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.
DATE May 17, 2012
FROM
Paul Lafond
Financial Institutions Unit
Financial Institutions and Real Property Division
TO
[Addressee]
FILE
97556
SUBJECT :
GST/HST Interpretation - Referral services associated to point-of-sale processing services
Further to […][your inquiry], we are writing in response to your concerns on the application of the GST/HST to supplies of referral services provided by […](Supplier) in connection with point-of-sale (POS) debit and credit card processing services (Processing Services). We apologize for the delay in responding.
All legislative references are to the Excise Tax Act (ETA) and the regulations therein, unless otherwise specified.
BACKGROUND/FACTS
Our understanding of the facts is based on the following documents:
1. […](Processing Agreement), dated [mm/dd/yyyy], between the Supplier, […](USCo), and the […](U.S. Member).
2. Letter dated [mm/dd/yyyy], from the Supplier’s representative, […], briefly outlining the business relationships and activities of the Supplier.
3. Revenue sharing report detailing the calculations and payments made to the Supplier by […] (CanCo), […].
4. […] Application between a Canadian retailer (Merchant), CanCo, and […] and […] (Canada Members).
5. Sample invoice of the Supplier’s purchase of POS Terminals from CanCo.
6. Letter dated [mm/dd/yyyy], from CanCo to the Supplier discussing the […] program with […].
The Supplier purchases POS Terminals from CanCo, sells them to Merchants and leasing companies and collects GST/HST on the consideration charged to the Merchants. The Supplier does not provide Processing Services or contract with the Merchants for such services. Rather, as a Member Service Provider (MSP), the Supplier markets the Processing Services to Merchants who are then referred to CanCo (Referral Service).
CanCo and USCo supply various technical and administrative services designed to support customer transactions initiated on the Merchant’s POS Terminal. Since CanCo and USCo are not Interac Association Members, the Processing Services are contracted to a third party, […], an Interac Member and Acquirer.
According to the Processing Agreement, the Supplier refers to USCo and the U.S. Member potential Merchants (Referred Merchants) for the purpose of providing Processing Services to those Merchants by setting out the circumstances under which the Supplier may introduce the Merchants, as well as the fees payable to the Supplier for its Referral Service. The Supplier, as an MSP is an independent contractor and not an agent or employee of USCo or U.S. Member.
Under the Processing Agreement, a Referred Merchant is any seller of goods, services or both, referred to USCo and the U.S. Member by the MSP (i.e., the Supplier). The Supplier will use its best efforts to locate, investigate and refer Merchants that the Supplier believes to be likely candidates for the Processing Services offered by USCo.
The Processing Agreement explains that USCo or the U.S. Member will review the Merchant Application submitted by the Referred Merchant and will, at their sole discretion, reserve the right to refuse to sign an Application with any Merchant referred by the Supplier. Any Referred Merchant will then enter into a Merchant Agreement (not provided) with USCo and the U.S. Member for the provision of the Processing Services in connection to the debit and credit card transactions. The Supplier is not a party to the Merchant Agreement, or have any additional obligations imposed upon it by that Agreement.
The Supplier will also provide under the Processing Agreement, all necessary training for Referred Merchants as well as Merchant Support to ensure that the Referred Merchant is aware of its customer service requirements and that it must remedy any customer service problems.
The Processing Agreement also explains that USCo will provide to the Referred Merchant a network help desk, enrolment and set up services, administration of credit policy, chargeback and retrieval processing services, collection and fraud monitoring and settlement services.
Although USCo is shown as a party to the Processing Agreement, you confirmed that CanCo is in fact the person who pays for the Supplier’s Referral Service. […], your view is that the Processing Agreement is in fact with CanCo rather than with USCo. Based on this account, we have therefore assumed that CanCo is the recipient of the Supplier’s services (i.e., CanCo is the person to whom the supply is made).
CanCo will pay the Supplier as consideration for the Referral Service and other services performed under the Processing Agreement, any Referred Merchant discount revenues and/or fees collected in excess of the fees and other charges set out in Schedule B (not included). You indicated that the Supplier does not collect or remit GST/HST on the consideration it receives under the Processing Agreement for its services.
