Please note that the following document, although correct at the time of issue, may not represent the current position of the Canada Revenue Agency. / Veuillez prendre note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'Agence du revenu du Canada.
GST/HST Rulings Directorate
Place de Ville, Tower A, 5th floor
320 Queen Street
Ottawa ON K1A 0L5
[Addressee]
Case Number: 244638
Dear [Client]:
Subject: GST/HST RULING
Acting as an Intermediary Between a Merchant and an Acquirer under a Payment Card Network
Thank you for your letter of [mm/dd/yyyy], in which you requested a ruling on behalf of […] (the “Company”), with respect to the application of the goods and services tax/harmonized sales tax (GST/HST) to the services supplied by the Company.
The HST applies in the participating provinces at the following rates: 13% in Ontario; and 15% in New Brunswick, Newfoundland and Labrador, Nova Scotia, and Prince Edward Island. The GST applies in the rest of Canada at the rate of 5%.
All legislative references below are to the Excise Tax Act (ETA) unless otherwise specified.
STATEMENT OF FACTS
For the purposes of your ruling request, you provided us with electronic copies of the following documents:
- Merchant Agreement between […][ACo] and a retailer (herein, the “Sample Merchant Agreement”)
- […] Agreement between the Company and [ACo] ([…][Agreement X])
Based on the information contained in your letter, the above documents and our telephone conversation of [mm/dd/yyyy], we understand the following:
1. The Company is retained by persons (each, an “Acquirer”) who supply merchants with the financial service (herein, an “Acquirer Service”) of acting as an acquirer under one or more payment card networks pursuant to Merchant Agreements of which the Sample Merchant Agreement is a representative example.
2. [Agreement X] is representative of the agreements that the Company enters into with Acquirers to provide them with services relating to their offering of Acquirer Services to merchants (each of which is hereinafter referred to as a “Client Agreement”).
3. The Company’s main duties and obligations under a Client Agreement with an Acquirer are as follows:
- soliciting prospective merchant customers of the Acquirer,
- negotiating terms and conditions of Merchant Agreements on behalf of the Acquirer, including rates, pricing and length of contract,
- assisting merchants with the completion of their application forms and verifying information,
- performing various checks (credit background and regulatory) and verifying the legitimacy of the merchant’s business in each case, including whether the merchant continues to comply with the relevant payment card network requirements, and
- educating and training merchants on the Acquirer’s services.
4. The Company negotiates each Merchant Agreement with the relevant merchant and then presents it to the Acquirer for consideration. The merchant will be bound by the terms so negotiated, subject to the Acquirer’s approval. The Company does not have the authority to bind the Acquirer. The Acquirer retains the right to accept or refuse to enter into a Merchant Agreement with a merchant.
5. For each transaction in respect of which an Acquirer provides its Acquirer Service to a merchant under a Merchant Agreement negotiated by the Company on behalf of the Acquirer, the Acquirer is liable to pay the Company a fee (the “Transaction-Based Fee”) as the sole form of consideration for the Company’s services to the Acquirer under their Client Agreement. This fee is generally calculated based on the difference between
(i) the Acquirer Service fee that the Company negotiated with the merchant; and
(ii) the sum of the interchange fee that was payable by the Acquirer to the card issuer in respect of the transaction and a base fee amount stipulated by the Acquirer to the Company (referred to as the “buy rate”).
RULING REQUESTED
You would like to know whether a supply made by the Company to an Acquirer pursuant to a Client Agreement is an exempt supply of a “financial service” within the meaning of the ETA.
RULING GIVEN
Based on the facts set out above, we rule that a supply made by the Company to an Acquirer pursuant to a Client Agreement is a supply of a “financial service” that falls under paragraph (l) of the definition of that term in subsection 123(1). Any such supply to an Acquirer is an exempt supply, unless it meets the conditions for being treated as a zero-rated supply under Part IX of Schedule VI to the ETA.
EXPLANATION
There are several elements of service that are provided by the Company to an Acquirer under a Client Agreement. Where an agreement provides for the provision of a combination of services and/or property, it must first be determined whether a single supply or multiple supplies are being made under the agreement.
Whether the provision of a combination of elements under an agreement constitutes a single supply or multiple supplies is a question of fact. GST/HST Policy Statement P-077R2, Single and Multiple Supplies provides guidance for making this determination, including the following principles.
1. Every supply should be regarded as distinct and independent.
2. A supply that is a single supply from an economic point of view should not be artificially split.
3. There is a single supply where one or more elements constitute the supply and any remaining elements serve only to enhance the supply.
