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.
GST/HST Rulings Directorate
5th floor, Tower A, Place de Ville
320 Queen Street
Ottawa ON K1A 0L5
[Addressee]
Case Number: 218615
Business Number: N/A
Dear [Client]:
Subject: GST/HST interpretation
Tax status of supplies made to TFSA account holders
Thank you for your correspondence of [mm/dd/yyyy] (your “Incoming Letter”), concerning the application of the goods and services tax/harmonized sales tax (“GST/HST”) to supplies made to TFSA account holders who are members of a group retirement savings arrangement. [...].
The HST applies in the participating provinces at the following rates: 13% in Ontario; and 15% in New Brunswick, Newfoundland and Labrador, Nova Scotia, and Prince Edward Island. The GST applies in the rest of Canada at the rate of 5%.
All legislative references are to the Excise Tax Act (“ETA”) unless otherwise specified.
We understand the following, from a review of the agreements and sample invoices you provided, as well as additional information supplied in your Incoming Letter and subsequent letters dated [mm/dd/yyyy] [...] and [mm/dd/yyyy] (“October Response”):
1. A group Tax Free Savings Account (“TFSA”) retirement savings arrangement was established by [...] (the “Group”) for the benefit of employees that are members in the Group (“Members”). Version 2 of the plan document, entitled [...], was issued on [mm/dd/yyyy] (the “Plan”). The Plan is registered under section 146.2 of the lncome Tax Act, with reference number [...].
2. Each Member who chooses to participate in the Plan becomes a separate TFSA account holder under the Plan. The Plan generally involves contributions made by Members and their employers to the Members’ TFSA accounts.
3. [...] (the “Sponsor”) has been created by the Group and appointed as sponsor to oversee the Plan. A separate Board of Directors was appointed to administer the Plan. The Sponsor is registered as a non-profit corporation under the Canada Not-For-Profit Corporations Act. [...].
Basic Plan Structure
4. The Sponsor entered into a Sponsor Agreement (the “Sponsor Agreement”) with [...] (the “Issuer”) on [mm/dd/yyyy] to appoint the Issuer as issuer and trustee of each Member’s TFSA account under the Plan. The Issuer is a Schedule I bank under the Bank Act.
5. The Sponsor also entered into an amended and restated Service Agreement (the “Service Agreement”) with [...] (the “Administrator”) on [mm/dd/yyyy] to appoint the Administrator to generally administer the Plan and the TFSA accounts within it.
6. The Issuer and the Administrator entered into an Agency Agreement (the “Agency Agreement”) on [mm/dd/yyyy] to appoint the Administrator as agent of the Issuer in performing certain of the Issuer’s duties in respect of the TFSA accounts under the Plan.
7. The Administrator entered into a Subscription Agreement (the “Subscription Agreement”) with [...] (the “Manager”) to retain the Manager as investment manager for the Plan and supply investment options.
8. When each Member chooses to participate in the Plan, they are provided with the Issuer’s account application form and accompanying Declaration of Trust (the “Declaration of Trust”) which generally sets out the role and responsibilities of the Issuer, as issuer and trustee of the Member’s TFSA account. The Member completes the application and it is processed by the Administrator and the Issuer.
9. [...] of the Sponsor Agreement broadly states that the Sponsor acts as agent of each Member for purposes of his or her TFSA account. However, under the Declaration of Trust, the Member only accepts the Sponsor as his/her agent for purposes of constituting his/her TFSA account.
10. As noted in […] the Plan, certain monthly administration and asset-based fees are deducted from each member’s TFSA account (the “Account Fees”). These fees are more specifically set out on the Sponsor’s website as:
a. A monthly plan administration fee of [...]; plus
b. An annual investment and custodial fee of [...]% of the value of assets (billed monthly); and
c. Certain transaction specific fees, where applicable:
i. [...] for processing fund withdrawals, partial transfers out, death or marriage breakdown;
ii. [...] for full transfers out; and
iii. [...] for NSF
Fees deducted from TFSA accounts
11. […] your Incoming Letter indicated that the Issuer does not charge the individual TFSA Member any fees. However in accordance with the Declaration of Trust for each TFSA account:
a. [...][specific text referring to the Issuer’s charging of fees]
b. The words "us", "our" and "we" are used in the Declaration of Trust to refer to the Issuer.
c. The fee schedule referred to in the Declaration of Trust is provided to each Member upon opening a TFSA account, and is the fee schedule shown on the Sponsor’s website.
Fees earned by Issuer
12. […] the Agency Agreement and […] the Sponsor Agreement require the Administrator to pay the Issuer’s compensation for services rendered in respect of the Plan. [...]
