30 June 2003 GST/HST Interpretation 41416 - GST Treatment of Fees and Input Tax Credits (ITCs) Related to Automated Bank Machine (ABM) Transactions

Dear XXXXX:

Thank you for your letter XXXXX concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to transactions involving ABMs. Unless otherwise indicated, all legislative references contained herein are references to the Excise Tax Act (ETA).

Interpretation Requested

In light of concerns within the industry that the GST/HST be correctly applied to ABM transactions, you have requested clarification of the CCRA's position on the application of the ETA to:

1. the current industry practice whereby many ABM owners/operators share "surcharge revenue with merchants, under the terms of a revenue sharing agreement, GST exempt"; and

2. ABM operations generally, specifically as relates to ITC entitlement in the provision of exempt supplies or both exempt and taxable supplies.

You have also indicated concerns regarding the treatment of ABM operations, and request "consistent treatment within industry." It is important to note that ABM operations, particularly in the white label industry, may be structured in any number of different ways with a variety of parties or fees in a given agreement. As discussed below, the GST/HST is a transaction-based tax and the treatment of particular supplies depends upon the specific transaction.

As you are aware, the tax status of the interchange fee is currently under review. For this reason, and due to the above-noted variety of potential supplies and concerns, the analysis regarding ITC entitlement and allocation will provide general information only. Of course, we would be pleased to consider specific agreements, on request.

Interpretation Given

Based on the information provided, the application of the ETA to surcharge revenue and ITC entitlement for ABM operators is as follows:

1. Revenue Sharing

An owner/operator may charge a fee to a user of the ABM (often referred to as a "surcharge fee"). The person who is entitled to the surcharge fee for providing the payment of money to the cardholder is considered to be the supplier of a financial service to the cardholder. For greater certainty, generally, the supplier of the financial service to the cardholder is the person entitled to receive the fee either by virtue of ABM ownership or rental. Where the supplier of the financial service pays a portion of the surcharge fee (paid by the ABM user) to another person, such as a merchant who has provided a location for the ABM, the payment will, generally, be considered to be consideration for a taxable supply. The person who receives "a portion" of the fee from the supplier of the exempt financial service is not necessarily providing a financial service to this supplier.

2. ITCs

Generally, a registrant is entitled to an ITC for the GST/HST paid on property or services acquired for consumption, use or supply in the course of the registrant's commercial activities. Commercial activity does not include the making of exempt supplies. Consequently, no ITCs are allowed with respect to inputs to exempt supplies made by the registrant. Generally, where goods or services are used partly for personal use or for making exempt supplies, registrants are entitled to partial ITCs to the extent that the inputs are for use in commercial activities. No ITCs are available for inputs to exempt supplies.

Explanation

1. Sharing the Surcharge

Under the ETA, the tax status of fees relates directly to the service or good provided for the fee. It is the understanding of the CCRA that persons who own/operate ABMs may charge "surcharge fees" to cardholders who use the ABM in order to withdraw money. The surcharge fee paid by the cardholder using the ABM is considered to be consideration for an exempt supply of a financial service.

Under the ETA, where a person is entitled to receive a fee for a supply, the "sharing" of that fee, or "giving a portion" of the fee by agreement to another person indicates that there are two supplies involved: 1. the person entitled to the surcharge fee, as set out above, receives the entire surcharge fee for the exempt supply; and then 2. this person pays a fee to the other party for a supply (usually, for the supply of a non-financial service). The fact that one party agrees to pay a portion of the surcharge fee to another person, as opposed to agreeing to pay an amount from some other source of funds, does not negate the fact that the payment to the other party is for a separate supply.

The person who is entitled to collect the surcharge for providing the payment of money to the cardholder is considered to be the "supplier" of the financial service to the Cardholder. Generally, the supplier of the financial service is the person entitled to receive the fee either by virtue of ABM ownership or rental.

