19 September 2003 GST/HST Interpretation 41939 - Application of GST to Clearing and Settlement Fees Charged to Introducing Brokers

Dear XXXXX:

Thank you for your letter XXXXX concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to clearing and settlement services provided by one brokerage firm ("the carrying broker") to another brokerage firm ("the introducing broker"). Unless otherwise indicated, all legislative references contained herein are references to the Excise Tax Act (ETA).

We apologize for the delay in providing you with this interpretation.

Interpretation Requested

You are requesting interpretations of the application of the legislation contained in the ETA and the CCRA's administrative policies as they apply to the following circumstances:

1. The carrying broker executes a trade ("the trading services") and performs clearing and settlement services in respect of that trade ("the clearing services") on behalf of the introducing broker. A single fee per trade is charged for performance of both the trading services and clearing services.

2. The carrying broker provides both trading services and clearing services in respect of a given trade. A separate fee per trade is charged for each of the trading services and clearing services.

3. The carrying broker provides both trading services and clearing services in respect of a given trade. A separate fee per trade is charged for each of the trading services and clearing services; however, the introducing broker must pay a minimum flat fee per month in respect of total clearing services.

4. The introducing broker executes its own trades but relies upon the carrying broker to perform clearing services for a fee per trade.

5. The introducing broker executes its own trades but relies upon the carrying broker to perform clearing services for a fee per trade. In addition, the introducing broker is subject to paying a minimum flat fee per month for clearing services.

You are of the view that clearing and settlement fees charged in respect of the proposed situations should all be considered exempt financial services, pursuant to paragraph (1) of the definition of financial service contained in subsection 123(1) as these services are integral to the transfer of ownership of a security regardless of who performs these services. Without such services, transfer of ownership would never occur and, therefore, the provision of such services should be considered the arranging for the transfer of ownership of a financial instrument. For this reason, these clearing and settlement services should be considered exempt financial services pursuant to paragraph (1) of the definition of financial service pursuant to subsection 123(1).

Interpretation Given

Based on the information provided, our interpretation is given in the same order as the questions posed:

1. When the carrying broker executes a trade and performs clearing services in respect of that trade on behalf of the introducing broker, and charges a single fee per trade for both services, this fee is paid in consideration for an exempt financial service (Paragraphs 123(1)(d) and (l) of the definition of "financial service"), as both services provided by the carrying broker are an integral part of the arranging for the transfer of ownership of a financial instrument.

2. When the carrying broker provides both trading services and clearing services in respect of a given trade, and charges a separate fee per trade for each of the trading services and clearing services, these fees are paid in consideration for an exempt financial service (Paragraphs 123(1)(d) and (l) of the definition of "financial service"), as both services provided by the carrying broker are an integral part of the arranging for the transfer of ownership of a financial instrument.

3. When the carrying broker provides both trading services and clearing services in respect of a given trade, and the introducing broker must pay a minimum flat fee per month in respect of total clearing services, in addition to paying a separate fee per trade for each of the trading services and clearing services, these fees are paid in consideration for an exempt financial service (Paragraphs 123(1)(d) and (l) of the definition of "financial service"), as both services provided by the carrying broker are an integral part of the arranging for the transfer of ownership of a financial instrument.

4. When the introducing broker executes its own trades but relies upon the carrying broker to perform clearing services for a fee per trade, the fee paid for the clearing services provided by the carrying broker is paid in consideration for a taxable administrative service.

5. When the introducing broker executes its own trades but relies upon the carrying broker to perform clearing services for a fee per trade, in addition to paying a minimum flat fee per month for clearing services, both fees paid for the clearing services provided by the carrying broker are paid in consideration for a taxable administrative service.

Explanation

Pursuant to subsection 123(1), the service of arranging for the issuance, granting, allotment, acceptance, endorsement, processing, variation, transfer of ownership, or repayment of a financial instrument is an exempt financial service. Some services, such as administrative services and information handling fees, may become taxable by virtue of the provisions of the Financial Services (GST/HST) Regulations if the services are provided by a person who is not at risk; however, services provided inter alia by an agent, salesperson, or broker who transfers the ownership of the instrument for a person at risk remain exempt. The CCRA considers this paragraph to encompass the ordinary activities of brokers, agents, and salespersons in their roles as go-betweens in the issue, renewal, sale, and purchase of financial instruments.

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.

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

Yours truly,

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