8 July 1997 GST/HST Interpretation HQR0000556 - Treatment of Intermediary Brokers under Financial Services (GST) Regulations SOR 91-26

                                                                        GST/HST Rulings and Interpretations Directorate
10th Floor, Place Vanier, Tower C
25 McArthur Road
Ottawa, Ontario
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Dear XXXXX

Thank you for your letter of February 6, 1997 concerning the application of the goods and services tax (GST)/harmonized sales tax (HST) to certain clearing and settlement services performed by your clients in the securities brokerage industry.

Interpretation Requested

Proposed amendments to the "person at risk" concept in the above Regulation were announced by a Department of Finance news release on November 5, 1991, which indicated that the "GST legislation will be amended to clarify that clearing and settlement services in respect of financial instruments are not financial services notwithstanding that the supplier of the service may become at risk with respect to the instruments in the course of the supply of the clearing and settlement services. Consistent with existing administrative practice, this amendment will be effective as of January 1, 1991." The explanatory notes to this proposed amendment stated that "this amendment will deal with credit card verification services and similar services. Under their contractual arrangement, persons providing such services can become "at risk" in some circumstances, which could have the effect of taking them out of paragraph (t) and making their services exempt. This amendment will ensure that the services remain taxable." As this proposed amendment has never been formally enacted in the Excise Tax Act (Act) subsequent to its announcement in 1991, you wish to confirm with our office that this interpretation continues to be the administrative policy applied by Revenue Canada.

You also wish the Department's consideration and confirmation that the clearing and settlement services performed by a carrying broker on behalf of an introducing broker in the course of effecting a security transaction be consistently treated as exempt for GST purposes.

We understand that a "carrying broker" is an investment dealer which, in general, undertakes responsibility for one or more of the actual execution, clearance and settlement functions of a securities trade on behalf of the introducing broker together with other responsibilities in respect of funds and securities. The execution, clearance and settlement activities are each integral parts of "arranging for" a transaction, and are carried out under the carrying broker's execution number assigned to the broker by the applicable securities exchange through which the trade is effected. It is the clearance and settlement process that effects the transfer of the actual financial instrument from one owner to another in exchange for payment and is a pre-condition to the successful completion of the transfer of the financial instrument.

Interpretation Given

Based on the information provided in your letter, we agree that clearing and settlement services performed by a carrying broker on or behalf of an introducing broker in the course of effecting a security transaction would normally be part of an exempt financial service for GST purposes.

The Department's view is that the clearing and settlement services that are offered by a carrying broker in the course of effecting a security transaction, are an integral part of the "arranging for" the "issuance, granting, allotment, acceptance, endorsement, renewal, processing, variation, or transfer of ownership or repayment of a financial instrument."

The service of "arranging for" the transfer of a financial instrument is an exempt financial service under paragraph (l) of the definition of "financial service" in subsection 123(1) of the Act. While some services become taxable by virtue of the provisions of the Financial Services (GST) Regulations, because they are provided by a person who is not "at risk", services provided by, inter alia, "an agent, salesperson or broker who transfers ownership of the instrument for a person at risk or a person closely related to the person at risk" remain exempt. This paragraph encompasses the ordinary activities of brokers, agents and salespersons in their roles as go-between in the issue, renewal, sale and purchase of financial instruments.

Clearing and settlement services, on their own, i.e., third party administrative services only, are taxable when provided by a person not at risk. For example, if the introducing broker executes the trade, but relies upon the carrying broker to perform the clearing and settlement services only, the Department feels these clearing and settlement services are administrative in nature, and are therefore taxable - these services, for greater clarification, would be considered by the Department to be:

i) information delivery (transmittal of information);

ii) information processing (gathering, processing, reconciliation, etc.);

iii) third party administrative services such as custodian fees, dividend services and security settlement, etc.); and,

iv) taxable supplies such as photocopying, document distribution and security delivery fees.

The foregoing comments represent our general views with respect to the proposed amendment(s) to the Excise Tax Act as it(they) relate(s) to the subject matter of your letter. Proposed amendments to the Excise Tax Act, if enacted, could affect this interpretation. In addition, these comments do not take into account any future changes to the interpretation of the Excise Tax Act or to departmental administrative policy. These comments are not rulings and, in accordance with the guidelines set out in section 1.4 of Chapter 1 of the GST Memoranda Series, do not bind the Department with respect to a particular situation.

Should you have any further questions or require clarification on the above or any other GST/HST matter, please do not hesitate to contact me at (613) 954-4393.

Yours sincerely,

Karl P. Marten
Financial Institutions Unit
Financial Institutions & Real Property Division
GST/HST Rulings and Interpretations Directorate

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