In the present case, the Company receives a single consideration (in the form of the Transaction-Based Fee) for all of the elements that it provides to the Acquirer under a Client Agreement. The elements are provided together as integral components of what is a single supply from an economic point of view, which should not be artificially split. Accordingly, we conclude that the Company is making a single supply under a Client Agreement.
The next step is to determine the character of the supply that is made by the Company to an Acquirer under a Client Agreement. In particular, the question is whether the overall service supplied by the Company to the Acquirer is a “financial service”, within the meaning of the ETA.
A supply is one of a “financial service” for GST/HST purposes if the essence or essential character of the supply is captured by any of the inclusionary paragraphs (a) to (m) of the definition of that term in subsection 123(1) and is not captured by any of the exclusionary paragraphs (n) to (t) of the definition. The relevant inclusionary paragraphs for present purposes are paragraphs (a), (i) and (l).
Paragraph (a) includes the payment of money. Paragraph (i) refers to any service provided pursuant to the terms and conditions of any agreement relating to payments of amounts for which a credit card voucher or charge card voucher has been issued. Paragraph (l) refers to the agreeing to provide, or the arranging for, a service that is referred to in any of paragraphs (a) to (i) and not referred to in any of paragraphs (n) to (t).
The Acquirer Service falls under paragraph (a) and/or (i) of the financial service definition. Consequently, the service that is supplied by the Company to an Acquirer under a Client Agreement falls within the financial service definition under paragraph (l) thereof if the Company’s service can properly be described as arranging for the Acquirer Service that is supplied by the Acquirer.
In determining if a service is included in paragraph (l) of the financial service definition, all of the facts surrounding the transaction must be considered. Technical Information Bulletin B-105, Changes to the Definition of Financial Service (TIB B-105) sets out a number of factors to consider, including (but not limited to) the activities performed by the intermediary, the extent of involvement and effort of the intermediary in the provision of the financial service in question, the degree of reliance of either the supplier or recipient on the intermediary in the course of providing the financial service and the intention of the intermediary to effect a supply of the financial service.
In the present case, the purpose of the Company’s supply is to act as an intermediary to bring together the Acquirer and prospective merchant customers of the Acquirer with the view to causing supplies by the Acquirer of its Acquirer Service to occur. The Company is involved in the entire negotiation process for the supply of Acquirer Services by the Acquirer to merchants. In that process, it appears that in each case the Company is relied upon heavily by the merchant and the Acquirer. The Company delivers to the Acquirer a fully negotiated Merchant Agreement to which the merchant will be bound, subject to the Acquirer’s approval. We therefore conclude that under its Client Agreement with an Acquirer, the Company is making a supply of a service of “arranging for” the Acquirer Service offered by the Acquirer, within the meaning of paragraph (l) of the financial service definition. None of the exclusionary paragraphs of that definition apply in the circumstances. The Company’s service to the Acquirer is thus a financial service for GST/HST purposes.
A supply of a financial service is an exempt supply under Part VII of Schedule V to the ETA unless it meets the conditions for being treated as a zero-rated supply under Part IX of Schedule VI to the ETA. In this case, for the Company’s supply to an Acquirer to be a zero-rated supply, the Acquirer would have to be a non-resident person and, at the time of the supply, the Company would have to be a “financial institution”, within the meaning of the ETA. For more information regarding financial institution status, refer to GST/HST Memorandum 17-6, Definition of “Selected Listed Financial Institution”, and GST/HST Memorandum 17-7, De Minimis Financial Institutions.
DISCLAIMER
In accordance with the qualifications and guidelines set out in GST/HST Memorandum 1-4, Excise and GST/HST Rulings and Interpretations Service, the Canada Revenue Agency (CRA) is bound by the ruling given in this letter provided that: none of the issues discussed in the ruling are currently under audit, objection, or appeal; no future changes to the ETA, regulations or the CRA’s interpretative policy affect its validity; and all relevant facts and transactions have been fully and accurately disclosed.
If you require clarification with respect to any of the issues discussed in this letter, please call me directly at 416-709-0130 or my manager, Hélène Lacasse, at 343-571-0207. Should you have additional questions on the interpretation and application of the GST/HST, please contact a GST/HST Rulings officer at 1-800-959-8287.
Sincerely,
Marlene Legare
Industry Sector Specialist
Financial Services Unit
Financial Institutions and Real Property Division
GST/HST Rulings Directorate
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