2. ITCs

You have indicated concerns regarding the consistent treatment of ITC claims in relation to ABMs. The scheme of the ETA is such that an ITC is a credit that GST/HST registrants can claim to recover the GST/HST that was paid or is payable to their suppliers for goods or services they acquired, imported, or brought into a participating province for use, consumption or supply in their commercial activities. Some registrants, including financial institutions (FIs), are governed by special provisions for allocating inputs as set out below; however, the underlying principle remains the same.

In order to determine ITC entitlement, a registrant must know the intended use of an input as well as whether the registrant is a person subject to special rules, in this case a FI. A registrant may be a listed FI as defined at paragraph 149(1)(a), or a de minimis FI, as defined at paragraph 149(1)(b), or (c). In general, under paragraph (b), the rule provides that a person is a FI if the person's revenues in the preceding taxation year from interest, certain dividends or income from separate fees or charges for financial services exceeded 10% of the person's total revenues for the preceding taxation year, and exceeded the threshold amount of $10,000,000 on an annualized basis. In general under paragraph (c), a person is considered a FI throughout a taxation year where the total of all amounts each of which is included in computing the person's income is comprised of interest, fees or other charges in respect of charge cards or credit cards issued by the person or loans, advances or credit granted by the person exceeded $1,000,000 in the preceding year.

Since the majority of your Association members are non-FIs, the general rules with respect to claiming ITCs are set out below. Any Association members who fall within the definitions of FI set out above will be required to follow the special ITC rules for FIs set out following the general rules below.

General Rule

The general rule regarding ITCs is found at section 169. Basically, a registrant may claim an ITC for GST/HST paid on the acquisition or importation of property or a service to the extent to which the person acquired or imported the property or service or brought it into the participating province for consumption, use or supply in the course of commercial activities of the person. Commercial activity does not include the making of exempt supplies by the person. In all cases, where an ITC is claimed, the documentary requirements set out at subsection 169(4) and the related Input Tax Credit Information Regulations must be met to support the claim.

Persons other than FIs are subject to the general rules for the calculation of ITCs, as set out at sections 169, 141 and 141.01. Section 141 generally provides that where substantially all (i.e., 90% or more) of the consumption or use of a property is in the course of commercial activity, all of the consumption or use will be deemed to be in the course of commercial activity. That is to say, a non-FI may claim full ITCs for inputs used "all or substantially all" in the course of commercial activity. Conversely, where "all or substantially all" of the intended or actual consumption or use of property or a service is other than in the course of commercial activity, all of the consumption or use is deemed to be other than in the course of commercial activity and no ITCs may be claimed on the input. The intent of the section is to reduce the number of instances where registrants might otherwise be required, for the purposes of determining an ITC, to apportion tax paid in respect of supplies received between commercial and other activities. Consequently, in cases where the 90% threshold has been met or exceeded, no allocation is necessary.

Where inputs do not meet or exceed the 90% threshold, the registrant must allocate inputs according to their percentage of use in commercial activities, exempt activities or otherwise. Generally, under the provisions of section 141.01, the extent to which property or a service is consumed or used, or is to be consumed or used, in the course of a commercial activity depends on the extent to which the consumption or use, or intended consumption or use, is for the purpose of making taxable supplies for consideration.

ITCs claimed with respect to the proceeds of supplies made via the ABM

As you are aware, the supplies made with respect to ABM ownership and operation may be either exempt or taxable in nature. The above-noted rules regarding ITC entitlement will apply to determine the eligibility of a registrant to claim ITCs.

For example, with respect to the surcharge fee, generally, the person entitled to receive the fee as consideration for an exempt supply will not be eligible to claim ITCs on any inputs related to the making of the exempt supply. However, where an ABM owner or operator is a non-FI making both taxable and exempt supplies, the registrant would first determine if the inputs are acquired for use, consumption or supply "all or substantially all" in the course of commercial activity (making taxable supplies), if so, full ITCs would be allowed. Where this is not the case, and inputs are acquired for use partially in commercial activity and partially in exempt activity, an ITC may be claimed to the extent of use in commercial activity; the non-FI registrant, like the FI registrant, must refer to sections 169 and 141.01 in order to determine the percentage of ITCs that may be claimed (for example, where an ABM owner acquires an input used 60% in exempt activities and 40% in taxable activities, the registrant would be entitled to claim an apportioned ITC of 40% of the GST paid on the inputs.)