13. […] the Sponsor Agreement states that the Issuer is further entitled to compensation in accordance with the Declaration of Trust, in addition to what it is paid by the Administrator.
Fees earned by Administrator
14. […] the Service Agreement set out the services to be supplied by the Administrator. The services generally pertain to administering enrolment, contributions, benefits for each TFSA account and record-keeping for both the TFSA accounts and the Plan. The Administrator also authorizes payment of expenses related to operation of the Plan. Providing or arranging for investment management is not listed among the services.
15. Under […] the Service Agreement, the Administrator is entitled to earn from the Sponsor:
a. the greater of [...] for each TFSA account (which coincides with what the Issuer charges to each Member pursuant to the Declaration of Trust); plus
b. the Administrator is entitled to invoice the Sponsor for [...]% of what the Issuer has invoiced the Administrator.
16. Lastly, per […] the Service Agreement, the Administrator is entitled to “collect” an annual fund administration fee of [...]% of assets under management. The Service Agreement does not specify from whom the Administrator may collect this fund administration fee, however this fee also appears to coincide with the [...]% custodial and investment fee that the Issuer charges to each Member pursuant to the Declaration of Trust.
17. You provided the compiled financial statements for the Sponsor for fiscal (calendar) [...]. Your October Response indicated that the Sponsor reports as revenue the total of fees deducted from the Member TFSA accounts.
18. The Sponsor is not entitled to earn any fees from the Issuer under the Sponsor Agreement. The Sponsor’s responsibilities under the Sponsor Agreement generally include reviewing Plan asset statements, clarifying facts concerning Member eligibility, distributing applications to Members, remitting contributions, and selecting investment options.
19. The Sponsor is not entitled to earn any fees from Members under the Declaration of Trust.
20. Per […] the Service Agreement, the Administrator is required to “remit back” [...][a portion of its] fund administration fee (described in fact #16 above) to the Sponsor. The Service Agreement does not specify what service is being supplied by the Sponsor in exchange for the [...][portion] of the fund administration fee that it earns from the Administrator. The Sponsor is not responsible to perform any acts or services under the Service Agreement.
RULING REQUESTED
You have asked us to provide a ruling in respect of the following:
1) Whether the services provided by the Sponsor to the Members are taxable supplies or exempt supplies under the ETA;
2) If the answer to question 1 is that they are taxable supplies:
a. Whether the Sponsor should be collecting HST on the fees charged to Members under this arrangement, and
b. Whether the Sponsor is eligible to claim ITCs on the HST paid to its suppliers in accordance with subsection 169(1) of the ETA.
INTERPRETATION GIVEN
As noted in GST/HST Memorandum 1-4, Excise and GST/HST Rulings and Interpretations Service, a ruling provided by the Canada Revenue Agency (CRA) applies only to the person that requested it. In this case you are enquiring about the tax status of a supply made by someone other than yourself. Further, a ruling can only be provided in relation to a clearly defined fact situation. As the determination of the tax status of the supplies does not apply to you and there appears to be some contradiction of facts, we are unable to issue a binding ruling to you.[...] However, we are pleased to provide an interpretation of the ETA provisions relevant to your situation, for your assistance.
You have enquired about the tax status of services provided by the Sponsor to Members. However, from the documentation supplied, it does not appear that the Sponsor supplied any services directly to the Members for any consideration.
Upon applying to the Plan, Members receive the Declaration of Trust, which outlines the fees being charged to the Members’ accounts by the Issuer.
Tax status of Account Fees
Pursuant to the Declaration of Trust, the Issuer charges a monthly “plan administration fee” [...] to each Member that is deducted from their TFSA account. The Issuer also charges each Member an “investment and custodial fee” of [...]% per year of assets under management, and certain transaction-specific fees, also deducted from the Member’s TFSA account. Neither the Sponsor’s website, nor the Declaration of Trust, provide any indication as to exactly what service is supplied in exchange for each of these fees. However, […] the Declaration of Trust, and […] the Sponsor Agreement state that the fees are earned by the Issuer.
As noted in GST/HST Memorandum 17-2, Products and Services of a Deposit-taking Financial Institution, services supplied by banks that relate to the setup, maintenance and administration of residents’ deposit-taking accounts are generally financial services that are exempt from GST/HST. Further, transaction services that relate to the payment or transfer of funds in a resident’s deposit-taking account are also generally exempt financial services. Conversely, asset custodianship or asset/investment management services are generally taxable for GST/HST purposes.
Claiming ITCs
As noted in Guide RC4022, General Information for GST/HST Registrants, a person may be eligible to claim ITCs only to the extent that the person’s purchases and expenses are for consumption, use, or supply in its own commercial activities. To clarify, a person may not claim ITCs in relation to taxable supplies that are made by another person.
You have indicated that the Sponsor is reporting the fees deducted from the Members’ TFSA accounts as its own revenue for accounting purposes. However it is unclear on what basis it is doing so. The Sponsor is entitled to earn a [...][proportionate] fee from the Administrator in accordance with […] the Service Agreement. The Sponsor is not entitled to earn any fees from the Issuer under the Sponsor Agreement. The Sponsor is not entitled to earn any fees from Members under the Declaration of Trust.
There is also no indication exactly what the Sponsor is supplying (or to whom) in exchange for the revenue it has reported. Therefore, we offer the following information for your reference.
The determination of whether a particular supply made by a registrant is subject to GST/HST requires a detailed review of the facts and circumstances of the transactions which generally includes a review of the agreement(s) under which the supply is made. 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.
Whether services performed by a registrant are considered to be a single supply or multiple supplies is a question of fact. 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.
Where a registrant collects fees that are not earned under a particular agreement (or invoice), it is difficult to establish what the registrant’s supply is and whether the registrant is providing a single or multiple supplies. Generally, if the facts demonstrate that each element of the registrant's supply is determined to be intricately linked to each other with no option to acquire certain services separately, then each element would be considered an integral part of a single supply. If not, then the registrant's services would be considered the provision of multiple supplies.
Once it has been determined whether a registrant is making a single or multiple supplies, the supply (supplies) must then be characterized.
Generally, all supplies made in Canada are taxable unless specifically identified as exempt in Schedule V. Of relevance to your particular question, supplies of financial services are exempt under Part VII of Schedule V.
The definition of “financial service” is set out in subsection 123(1), and it may, under paragraph (l) of the definition, include certain activities performed by an intermediary, for example, such as arranging for financial services supplied by a bank in relation to deposit-taking accounts. It is unclear to us whether the Sponsor might view itself as some form of intermediary between Issuer and Members.
The expression “arranging for”, as used in paragraph (l) of the financial service definition, is not defined in the ETA. It therefore has its ordinary meaning. “Arranging for” a financial service is essentially bringing together the parties to the transaction, as an intermediary.
For a supply by an intermediary to constitute the arranging for of a financial service as contemplated by paragraph (l) of the financial service definition, the purpose of the intermediary’s supply must be clearly linked to the provision of the financial service. Further, the intermediary should be involved in the process that culminates in the provision of the financial service to the degree that the intermediary can be considered to cause the financial service to occur, although it is not necessary for the intermediary to be involved in each individual transaction. The most straightforward example of where these conditions are met is where, under the agreement for the intermediary’s supply, the intermediary is to act on behalf of the supplier of a financial service and/or a person seeking to obtain the financial service to effect a supply of the financial service by the supplier to the person.
The following are additional considerations in determining whether an intermediary is providing an ‘arranging-for’ service included in paragraph (l):
- There should be a high degree of reliance on the intermediary by the financial service provider and/or the person or persons seeking to obtain the financial service.
- Merely identifying persons interested in obtaining a financial service and/or referring such persons to the financial service provider does not constitute arranging for the financial service.
- It is not necessary that an intermediary have authority as an agent to bind a party to the supply of a financial service for the intermediary to be considered to be arranging for the supply of the financial service.
- More than one intermediary may arrange for the same underlying financial service.
Where a registrant is viewed as arranging for a financial service, the registrant’s intermediary service will be exempt from GST/HST.
Generally, the provision of administrative services, however, are taxable, and that may be the case even under certain circumstances where administration forms part of a service of arranging for a financial service. Alternatively, the provision of asset management and/or program management services would also be taxable. It is possible, but equally unclear, whether the Sponsor’s services would be characterized as one of these taxable services. Technical Information Bulletin B-105, Changes to the Definition of Financial Service, may provide some clarification on this point.
As noted above, a registrant may be eligible to claim ITCs only to the extent that it acquired business inputs for consumption, use, or supply in making taxable supplies for consideration.
DISCLAIMER
In accordance with the qualifications and guidelines set out in GST/HST Memorandum 1-4, Excise and GST/HST Rulings and Interpretations Service, the interpretation(s) given in this letter, including any additional information, is not a ruling and does not bind the Canada Revenue Agency (CRA) with respect to a particular situation. Future changes to the ETA, regulations, or the CRA’s interpretative policy could affect the interpretation(s) or the additional information provided herein.
If you require clarification with respect to any of the issues discussed in this letter, please call me directly at 236-330-8100.
Should you have additional questions on the interpretation and application of the GST/HST, please contact a GST/HST Rulings officer at 1-800-959-8287.
Sincerely,
Frankie Fenton
Industry Sector Specialist
Financial Services Unit
Financial Institutions and Real Property Division
GST/HST Rulings Directorate
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