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.
Excise and GST/HST Rulings Directorate
Place de Ville, Tower A, 15th floor
320 Queen Street
Ottawa ON K1A 0L5
Case Number: 121555
February 21, 2011
Dear [Client]:
Subject:
GST/HST INTERPRETATION
Application of GST/HST to Referral Services
Thank you for your letter of February 9, 2010 and the sample referral agreement you provided on April 30, 2010 concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to referral services. We apologize for the delay in responding to your enquiry.
HST applies at the rate of 15% in Nova Scotia, 13% in Ontario, New Brunswick, and Newfoundland and Labrador, and 12% in British Columbia. GST applies at the rate of 5% in the remaining provinces and territories.
All legislative references are to the Excise Tax Act (ETA) unless otherwise specified.
Based on the information in your letter and the copy of an agreement entitled, [...]
(the agreement), you provided:
• A Person (referred to as the "Company" in the agreement) who is not licensed to trade in securities or to provide discretionary portfolio management services refers prospective clients to investment counsel and/or portfolio managers ("ICPM") (referred to as "Advisor" in the agreement) who are licensed under securities laws to trade in securities and to provide discretionary management services.
• The Person engages in seeking out and introducing clients to the Advisor, gathering information about clients for the Advisor, completing required forms to transfer funds to the Advisor and providing other assistance as required from time to time by the Advisor or clients.
• For these services, the Advisor pays the Person a fee calculated as a fixed percentage of the amount the Advisor bills to the client.
• The Advisor bills his clients a fee that is calculated on a quarterly basis as a percentage of net asset value of the account under management on the last day of the quarter.
• Based on section [X] of the agreement, the Person may refer clients to the Advisor for the opening of investment advisory accounts where such would be consistent with those clients' needs and objectives.
• Based on section [XX], the agreement is not intended to be and shall not be treated as anything other than a referral agreement relating to the provision of certain services, with the rights of the parties being those created under the agreement and as may now or hereafter exist in accordance with applicable law.
Interpretation Requested
You would like to know whether the services provided by the Person to the Advisor as described in section [X] of the agreement falls within paragraph (l) of the definition of financial service in subsection 123(1).
Interpretation Given
Under the ETA, all supplies are taxable, including referral services, unless they are specifically exempt.
All supplies of financial services are exempt under Part VII of Schedule V unless they are specifically zero-rated under Part IX of Schedule XI (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 is 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.
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. In this type of situation it is a question of fact whether the person is making a single supply or multiple supplies.
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 is determined that multiple supplies are being provided by a person the possible application of sections 138 and 139 should be considered.
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.
The term "arranging for" under paragraph (l) is generally intended to include intermediation activities that are normally performed by financial intermediaries described in subparagraph 149(1)(a)(iii) such as agents, broker and dealers in financial instruments or money. In determining if an intermediary's service is included in paragraph (l), all 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 the business of providing financial services).
A referral service provided by the Person to the Advisor, such as the service described in the agreement is not a financial service, even if the service may result in clients investing with the Advisor. The Person's referral service consists of identifying and introducing potential clients to the Advisor, and as such, is not included in paragraph (l) of the definition of financial service.
While the Person's service may assist the Advisor in providing a financial service of issuing or transferring securities, the service considered as a whole is a referral service.
Even if it could be argued that the supply of a referral service made by the Person to the Advisor is included in paragraph (l) of the definition of financial service in subsection 123(1), the service is excluded from that definition by paragraph (r.4) of the same definition.
Paragraph (r.4) clarifies that certain services that are preparatory to or provided in conjunction with a financial service are excluded from that definition. Paragraph (r.4) excludes from the definition of financial service, a service (other than a prescribed service) that is preparatory to the provision or the potential provision of a service referred to in any of paragraphs (a) to (i) and (l) of the definition of "financial service", or that is provided in conjunction with a service referred to in any of those paragraphs, that is:
(i) a service of collecting, collating or providing information; or
(ii) a market research, product design, document preparation, document processing, customer assistance, promotional or advertising service or a similar service.
Currently, no services are prescribed or proposed to be prescribed for the purposes of paragraph (r.4).
As clarified by paragraph (r.4), even it could be argued that the service provided by the Person is in paragraph (l) of the definition of financial service such service would be excluded from that definition. Consequently, a referral service provided by the Person to the Advisor as described in the agreement, is a taxable supply.
Please note that examples 10 and 17 of the GST/HST Technical Information Bulletin: B-105, Changes to the Definition of Financial Service, illustrate situations that relate to referral services.
The foregoing comments represent our general views with respect to the subject matter of your request. These comments are not rulings and, in accordance with the guidelines set out in GST/HST Memorandum 1.4, Excise and GST/HST Rulings and Interpretations Service, do not bind the Canada Revenue Agency with respect to a particular situation. Future changes to the ETA, regulations, or our interpretative policy could affect this interpretation.
If you require clarification with respect to any of the issues discussed in this letter, please call me directly at 613-954-1433. Should you have additional questions on the interpretation and application of GST/HST, please contact a GST/HST Rulings officer at 1-800-959-8287.
Yours truly,
Gabrielle Nadeau
Financial Institutions Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate
UNCLASSIFIED
Email this Content