19 March 2004 GST/HST Interpretation 48257 - Applicability of GST on Payment to Company A

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

Dear XXXXX:

Thank you for your letter XXXXX (with attachments), and for taking the time to speak to me with respect to the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to the transaction(s) described below. As your clientXXXXX requested XXXXX this ruling deals solely with the GST status of payments made by XXXXXCompany B to Company A XXXXX.

Statement of Facts

In the context of this request, you provided four agreements: the XXXXX Agreement, the XXXXX Agreement, the XXXXX Agreement and the XXXXX Agreement. Of these agreements, the XXXXX Agreement is the only agreement to which Company A is a party. The fees payable to Company A and the services for which it is to be compensated are set out in this agreement.

The purpose of the transactions is set out in the Preamble to the XXXXX Agreement as follows:

XXXXX

The services to be provided to Company B by Company A are set out in XXXXX of the Agreement and are reproduced here for ease of reference:

XXXXX

As set out below, Company A bills for certain services as well as receiving payment as a component of managed accounts. Company A's compensation for providing securities-related services is set out at XXXXX; whereas XXXXX provides for Company A billing Company B on a value or hourly basis, as follows:

XXXXX

In addition, XXXXX stipulates that Company A shall be responsible for the following costs, set out at XXXXX to the agreement:

XXXXX

Transaction(s)

Investment dealer/insurance broker XXXXX Company C/XXXXX Company DXXXXX hires Company B to act as an agent for the investment dealer in "arranging for" the issuance of insurance and securities and securities trading out of a "sub-office" provided for this purpose by Company A XXXXX. Under the various agreements provided, Company B hires Company C/Company D agents and Company B enters into a XXXXX Agreement with Company A and Company A Accounting Firm whereby Company A provides the premises, client referrals and client specific advice to Company C/Company D. In return, as part of its duties under the XXXXX Agreement, Company B agrees to compensate Company A on both a percentage and value basis.

This is confirmed by my conversations with XXXXX. The accounting firm is providing value for money. They place a Company C/Company D agent (IA) in an office connected to their office and signed "Company C". They provide technology and space. They review the financial plans on an as-needed basis. They know their clients needs and communicate them to Company C/Company D agents so that the IA can choose the best product. A portion of the entire amount paid to Company B pursuant to the various agreements is paid to Company A.

XXXXX considers the provision of investment advice to be arranging for a financial service, especially since the majority of fees are only paid where financial services are provided. He is of the opinion that since Company B receives no revenue if no securities or policies of insurance are placed, that the fees paid to Company A are consideration for the supply of a financial service. As part of its duties under the four related agreements, Company B is required to supervise trades, engage agents of Company C, ensure compliance, monitoring, and perform other functions necessary to meet licensing requirements.

Ruling Requested

What is the GST/HST treatment of the fees paid by Company B to Company A?

Ruling Given

Based on the facts set out above, we rule that the supplies made by Company A to Company B are taxable supplies of property and services subject to the GST/HST.

This ruling is subject to the general limitations and qualifications outlined in section 1.4 of Chapter 1 of the GST/HST Memoranda Series. We are bound by this ruling provided that none of the above issues is currently under audit, objection, or appeal; that there are no relevant changes in the future to the Excise Tax Act, or to our interpretative policy; and that you have fully described all necessary facts and transaction(s) for which you requested a ruling.

Explanation

Although Company A covenants at XXXXX to XXXXX this is not, in and of itself, a "financial service", as defined at subsection 123(1) of the Excise Tax Act (ETA). The supplies of real property (the premises), advice and referral services are not "financial services," nor are they "arranging for financial services" within the meaning of the definition of "financial service" pursuant to subsection 123(1) of the ETA.

Policy Paper, P-239, "Meaning of the Term "arranging for," sets out the CRA's interpretation of paragraph 123(1)(l) of the ETA. At page 3, paragraph b) sets out that the service of a third party of providing assistance to the supplier or the recipient in the provision of a financial service by the supplier or the recipient will not qualify as an "arranging for" service (e.g. a legal service... or referral service). The example provided parallels the supply from Company A to Company B. Thus, although the supplies by Company A may facilitate the provision of a financial service from Company B Associates ("IAs"/Company C/Company D Agents) to Company A's client, they do not constitute "arranging for a financial service," they are only inputs to Company B for use by the insurers and securities dealers issuing or transferring the financial instruments to the customer. I have enclosed a copy of this policy paper for your reference.

As set out in the Statement of Facts above, XXXXX of the preamble to the agreement includes restrictions that would preclude the CRA from considering Company A to be a "salesperson" for the insurer or securities dealer.

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