Representations have been made by some retail ABM locations that the provision of money through the ABM is related to their commercial activities and falls within the application of subsection 185(1), thus entitling these registrants to full ITCs. Subsection 185(1) does not apply unless it can be demonstrated that the supply of the financial service relates to the commercial activities of the registrant. For example, a retail merchant who is in the business of operating a convenience store installs an ABM. The supply of the financial service made via the ABM is not directly related to the commercial activity of the store, subsection 185(1) would generally not apply and ITCs would be not be allowed for GST/HST paid on inputs to the operation of the ABM.

ITCs on the Supply of ABMs

It is our understanding that some members of your association may purchase ABMs for resale while others may purchase the ABMs for their own use. Eligibility to claim ITCs is based upon the intention of the person at the time that the property is acquired. Section 169 provides the general rules with respect to ITCs as noted above.

Generally, pursuant to subsection 169(1), a registrant will be entitled to a full ITC on ABMs acquired by it for resale or supply as tangible personal property. Where the registrant operates the ABM, there are specific rules dealing with ITCs and capital personal property found at section 199. Generally, ITC eligibility is determined based on a "primary use" test (more than 50%), in cases where the registrant remains the owner or operator of the machine. Where a change of use occurs following the initial purchase, the ETA provides rules as to the GST/HST treatment.

The ITC that a registrant is entitled to claim for capital personal property, at the time the property is acquired, is determined on the basis of the registrant's intended use in commercial activities at that time (section 196). If, at a later date, it is determined that the actual use of the property is different than its intended use, the change of use rule with reference to basic tax content may apply unless the change of use is found to be insignificant pursuant to section 197. A change of less than 10% is considered to be insignificant unless that change changes the percentage to more or less than 50%.

In circumstances where the registrant is not a FI, where the actual use of the property differs from the intended use, the change of use rules found at sections 199 and 200 will apply to capital personal property. Where the property is tangible personal property that has been appropriated by the registrant for use as capital personal property, section 196.1 provides guidance.

For example, where the owner sells the ABM:

(a) new - without ever having used it in its own activities - the general rules apply

The machine was purchased for resupply in the course of the commercial activities of the registrant; the registrant is entitled to full ITCs for the purchase of the ABM.

(b) used - after having used it in its own activities - the capital personal property rules apply

Generally, the machine has been used as an input to both taxable and exempt supplies.

Where the machine was primarily (more than 50%) used as an input to exempt activities (e.g. the revenues received from exempt supplies exceed the revenues from taxable supplies), no ITCs will be available on the purchase and the sale of the machine will be an exempt supply pursuant to subsection 200(3). Where this is not the case, the sale of the machine will be a taxable supply.

(c) used - pursuant to the terms of a demonstration agreement - the capital personal property or general rules will apply depending upon the owner's treatment of the ABM for income tax purposes and its stated intention (as evidenced by whether or not it claimed ITCs for the GST/HST paid upon purchasing the ABM). Where an ABM has been operated by the owner, even under a demonstration agreement giving an option to purchase, the CCRA would generally view the supply as a sale of personal property that is used capital property of the ABM supplier. Generally, the capital property has been used primarily to provide exempt financial services. As set out in example (b) above, the inputs are generally related to the exempt activity of providing financial services; therefore, subsection 185(1) would not apply to these inputs.

Special Rules for Financial Institutions (Listed and de minimis at 149(1)(b) and (c))

FIs are subject to special rules with respect to claiming ITCs. For example, section 185 does not apply to FIs. In addition, they are excluded from section 141 and the "all or substantially all" rule and must claim their ITCs based on the actual percentage of consumption, use or supply in commercial activity of the property or service. In other words, where FIs do not use inputs exclusively in the course of commercial activity, the tax paid or payable on the input must be apportioned between the intended use of the input in a commercial activity and any other use.

Where a registrant is a FI, it must apportion its mixed inputs as set out at section 141.01. For approaches that may be used to allocate multi-use inputs between taxable and exempt activities, please refer to GST/HST Memorandum 700-5-1 "ITC Allocation for Financial Institutions".

Capital Property of FIs (ITCs on acquisition of ABM)

Since the majority of supplies made by most FIs are exempt, it is more appropriate to allocate capital property inputs to supplies to determine ITCs rather than use the primary use rule. As a result, FIs may claim a partial ITC under subsection 169(1) at the time of acquisition of capital personal property to the extent the property is to be used in the FIs' commercial activities. For example, if a FI acquires a computer which is used 20% of the time in commercial activities, the FI may claim an ITC of 20% of the GST/HST paid on that computer.

Any subsequent change (10% or more) in use of capital personal property will be subject to the change in use rules in section 204, where the capital personal property costs over $50,000. In certain circumstances, the change of use rules for capital personal property of a FI apply to all capital personal property of the institution, including properties costing $50,000 or less. In general, the exceptions to the $50,000 threshold apply where a person becomes or ceases to be a FI, where a FI purchases a new business, or where a wind-up or amalgamation occurs. As a result, the FI must account for tax on any reduction in the use of its capital personal property in commercial activities or may be entitled to claim ITCs to the extent the property is used in commercial activities in certain circumstances as set out at sections 205 and 206.

Section 150 entitles two corporations who are members of the same closely related group that includes a listed FI to make an election to treat certain supplies as exempt supplies. The effect of this election is that the supplying member bears the tax on any inputs attributable to the provision of the property or services to the related member. The supplying member is not entitled to claim ITCs in respect of those inputs and does not charge tax to the related member. Qualifying supplies will be treated as financial services under paragraph (k) of the "financial service" definition at subsection 123(1) (supplies deemed to be financial services under section 150). As a result, the input used to make a supply that is deemed to be a financial service under subsection 150(1) will not be eligible for an ITC.

In addition, where a corporation, that is a member of a closely related group, has made an election under subsection 150(1), it is deemed to be a FI pursuant to section 151 throughout the period the election is in effect.

Varia

Restrictions on ITCs and Rebates

Most registrants claim their ITCs when they file their GST/HST return for the reporting period in which they made their purchases. A registrant may, however, claim an ITC in any reporting period that ends within four years of the end of the reporting period in which the registrant made the purchase that qualifies for the ITC.

Note that the time limit for claiming ITCs for a reporting period is reduced from four to two years for the following:

•   listed financial institutions; and

•   persons or businesses with annual taxable sales of more than $6 million for each of the two previous fiscal years.

Further, the two-year time limit does not apply to the following persons, even if they fall into the above two categories-these registrants have four years to claim their ITCs:

•   charities; and

•   persons or businesses with annual taxable sales of more than $6 million in the two previous fiscal years if at least 90% of their sales are from taxable sales, other than financial services.

Documentary Requirements

In a situation where a person has met the general conditions for claiming an ITC in respect of a supply of property or a service in a reporting period as set forth in subsection 169(1), in accordance with paragraph 169(4)(a), before filing the return in which the credit is claimed, the registrant must obtain sufficient evidence. That is, the supporting documentation must be in such form and contain such information as to enable the amount of the ITC to be determined, including any such information as may be prescribed. In addition to the general information requirements of paragraph 169(4)(a), the Input Tax Credit (GST/HST) Regulations contain the prescribed supporting documentation that a registrant is to obtain before filing a return in which an ITC is claimed. For specific requirements please refer to the regulation or to GST Memorandum 400-1-2: Documentary Requirements (enclosed.)

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 613-952-9262.

Yours truly,

Sheena France
Financial Institutions Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate

Enclosures (3)