XXXXX
XXXXX
XXXXX
M. Guerra Case: HQR0000579
File: 11590-5; 11585-2
September 3, 1997
Dear XXXXX
This letter is in response to your memorandum dated February 24, 1997, requesting a confirmation of your position on the tax status of certain services supplied to the XXXXX . We apologize for the delay in responding.]
Our understanding of the facts is as follows:
1. XXXXX
2. XXXXX enters into swap transactions with Canadian residents. However, all the deals for North America are structured through a company in North America, XXXXX , because of the guarantee requirements for the swap contracts. XXXXX is a non-resident person and is not a registrant.
3. XXXXX charges XXXXX a swap servicing fee in relation to the master service agreement.
4. XXXXX
5. XXXXX is the centralized support unit for the legal and credit aspects of XXXXX global derivatives business. The Registrant is charged a separate fee for the legal and credit services provided by XXXXX
The following documents were provided:
1. XXXXX
2. XXXXX
3. XXXXX
4. XXXXX
5. XXXXX
6. XXXXX
7. XXXXX
8. The Master Service Agreement between XXXXX
9. XXXXX
Interpretations Requested
1. Are the fees charged by XXXXX Inc. for services which are exempt supplies because XXXXX are "arranging for financial services"?
2. Are XXXXX persons "at risk" thus exempting their supplies of the administrative services?
3. Are the services provided by XXXXX taxable supplies imported by the registrant for the purpose of making exempt supplies?
Analysis
A swap is a financial transaction in which two counterparties agree to exchange streams of payments over time according to a predetermined rule. A swap can be used to hedge any floating risk for a fixed rate such as commodity prices, interest rates or foreign exchange rates. Most swaps are settled in cash, they are usually over the counter with a counterparty, and are not generally traded on a recognized commodity exchange.
"Financial instrument" is defined in subsection 123(1) of the Excise Tax Act (ETA) as:
(a) a debt security,
(b) an equity security,
(c) an insurance policy,
(d) an interest in a partnership, a trust or the estate of a deceased individual, or any right in respect of such an interest,
(e) a precious metal,
(f) an option or a contract for the future supply of a commodity, where the option or contract is traded on a recognized commodity exchange,
(g) a prescribed instrument,(h) a guarantee, an acceptance or an indemnity in respect of anything described in paragraph (a), (b), (d), (e) or (g), or,
(i) an option or a contract for the future supply of money or anything described in any of paragraphs (a) to (h).
A swap transaction falls under the definition of "debt security" since the definition of debt security pursuant to ss. 123(1) includes "a right to be paid money".
A swap transaction is evidenced by an XXXXX , a standard form of master agreement which provides "standard terms for interest rate and currency transactions as well as a schedule which would allow customization of a number of specific points between the two parties to a transaction. Thus, the master agreement sets out the basic terms that would govern all transaction between the parties and only the specific details of individual transactions were required to be set out in confirmations" XXXXX
The Department has been provided with two such XXXXX . This indicates that there are two swap transactions taking place, i.e. the first between XXXXX and the second between XXXXX and the Counterparty.
A guarantee in respect of a financial instrument is considered to be a "financial service" under paragraph (e) of the definition of "financial service". Therefore the guarantee between XXXXX and the Beneficiary in respect of the swap between XXXXX and the Counterparty is considered to be a financial service as well. XXXXX is providing a financial service to the Beneficiary.
The Master Service Agreement states that XXXXX will provide the following services to XXXXX in connection with the administration of Canadian dollar swap agreements with third parties: (i) negotiation and preparation of appropriate documentation, including master agreements and other required documentation with third parties; and (ii) performance of back office support functions in connection with transactions entered into with third parties, including confirmations, periodic resets, booking transactions on the XXXXX system, and performing account and position reconciliation.
Appendix V notes that XXXXX also provides the following services once a transaction has been executed:
• preparation and delivery of counterparty confirmations;
• review of all XXXXX originated confirmations;
• processing of all swap transactions, including recording of transactions in the XXXXX software system;
• management of swap payment reset dates, including processing of reset dates, payment adjustments and accounting for the impact of resets;
• preparation of position reconciliations;
• preparation of account reconciliations;
• processing of all settlements with counterparties and with XXXXX staff in dealing with counterparty questions or disputes.
