23 April 2003 GST/HST Interpretation 43736 - ABM Machines

Dear XXXXX

Thank you for your e-mail XXXXX, relevant agreement and letter from the XXXXX concerning the application of the Goods and Services Tax (GST) to the operations of the XXXXX.

Statement of Facts

Our understanding of the facts is as follows:

1. The XXXXX, a corporation incorporated under the laws of XXXXX entered into a XXXXX (Service Agreement) with the XXXXX (Bank) XXXXX, to provide automated banking services at its casinos.

2. The Bank sub-leased XXXXX  white label Automated Banking Machines (ABMs) to the XXXXX through a Third Party authorized representative. According XXXXX to the Service Agreement, the XXXXX will make monthly lease payments, first line maintenance payments and second line maintenance payments to the Third Party in accordance with XXXXX the Service Agreement.

3. XXXXX of the Service Agreement defines the responsibilities of the XXXXX in relation to the white label ABMs operated by the XXXXX. These responsibilities include the installation of the white label ABMs, the purchase of supplies from the Bank, first line maintenance which includes supplying cash, clearing cash jams and loading transaction receipts XXXXX, the cost of second line maintenance provided by the Third Party in accordance with XXXXX, supplying cash and cash balancing with the assistance of the Bank XXXXX.

4. XXXXX of the Service Agreement defines the responsibilities of the Bank. The responsibilities of the Bank include the telecommunication costs, the switching/processing of all transactions XXXXX, the provision of a shared ABM network XXXXX, the monitoring services XXXXX, the cash balancing services XXXXX, the processing of daily cash settlements XXXXX, the settlement with other financial institutions XXXXX the training for XXXXX employees XXXXX and the other services required to operate the white label ABMs leased by the XXXXX.

5. According to XXXXX of the Service Agreement the Bank shall pay the XXXXX in accordance with the terms described in XXXXX the Service Agreement. The Bank receives a XXXXX generated when the debit cardholder uses a card at a white label ABM (XXXXX[)]. We have assumed that this fee represents the XXXXX charged by the XXXXX and described in the XXXXX[.] The Bank keeps $XXXXX of the $XXXXX XXXXX and pays $XXXXX to the XXXXX.

6. The XXXXX receives a XXXXX of XXXXX when a debit cardholder uses his/her card at a white label ABM machine. According to XXXXX the XXXXX pays the Bank the following amounts per white label ABM machine, $XXXXX per transaction for transactions between XXXXX and XXXXX per transaction for transactions between XXXXX. The Bank does not receive a portion of the XXXXX for transactions at the white label ABM of XXXXX and greater.

Interpretation Requested

1. Is the $XXXXX fee generated by the cardholder's use of the white label ABM subject to GST?

2. Does the XXXXX provide taxable services to the Bank XXXXX for the $XXXXX portion of the $XXXXX fee generated by the cardholder?

3. Does the XXXXX receive a taxable service for the portion of the XXXXX paid to the Bank XXXXX?

Interpretation Given

Based on the information provided,

1. We are currently reviewing, the status of the supply for which the $XXXXX is the consideration. Accordingly, we are unable to comment on the tax status of the $XXXXX fee received by the Bank.

2. The XXXXX provides taxable services to the Bank XXXXX for the $XXXXX portion of the $XXXXX XXXXX.

3. The XXXXX receives a taxable service the consideration being the portion of the XXXXX paid to the Bank XXXXX.

Explanation

1. Is the $XXXXX fee generated by the cardholder's use of the white label ABM subject to the GST?

The Bank as the Acquirer of the transaction resulting from the debit cardholders use of his/her debit card is allowed to charge the Issuer of the debit card an XXXXX in accordance with the XXXXX established by the XXXXX. The characterization of this fee is currently under consideration. Therefore, we are unable to provide you with our comments on the characterization of this supply. This fee is charged pursuant to an understanding between the Bank as the Acquirer of the transaction and the Issuer of the debit card, which is usually another Financial Institution. Therefore, as the $XXXXX fee is charged for services between two different parties (the Bank and another Financial Institution), the tax status of this fee does not affect the characterization of the services between the Bank and the XXXXX. The Bank pays the $XXXXX portion of the $XXXXX XXXXX for services received from the XXXXX. This fee has no co-relation to the $XXXXX fee received by the Bank for its role as the Acquirer of the transaction resulting from the debit cardholder's use of the debit card. Therefore, the characterization of the $XXXXX fee paid by the Bank to the XXXXX is not dependant on the characterization of the $XXXXX fee.

2. Does the XXXXX provide taxable services to the Bank XXXXX XXXXX for the $XXXXX portion of the $XXXXX fee generated by the cardholder?

The Bank is entitled to the $XXXXX fee as the Acquirer of the transaction that originates when the debit cardholder uses a debit card. The Bank keeps $XXXXX of the $XXXXX "XXXXX" for its role as Acquirer and pays $XXXXX to the XXXXX. The $XXXXX received by the XXXXX represents consideration for the services described in XXXXX the Service Agreement. These services include the cost of installing the white label ABM machines, first line maintenance of the machines which includes supplying cash, clearing cash jams and loading transaction receipts, and the cost of second line maintenance. These services do not qualify as "financial services" as listed in paragraphs (a) to (m) of the definition of "financial service" found in subsection 123(1) of the Excise Tax Act (ETA). Therefore, the XXXXX is required to collect the GST on the $XXXXX received from the Bank.

