current position of the Agency. / Veuillez prendre note que ces documents, bien qu'exacts au moment émis, peuvent ne pas représenter la position actuelle de l'Agence.

Dear XXXXX:

Thank you for your letter XXXXX concerning the application ruling previously provided to you in respect of services provided by XXXXX (the Corporation). You have provided further clarification of the activities of the Corporation and you have requested a review of our letter XXXXX in which we ruled that the services provided by the Corporation are taxable services pursuant to subsection 165(1) of the Excise Tax Act (ETA).

We will repeat our understanding of the facts as stated in your letter XXXXX. They are as follows:

1. The Corporation is a corporation registered pursuant to the Excise Tax Act.

2. XXXXX (Agent) is a licensed insurance agency in certain provinces of Canada including XXXXX.

3. The XXXXX (Company) is a corporation authorized to write life insurance risks in all provinces of Canada.

4. The Corporation has a technology platform (the Platform) which permits the electronic collection of mortgage loan application and underwriting information.

5. Mortgage brokers use the Platform to complete mortgage loan applications.

6. The Corporation, the Company and the Agent have entered into an agreement to collaborate and arrange for the distribution of mortgage life group creditor insurance policies to mortgage brokers and certificates of group creditor insurance to qualified borrowers. (A copy of this agreement was previously provided.)

7. The Corporation's responsibilities are detailed in XXXXX the agreement as follows:

8. XXXXX

In consideration for the services provided, the Corporation is entitled to a monthly fee calculated in accordance with XXXXX the agreement.

Your Position

As outlined in your letter, it is your position that only a small portion of the fee received by the Corporation may be attributed to the right to use software and that the greater part of the fee is attributable to the exempt service of "arranging for" the issuance of an insurance policy and by virtue of section 139 of the ETA, the entire fee should be exempt.

You state that the Corporation is the entity that has both the distribution structure (i.e., the relationship with the mortgage brokers who are ultimately the group policy holders) and the delivery system (i.e., the Platform). Without the Corporation, the Company would not be able to offer the program. The Corporation is not simply providing a software platform to assist in the signing up of the mortgage brokers, it is actually providing the mortgage brokers who are being signed up. The Corporation has established a relationship with the mortgage brokers and controls access to them.

Our Comments

There are three parties to the agreement in question. They are the Company, the Agent and the Corporation. XXXXX[.]

XXXXX of the Agreement outline the Corporation's, the Agent's and the Company's obligations respectively. The Corporation's responsibilities are noted in the Statement of Facts above.

The main transaction is the issuing of a group insurance policy (the Life Policy) to the Policyholders, i.e., the mortgage brokers. The issuer is the Company. The mortgage brokers promote the Mortgage Protection Plan to eligible borrowers and those borrowers who are accepted by the Company receive a certificate of insurance. The Agent acts as an intermediary between the Company and the mortgage brokers in the placement of the Life Policies.

GST/HST policy statement P-239 - Meaning of the Term "Arranging for" as Provided in the Definition of "Financial Service" describes the elements that should be present for a service to qualify as a service of "arranging for" the supply of a financial service. The elements that should be present are:

•   the intermediary will help either the supplier or the recipient or both, in the supply of a financial service,

•   the supplier and/or recipient count on one or more intermediaries for assistance in the course of a supply of a financial service, and

•   the intermediary is directly involved in the process of the provision of a financial service and will therefore, expend the time and effort necessary with the intent to effect a supply of a service described in paragraphs (a) to (i) of the definition of financial service.

The policy also provides examples of what is and what is not considered "arranging for". It notes that a service acquired by an intermediary in providing an "arranging for" service will not in itself qualify as an "arranging for" service as it is only an input to the intermediary.

It is mortgage brokers and the Agent who use the Corporation's system and the Corporation's responsibilities as detailed in the agreement relate foremost to its relationship with the Agent. The Corporation's services as detailed in the agreement are provided to the Agent. Although the Corporation receives compensation from the Company, it does not directly provide any services to the Company.

Based on the above, we confirm our opinion that the services provided by the Corporation do not fall within paragraph (l) of the definition of financial service in subsection 123(1) of the ETA. The services provided by the Corporation are taxable services pursuant to subsection 165(1) of the ETA.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 952-9577.

Yours truly,

Marilena Guerra
Financial Institutions Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate