Words and Phrases - "arranging for"
Zomaron Inc. v. The Queen, 2020 TCC 35
CRA viewed the taxpayer (Zomaron) as essentially a marketing arm of two “Processors” (e.g., “Elavon”) that accessed the credit card issuer and payment network to pay a merchant whose customer had used a credit card, and then used a portion of the fee (e.g., 2%) paid by the merchant at the end of the month to pay the interchange fees of that network and split the balance of the fee between itself and Zomaron in the agreed proportions. However, it was Zomaron who obtained the agreement of the merchants to use the processing services of Elavon and, although the agreement between Zomaron and Elavon was termed a “marketing” agreement, essentially all the marketing involved was merely that entailed in persuading merchants to agree to use Elavon’s services.
After noting (at para. 97) that the concept of "arranging for" "call[s] for the intermediary to have a sufficient amount of involvement to then 'cause to occur' or effect the financial service without involvement in every transaction" and in then finding that the net fees received by Zomaron were exempt “arranging for” fees that were not excluded by virtue of being taxable promotional services under para. (r.4) of the financial services definition, Lyons J stated (at paras. 107, 110):
[T]he essence for what the Processors is paying Zomaron for is to “arrange for” merchants to use the Processor’s card payment services. This, I find, is the predominant element of the supply provided by Zomaron to [the Processors].
… Even if the supply provided by Zomaron to the Processors involved services of a promotional nature, since these do not represent the predominant element of the supply, paragraph (r.4) has no application … .
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Excise Tax Act - Section 123 - Subsection 123(1) - Financial Service - Paragraph (r.4) | a service of inducing merchants to use credit card processing services was an exempt financial service | 553 |
Zomaron Inc. v. The Queen, 2020 TCC 35
The appellant (“Zomaron”) negotiated with and obtained from prospective merchants a commitment to use the card payment processing services of two companies (“Elavon” and “First Data”), which in turn accessed the VISA (or other credit card network) to access payment from the bank that had issued the card of the customer of the merchant, so that the merchant was paid. As an example, Zomaron would negotiate a transaction fee of 2% with a particular merchant, and when a customer used her card to make a purchase from the merchant for, say, $100, Elavon would collect $100 from the customer’s issuing bank and deposit the $100 to the merchant’s bank account the next day. At month’s end, Elavon would collect the $2 merchant fee (2%) from the merchant’s bank account which was then distributed as follows: Elavon pays $1.50 (the interchange fee) to the card issuer and payment network; the remaining $0.50 cents (the “mark-up”) is the revenue shared between Elavon and Zomaron in accordance with a negotiated split – say, 30%/70%, so that Elavon retains $0.15 and pays Zomaron $0.35, representing its portion of the fee as consideration for its services. The mark-up was negotiated in the discretion of Zomaron with the merchant based on risk and other factors.
The Minister had found that the services of Zomaron were promotional servicers described in para. (r.4), partly on the basis of its “Marketing Agreement” with Elavon stating that it would “market” merchant services offered by Elavon – but Lyons J accepted evidence that Zomaron did not carry out such marketing services. Lyons J noted (at para. 65) that “only the predominant elements are taken into account in applying the inclusions and exclusions in the definition” and (at para. 71) that “Zomaron’s compensation is entirely dependant on whether a financial service is ultimately provided by a Processor to a merchant.”
After having referred (at para. 94) to a statement in the 1989 GST/HST technical paper of Finance that “the services provided by insurance agents, mortgage brokers and investment dealers will be treated as tax-exempt supplies,” she stated (at para. 97) that nonetheless:
Parliament intended that the concept of “arranging for” to mean “bringing together parties to a service.”. … Additionally, it … call[s] for the intermediary to have a sufficient amount of involvement to then “cause to occur” or effect the financial service without involvement in every transaction.
Lyons J found that the fees received by Zomaron were exempt “arranging for” fees, stating (at paras 107, 110):
… [T]he vital element of Zomaron’s supply was as an intermediary “arranging for” payment processing services leading to Processors successfully acquiring merchants. Without this, there would be no point to the constituent elements. Accordingly, the end product, the final result, the essence for what the Processors is paying Zomaron for is to “arrange for” merchants to use the Processor’s card payment services. This, I find, is the predominant element of the supply provided by Zomaron to Elavon and First Data.
… Even if the supply provided by Zomaron to the Processors involved services of a promotional nature, since these do not represent the predominant element of the supply, paragraph (r.4) has no application … .