3. Does the XXXXX receive a taxable service for the portion of the XXXXX paid to the Bank XXXXX[.] According to the XXXXX the XXXXX as the Card Acceptor is allowed to charge the debit cardholder a XXXXX[.] The XXXXX dispenses money to the debit cardholder and receives the XXXXX fee as consideration for this service. The cash dispensing service qualifies as the "payment of money" under paragraph (a) of the definition of "financial service" found in subsection 123(1) of the ETA. Therefore the XXXXX paid by the cardholder qualifies as an exempt supply under section 1 of Part VII of Schedule V to the ETA. However, the portion of the XXXXX paid to the Bank is paid as consideration for a composite supply of taxable services.

Our analysis of the services provided by the Bank and listed in XXXXX the Service Agreement results in three main groups of services. The first group of services relates to the mechanical and telecommunication support required to operate a white label ABM, the second group of services relates to customer services and white label ABM monitoring services and the third group of services relates to the cash balancing services offered by the Bank.

The first group of services includes services like the switching/processing of all transactions, the demarcation of white label ABM units and access to the Bank's XXXXX. The second group of services includes customer dispute services and ABM monitoring services. The third group of services relates to the cash balancing function and the settlement of transactions with other financial institutions. Although XXXXX indicates that there are three groups of services offered, it is essential to determine whether these three groups of services interact with each other to form a single composite supply as referred to in GST/HST Policy Statement P-077R: SINGLE AND MULTIPLE SUPPLIES (Policy P-077R). Policy P-077R provides guidance on the principles to be used to distinguish between single and multiple supplies. As the initial tests do not assist in the characterization of the services provided by the Bank the additional tests listed below suggested in Policy P-077R help to characterize the services provided by the Bank.

1. If the recipient did not receive all of the elements, would each element, in itself, and in the context of this transaction, be of any use to the recipient? [If yes, likely multiple supplies; if no single supply.]

The second and third groups of services will be of no use to the XXXXX without the mechanical and telecommunications services (first group of services). By operating these white label ABMs the XXXXX offers a cash dispensing service to its customers and the services provided by the Bank supports the operation of these white label ABMs. The various services like the ABM monitoring service, the training and the telecommunication services do not have inherent use to the XXXXX as independent services. It is the inter-relationship between these services that results in the operation of the white label ABM. Therefore, this factor suggests that the services result in the provision of a composite supply.

2. Is the provision of a particular element contingent on the provision of another element? [If yes likely a single supply; if no, likely a multiple supply.]

The monitoring service offered by the XXXXX will be of no use to the XXXXX without the telecommunications services provided by the Bank. Similarly the services of a project manager will be useless if XXXXX does not have access to the Bank's XXXXX. It is clear that all the services provided by the Bank are contingent on each other and interact with each other to facilitate the operation of white label ABMs.

3. Is the recipient made aware of the specific elements (in detail) that are part of the package? [if yes, likely multiple supplies; if no, likely a single supply.]

The XXXXX is made aware of the services provided by the Bank. Therefore, this factor does not assist in the characterization of the supply. However, according to XXXXX the Service Agreement "XXXXX[".] This section indicates that the Bank consider the project as a single project and assumes responsibility for the project as the XXXXX attendance at the meeting is optional. Therefore, although the XXXXX is aware of the services provided by the Bank the XXXXX is unable to provide any meaningful input on how the Bank should perform its duties. Therefore, it is likely that the XXXXX purchases a composite supply of a white label ABM support system from the Bank[.]

The factors discussed above indicate that the Bank provides a single composite supply of a support system required to provide the cash dispensing service offered through the white label ABMs leased by the XXXXX.

The next issue is the tax status of this composite supply. Most of the services provided by the Bank are taxable services like, the switching/processing of all transactions, the provision of a shared ABM network, the ABM monitoring service and the employee training services. However, we recognize that the Bank provides a clearing and settlement function in relation to withdrawals from and deposits made at the white label ABM. According to section 3 of the Financial Services Regulations established under the ETA the clearing and settling of cheques carried out by members of the Canadian Payments Association is a "prescribed service" for the purposes of paragraph (m) of the definition of "financial service" found in subsection 123(1) of the ETA. As the Bank is a member of the Canadian Payments Association this service will qualify as a prescribed services under paragraph (m) of the definition of "financial service" in subsection 123(1) of the ETA. However, these services inter-relate with each other to result in a supply of a support system that facilitates the operation of white label ABMs. This support system offered by the Bank is a taxable supply.

The tax status of the underlying service does not affect the characterization of the composite supply. The main categories of services received by the XXXXX relate to the switching service, the provision of the ABM network, and the ABM monitoring service, the customer dispute services and employee training service. These services are taxable services and the clearing and settlement service is one of the many services that support the operation of the ABM.

The composite service offered by the Bank is an ABM support system that assists the operation of white label ABMs. This service does not qualify as a "financial service" as it is not referred to in any of the paragraphs from (a) to (m) of the definition of "financial service" found in subsection 123(1) of the ETA. The portion of the XXXXX paid by the XXXXX to the Bank presents consideration for a taxable service required to support the operation of white label ABMs. Therefore, the XXXXX should pay GST on the portion of the XXXXX paid to the Bank.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 957-8222.

Yours truly,

Manjula Vethanayagam
Financial Institutions Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate
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