ISSUE
You would like to know whether the services provided by the Supplier under the Processing Agreement fall within paragraph (l) of the definition of “financial service” in subsection 123(1).
ANALYSIS
The determination of whether a particular supply made by the Supplier is subject to GST/HST requires a detailed review of the facts and circumstances of the transactions which generally includes a review of the agreement or agreements under which the supply is made.
Where an agreement provides for the provision of a number of services or property and services, it must first be determined whether a single supply or multiple supplies are being provided under the agreement. This distinction is important in cases where a combination of services and or property is supplied by a person under an agreement, some of which would be taxable and some of which would be exempt if supplied separately.
Whether services performed by the Supplier are considered to be a single supply or multiple supplies under the Processing Agreement is a question of fact. GST/HST Policy Statement P-077R2, Single and Multiple Supplies, provides additional information on determining whether a single supply or multiple supplies are being provided.
If it is determined that multiple supplies are being provided by a person, the possible application of sections 138 and 139 should be considered. However, if it is determined that a single supply is being provided, then the predominant element of that supply must be established to determine the nature of the supply. If the predominant element of the single supply is determined to be a financial service, then the supply as a whole will be considered a financial service. This determination will generally be based on written agreements between the person providing the service and the person’s client detailing the actions, responsibilities and obligations of the person in connection with the supply.
When reviewing the facts set out above, it is clear that since the elements of the Supplier’s service relative to the POS Terminal under the Processing Agreement (i.e., Referral Service, Merchant Support and training) are integral components that are inextricably linked to each other, the Supplier is providing a single supply of a service to CanCo. Consequently, neither section 138 nor section 139 applies to the supply of the Referral Service.
Supplies of financial services
Supplies of financial services are exempt under Part VII of Schedule V unless they are specifically zero-rated under Part IX of Schedule VI (which generally requires that the supply be made by a financial institution to a non-resident and that certain other conditions are met). A service will be a financial service where it is included in any of paragraphs (a) to (m) of the definition of financial service in subsection 123(1) and is not otherwise excluded by any of paragraphs (n) to (t) of that same definition.
For example, a service performed by a person that is the agreeing to provide, or the arranging for, a financial service is also considered a financial service under paragraph (l) of the definition of financial service. The term “arranging for” is generally intended to include intermediation activities that are normally performed by financial intermediaries described in subparagraph 149(1)(a)(iii), such as agents, brokers and dealers in financial instruments or money.
In determining if an intermediary’s service is included in paragraph (l), all of the facts surrounding the transaction, including the following factors, must be considered:
* the degree of direct involvement and effort of the person in the provision of a financial service referred to in any of paragraphs (a) to (i);
* the time expended by the intermediary in the provision of a financial service referred to in any of paragraphs (a) to (i);
* the degree of reliance of either or both the supplier and the recipient on the intermediary in the course of providing a financial service referred to in any of paragraphs (a) to (i);
* the intention of the intermediary to effect a supply of a financial service referred to in any of paragraphs (a) to (i); and
* the normal activities of an intermediary in a given industry (including whether the intermediary is engaged in business of providing financial services).
Where an intermediary provides a number of services including services described by any of paragraphs (n) to (t) as part of an agreement to provide or arrange for a supply of a financial service, the single supply of the bundled services may be a supply of a financial service depending on the facts surrounding the transaction, the above listed factors, and the predominant element of the supply.
In general, services in the nature of management, administration, marketing or promotional activities including referral services are intended to be taxable as they are not themselves financial services. As such, the Supplier is not performing a financial service described in any of paragraphs (a) to (m), but rather is providing a taxable service consisting predominantly of marketing, promoting and referring potential Merchants for the purpose of providing Processing Services. Also, since we have assumed that the recipient of the Supplier’s services is CanCo (rather than USCo), the zero-rated provisions for exported services do not apply.
[…].
If you require further information or clarification please do not hesitate to contact me at (613) 941-2046.
Paul Lafond
Financial Institutions Unit
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