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Excise Tax Act - Section 123 - Subsection 123(1) - Financial Service - Paragraph (l) | finding and signing-up merchants to use the services of a credit card payment processor was an arranging-for service | 288 |
Canadian Imperial Bank of Commerce v. The Queen, 2018 TCC 109, rev'd 2021 FCA 10
The CIBC issued Visa credit cards and utilized a credit card payment system operated and managed by Visa Canada. Visa Canada essentially acted as a largely automated go-between between the “issuer,” who provided the funds for a purchase at a merchant by a cardholder, and the “acquirer,” who used such funds to pay the merchant. Visa Canada added $18M in GST or HST to its charges for its services to CIBC in the years in question, and CRA denied CIBC’s s. 261 rebate claim therefor. Before finding that the supply by Visa Canada was a prescribed supply under para. (t) of “financial service,” Rossiter CJ found that Visa Canada was providing an “arranging for” financial service, stating (at paras. 88, 92):
Visa satisfying paragraph (l), in conjunction with paragraph (a), is necessary in order for Visa to satisfy the financial services definition as the service provided by Visa does not involve Visa directly handling the funds that are in their possession. Instead, the transfer is done by having the issuers settle with Visa by paying the necessary funds into a designated bank account that Visa has with Scotiabank. …
Visa acts as a financial intermediary by facilitating the transfer of payments between issuers, acquirers and merchants. …The services provided by CIBC and the services provided by Visa are linked in their purpose to a degree where it can be said that Visa is “arranging for” the credit services offered by CIBC, through acting as an intermediary in the transfer of money. As a result, the conditions in paragraphs (a) and (l) are satisfied.
Canada v. Canadian Medical Protective Association, 2009 FCA 115, [2009] G.S.T.C. 65
Discretionary investment management services provided by investment managers to a not-for-profit corporation that provided professional liability protection to licensed medical practitioners in Canada qualified as financial services under paragraphs (d) and (l) (namely, "arranging for ... the ... transfer of ownership ... of a financial instrument"): as to the meaning of "arranging for," the "word 'give instructions', 'make preparation for', 'prendre les dispositions pour' are all acceptable and are as wide and as elastic as one wishes them to be (para. 61); "the final order is an essential characteristic of the management of the funds by the investment manager" (para. 63); and the services provided by the investment managers could not be divided. Furthermore, the investment managers did "not provide advice, since there is no one to provide advice to except themselves" (para. 64).
GST/HST Technical Information Bulletin B-105 February 2011 "Changes to the Definition of Financial Service"
Meaning of "arranging for"
In its preliminary discussion of para. (l), CRA stated:
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 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 a business of providing financial services).
Examples of situations included or excluded from para. (l)
Examples provided by CRA included:
- Example 3 (exemption of per-trade fees of full-service broker registered as investment dealer)
- Example 4 (fees paid by a mutual fund manager to mutual fund salespersons for the sale of mutual fund units are exempt including potentially trailer fees if there is a single supply);
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Example 6 (taxable supply by merchant of promotional and data entry services to bank re co-branded credit card);
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Example 9 (commissions generated by MBCo, a broker authorized under provincial law, and which entered into a mortgage broker agreement with a lender whereunder it agreed to participate in the preparation and submission of residential mortgage loan applications to the lender and assist the mortgage applicant in securing a mortgage loan, were exempt under para. (l), as “the services provided by MBCo in these circumstances, viewed as a whole, go beyond mere preparatory services described in paragraph (r.4)”);
- Example 10 (referral fees received by an unlicensed consultant for referring applicants, along with completed application forms, to a licensed mortgage broker (which itself is the one dealing with the lenders) are taxable);
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Example 11 (an individual, whose only business is as a self-employed insurance agent, earns exempt commissions from a distributor of insurance policies of an insurer in consideration for soliciting purchasers, submitting the policy application directly to the insurer and advising on the client’s coverage from time to time).
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Example 12 (the per-hour compensation received by a telemarketing agency, from an insurer providing specialized insurance coverage to members in a larger retailer group, in order to explain to such members the coverage available (following a predetermined script) and preparing the insurance coverage applications, was taxable).
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Example 13 (commissions received on closing by car dealership from a captive financing company are exempted given that, in addition to completing the loan applications of customers, the dealership employees make recommendations (which usually are accepted by the finance company) as to whether the applications should be accepted, and negotiate terms of the loans (e.g., whether it is full or partial recourse).
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Example 14 (referral fees received by car dealership (at the time of loan advances) from the lender for explaining the different financing options, and completing and completing the loan applications of customers, are taxable).
- Example 16 (services provided in order to find purchaser for shares of a subsidiary were taxable under (r.4) given their predominant customer assistance character and that the firm was not an investment dealer as described in s. 149(1)(a)(iii));
- Example 17 (a commission received by FinderCo as a percentage of the preferred share subscriptions received by CorpA from investors identified by FinderCo is taxable, as FinderCo is not directly involved in the sale ([i.e., the closing of the sale?] of the shares).