Interpretations Given
1. The fees charged by XXXXX and XXXXX are not fees charged for services which are exempt supplies because XXXXX are not "arranging for" financial services. A person who "arranges for" the entering into such swap transaction between two parties will be considered as providing a financial service by virtue of paragraph (l) of the definition of "financial service" in subsection 123(1) of the Act. For the purposes of paragraph (l) of the definition of "financial service" in subsection 123(1) of the ETA, Revenue Canada takes the position that the service of "arranging for" the supply of a financial service (such as the swap transaction) generally refers to the activities of an intermediary, such as a broker, a salesperson or a dealer, of bringing together in an active manner of two persons/parties (a supplier and a recipient of the financial service) for the supply of the financial service by one person to the other. "Arranging for" a service does not mean the service of "recommending", "advertising" or "marketing" alone. The term "arranging for" a service should go beyond the activities of merely referring or introducing one party to the other party for the supply of a financial service. In general, the intermediary would be expected to expend time and effort to assist both parties whenever necessary for the eventual success of the supply of the financial service by one party to the other party. An examination of the documents provided reveals that there are three separate financial instruments: the two swaps and the guarantee. XXXXX is entering into one swap transaction with XXXXX and a second one with the Canadian corporation (the "Counterparty"). The guarantee is between XXXXX and the Canadian corporation ("Beneficiary") and the guarantee is in respect of the financial instrument (the swap) between XXXXX . and the Beneficiary. Neither XXXXX are "arranging for" financial services. The documents provided do not evidence any transactions between the Counterparty and XXXXX i.e. no supply between XXXXX and the Counterparty, therefore XXXXX is not "arranging for" a financial service between XXXXX and the Counterparty. The service supplied by XXXXX to the Registrant is also not considered to be "arranging for" for the purpose of paragraph (l) of the definition of "financial service" in subsection 123(1) of the ETA.
2. XXXXX is not a person at risk. XXXXX is a division of XXXXX and is not a division of the parent corporation, XXXXX The issue of "person at risk" is not relevant regarding a particular service if the service does not qualify as a financial service under paragraphs (a) to (m) of the definition of "financial service" in subsection 123(1) of the ETA. XXXXX may be considered a "person at risk" by virtue of the Financial Services (GST) Regulations, but it should be noted that this is only relevant if XXXXX is providing a financial service as defined in paragraphs (a) to (m). Subsection 4(3) of the Financial Services (GST) Regulations states that a service referred to in subsection 4(2) of the Regulations is not a prescribed service for the purposes of paragraph (t) of the definition of "financial service" in subsection 123(1) of the ETA where the service is supplied with respect to an instrument by: "(a) a person at risk ...". "Instrument" as defined in subsection 4(1) of the Financial Services (GST) Regulations "means money, an account, a credit card voucher, a charge card voucher or a financial instrument". "Person at risk" is defined in subsection 4(1) of the Financial Services (GST) Regulations: "person at risk", in respect of an instrument in relation to which a service referred to in subsection (2) is provided, means a person who is financially at risk by virtue of the acquisition, ownership or issuance by that person of the instrument or of a guarantee, an acceptance or an indemnity in respect of that instrument. XXXXX is considered to be a "person at risk" under the provisions of subsections 4(1) and 4(3) of the Financial Services (GST) Regulations because XXXXX is considered to be financially at risk by virtue of the acquisition, ownership or issuance by XXXXX of a swap. As will be explained in 3 to follow, the service supplied by XXXXX . to XXXXX is not considered to be "a prescribed service" under paragraph (t) of the definition of "financial service" in subsection 123(1) of the Act since it is not defined to be a "financial service" under any of paragraphs (a) to (m).
3. The service supplied by XXXXX is considered to be a taxable supply. Since this supply is made outside Canada and it is not considered to be acquired by the Registrant for consumption, use or supply exclusively in the course of commercial activities of the Registrant, the service provided by XXXXX is an imported taxable supply for the purpose of the definition of "imported taxable supply" in section 217 of the ETA. The service supplied by XXXXX to the Registrant is therefore subject to the "Division IV Tax" imposed by section 218 of the ETA. The service supplied by XXXXX is a taxable supply. Appendix V states that XXXXX provides all the necessary services pertaining to the negotiation, preparation and ongoing administration of the underlying documentation for swap transactions including XXXXX , legal letters and corporate resolutions. In his letter dated XXXXX confirms that XXXXX "is heavily involved in the necessary negotiations with the counterparties, coordinates the work of other parties including legal counsel and acts as the central point of contact between the counterparty and XXXXX when the swap is in place." He also points out that "to the extent that the services supplied by XXXXX include certain administrative services, such services are not prescribed under paragraph (t) by the Financial Services (GST) Regulations." We are of the opinion that XXXXX is providing a management service which may include some administrative services. Management services are not included in any of paragraphs (a) to (m) of the financial service definition and are not exempted or zero-rated by any other provisions in the ETA. Consequently, the services provided by XXXXX are a taxable supply of a management service.
I trust the foregoing comments will be of assistance to you. Should you have any questions please do not hesitate to contact me at (613) 952-9577.
Sincerely,
Marilena Guerra,
C.M.A.
Rulings Officer
Financial Institutions and Real Property Division
GST/HST Rulings and Interpretations Directorate
Policy and Legislation Branch
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