9 March 2004 GST/HST Interpretation 48991 - Soft Dollar Arrangements

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.

This is in reply to your memorandum XXXXX which was forwarded to us by XXXXX of the XXXXX TSO.

Our understanding of the facts is as follows:

•   XXXXX (Investment Manager) has entered into soft dollar arrangements with XXXXX brokers: XXXXX. We have been provided with a copy of the Soft Dollar Agreement between the Investment Manager and XXXXX (the Broker).

•   The Investment Manager must identify a trade as a Soft Dollar Trade for its account when the trade is placed.

•   The trade must be in Canadian listed securities.

•   The Broker will execute the trade and charge a minimum Soft Dollar commission of $XXXXX.

•   XXXXX% of the Soft Dollar commissions are available to cover approved expenses.

•   Soft Dollar commissions generated will be accumulated in the Investment Manager's Soft Dollar account and paid out to approved vendors upon written instructions accompanied by the invoice involved, provided there are sufficient funds in the Soft Dollar account.

•   A monthly statement provided by the Broker will outline commissions generated and vendors paid on the Investment Manager's behalf.

Our Comments

As described in the facts above, the Investment Manager places a soft dollar trade order with Broker. The Broker executes the trade and charges a commission to the Investment Manager and places a specified percentage of the commission in a soft dollar account in the Investment Manager's name. The Broker uses the soft dollars to pay invoices on behalf of the Investment Manager.

Although there is no precise legal definition for the term, a soft dollar arrangement refers generally, to an arrangement in which a fiduciary (i.e., Investment Manager) directs trades for its fiduciary accounts to a broker-dealer for execution and in return, the broker-dealer sets aside a specified percentage of the commission paid ("soft dollars") in order to pay certain expenses incurred by the fiduciary. The types of expenses which can be paid using the soft dollars are outlined in the XXXXX Securities Commission Policy XXXXX.

"Supply" means "the provision of property or a service in any manner, including sale, transfer, barter, exchange, license, rental, lease, gift or disposition".

"Taxable supply" means "a supply that is made in the course of a commercial activity".

Subsection 165(1) states that "Subject to this Part, every recipient of a taxable supply made in Canada shall pay to Her Majesty in right of Canada tax in respect of the supply calculated at the rate of 7% on the value of the consideration for the supply".

Subsection 123(1) defines "financial service", in part, as "(d) the issue, granting, allotment, acceptance, endorsement, renewal, processing, variation, transfer of ownership or repayment of a financial instrument, ... (l) the agreeing to provide, or the arranging for, a service referred to in any of paragraphs (a) to (i)". A supply of a financial service is generally exempt. The commission charged by the Broker to the Investment Manager for executing the trade is a supply of a financial service and is therefore an exempt supply.

In addition to directing the trade order to the Broker the Investment Manager is making a supply to the Broker of referring its trading business. The portion of the commission retained by the Broker (i.e., the XXXXX% of the soft dollar commission) to pay for approved invoices on behalf of the Investment Manager is consideration for this supply by the Investment Manager to the Broker. This supply is a taxable supply. The Investment Manager must charge and collect GST on the supply. The Broker will not be eligible for ITCs on the GST paid in respect of this supply since it is an expense relating to its exempt activities.

The Investment Manager would be entitled to ITCs on its expenses paid for by the Broker using the soft dollars to the extent that the goods or services acquired are for the consumption, use or supply in the course of its commercial activities.

Should you have any further questions, do not hesitate to contact me at (613) 952-9577 or Duncan Jones at (613) 952-9210.

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

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