15 April 2002 General Information Letter 11585-27 - GENERAL INFORMATION LETTER Automated Banking Machine Transaction Fees

Dear XXXXX:

We are writing this letter to inform you XXXXX of the tax status of the automated banking machine (ABM) transaction fees.

We believe that there is some uncertainty in the industry as to the tax status of these fees, specifically, the interchange fees (also known as XXXXX fees) regulated by the XXXXX.

We understand that the major participants in the XXXXX network are:

-    The switch connector:

provides the relay environment to access the XXXXX network. There are approximately XXXXX switch connectors in Canada.

-    The operator of ABMs:

owns and operates the ABM.

Also, some operators sell ABMs to retailers.

-    The retailer:

provides the location for an ABM to the operator for a fee. Sometimes the retailer owns and operates the ABM.

Also, we understand that there are three major types of ABM fees:

1) Switching fees:

Switching fees are paid by the owner of the ABM to the switch connector for access to the relay environment (switch software and associated systems necessary to permit the retailer or operator to participate in the network).

The Canada Customs & Revenue Agency (CCRA) considers these fees to be payment for taxable supplies because they are consideration for the supply of telecommunications services, information technology services, installation and administration services, and the supply of taxable products and services.

2) Surcharge fees:

Surcharge fees are paid by the user of the ABM to the retailer or operator of the ABM.

The CCRA considers these fees to be payment for exempt financial services because the owner-operator of the ABM is providing the cardholder with access to his/her bank account or charge account and allows the cardholders to withdraw cash from their account. ABM withdrawals are exempt financial services as stated in CCRA's GST/HST Memoranda Series, chapter 17.2 Products and Services of a Deposit-Taking Financial Institution, items A-63, C-07.

3) Interchange fees:

When a client of a financial institution (debit card issuer) uses the ABM of another financial institution or a non-bank ABM, the financial institution of the client must pay an interchange fee. The switch connector then pays to the operator of the ABM a portion of the interchange fees as part of their agreement. Also, if the operator sold an ABM to a retailer, it will pay to the retailer a portion of the interchange fees (received from the switch connector) under their agreement.

The CCRA considers that in the case where a financial institution card issuer pays the interchange fee to another financial institution, the fee is payment for an exempt supply, pursuant to paragraph 123(1)(m) of the definition of "financial service" of the Excise Tax Act (ETA) where the financial institutions are members of the XXXXX. On the other hand, when a financial institution card issuer pays an interchange fee to a switch connector, the fee is payment for a taxable supply (7% GST or 15% HST) pursuant to section 165 of the ETA because the service rendered by the switch connector to the financial institution card issuer is not considered to be a financial service pursuant to paragraphs (a), (b) or (l) of the definition of "financial service".

The CCRA considers that in the case where a switch connector pays a portion of the interchange fee to an operator of an ABM, and/or the operator pays a portion of the interchange fee to a retailer, the fee is considered to be payment for a taxable supply, and not for a supply of an exempt financial service, as explained above.

All registrants involved in XXXXX transactions are required to account for tax on the taxable supplies, as described above, as of July 1st, 2002, if they are not already doing so.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact Nathalie Joly, Rulings Officer, at (613) 941-2046.

Yours truly,

Ivan Bastasic
Director
Financial Institutions & Real Property Division
Excise and GST/HST Rulings Directorate