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.
[Addressee]
Excise and GST/HST Rulings Directorate
Place de Ville, Tower A, 15th floor
320 Queen Street
Ottawa ON K1A 0L5
Case Number: 132880
October 31, 2011
Dear [Client]:
Subject:
GST/HST INTERPRETATION
Application of the GST/HST to fees paid by an investment management corporation to registered dealers
Thank you for your letter of [mm/dd/yyyy], concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to fees paid by [...] [(the Investment Manager)] to registered dealers. We apologize for the delay in responding.
HST applies at the rate of 15% in Nova Scotia, 13% in Ontario, New Brunswick, and Newfoundland and Labrador, and 12% in British Columbia. GST applies at the rate of 5% in the remaining provinces and territories.
All legislative references are to the Excise Tax Act (ETA) unless otherwise specified.
Note that as a result of changes to the definition of financial service, GST/HST Technical Information Bulletin B-105, Changes to the Definition of Financial Service issued in February 2011 (TIB B-105), replaces GST/HST Notice 250, Proposed Changes to the Definition of Financial Service, and GST/HST Policy Statements P-119, Trailer Commission Servicing Fees, and P-239, Meaning of the Term "Arranging for' as Provided in the Definition of "Financial Service", thereby making the Notice and the Policy Statements obsolete.
We understand that [the Investment Manager] is an [...] investment management corporation located in [...] [Province X] [...] who provides portfolio advisory services to [...] also located in [Province X] ("Investment Fund"). The Investment Fund's investment objective is to provide shareholders with [...].
On [mm/dd/yyyy], the Investment Manager and the Investment Fund entered into a [...] ("Agreement"). Under [...] the Agreement, the Investment Fund appoints the Investment Manager as its manager and grants the Investment Manager the exclusive authority to manage the Investment Fund's business operations including the full power and authority to bind the Investment Fund to negotiate, settle the terms of, enter into, execute and deliver any agreements, certificates or other documents on behalf of the Investment Fund within the scope of any authority delegated to it. [...] the Investment Manager provides (or causes to be provided) to the Investment Fund all management, investment management and administrative services and facilities required by the Investment Fund.
In accordance with the preamble to the Investment Fund's [...] dated [mm/dd/yyyy] (Prospectus), the Investment Fund proposes to offer [...] shares of the Investment Fund ("[...] Shares") at a price of $[...] per share (max. [#] shares / $[...]). You indicate in your letter that the Investment Manager's obligations under the Agreement include making arrangements with registered dealers ("Dealers") to arrange for the sale of those [...] Shares.
Although the Agreement and the Prospectus do not describe the services performed by the Dealers, you note in your letter that the Dealers' responsibilities to effect the sale of the Investment Fund's [...] Shares generally include contacting the Dealers' clients ("Clients") directly in order to arrange for the sale of those shares; being responsible for the actual execution of the transactions (e.g., drafting paperwork, executing legal documents, transferring share certificates etc.); advising Clients; and liaising between the Clients and the Investment Manager.
Under [...] the Agreement, the Investment Fund pays to the Investment Manager for the provision of the investment management services and the management and administrative services, an [...] Management Fee and a [...] Service Fee [...]. The Service Fee is equal to [...]% [...] of the [...] Shares (subject to certain adjustments) held [...] by the Clients [...]
[...] the Agreement and the Prospectus both state that the Investment Manager is required to pay to the Dealers a service fee [...] based on the number of [...] Shares held by their Clients [...] ("Dealers' Fee").
You indicated in your letter that the Dealers' Fee [...] [direct quote]
Interpretation Requested
You would like to know whether the Dealers' Fee payable by the Investment Manager to the Dealers is consideration for an exempt supply of "arranging for" a financial service under paragraph 123(1)(l) of the definition of "financial service".
Interpretation Given
The determination of whether a particular supply made by a Dealer 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 or agreements under which the supply is made. Although you did not provide us with a written agreement between any of the Dealers and the Investment Manager that clearly describe the actions, responsibilities and obligations of the Dealers, we are pleased to provide the following general information and relevant provisions in order to assist you with this determination.
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 the Dealer for the Investment Manager 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, including the following principles.
1. Every supply should be regarded as distinct and independent.
2. A supply that is a single supply from an economic point of view should not be artificially split.
3. There is a single supply where one or more elements constitute the supply and any remaining elements serve only to enhance the supply.
Supplies of financial services are exempt under Part VII of Schedule V unless they are specifically zero-rated under Part IX of Schedule VI (which generally requires that the supply be made by a financial institution to a non-resident and that certain other conditions are met). A service will be a financial service where it is included in any of paragraphs (a) to (m) of the definition of financial service in subsection 123(1) and is not otherwise excluded by any of paragraphs (n) to (t) of that same definition.
For example, paragraph (d) of the definition of financial service includes the issue, granting, allotment, acceptance, endorsement, renewal, processing, variation, transfer of ownership or repayment of a financial instrument. A "financial instrument" is defined under the same provision and includes an "equity security" which, in turn, means under that provision a share of the capital stock of a corporation or any interest in or right to such a share.
A service performed by a person that is the "arranging for" a financial service is also considered to be a financial service under paragraph (l) of the definition in subsection 123(1). 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 of 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 business of providing financial services).
Where an intermediary provides a number of services including services described by any of paragraphs (n) to (t) as part of an agreement to arrange for a supply of a financial service, the single supply of the bundled services may be a supply of a financial service of arranging for, depending on the facts surrounding the transaction, the above listed factors, and the predominant element of the supply.
In general, services in the nature of management, administration, marketing or promotional activities are intended to be taxable as they are not themselves financial services.
The information provided in this case is not sufficiently detailed to clearly describe the Dealers' actions, responsibilities and obligations as well as whether the Dealers are persons described in subparagraph 149(1)(a)(iii). As such, we are not in a position to confirm that the Dealers' services in exchange for the Dealers' Fee are exempt.
Also note that even if the supply of the Dealers' services consist of services included in paragraph (l) of the definition of financial service, those services may be excluded from the definition of financial service by paragraphs (p), (q), (q.1) and (r.4) of the definition.
Paragraph (p) of the definition of financial service excludes the service of providing advice other than advice connected to an insurance adjusting service under paragraph (j), or damage appraisals provided to insurers and adjusters described in paragraphs (j.1).
Paragraph (q) of the definition of financial service excludes a management or administrative service or any other service (other than a prescribed service) provided to an investment plan (as defined in subsection 149(5)) or to any corporation, partnership or trust whose principal activity is the investing of funds if the supplier is a person who provides management or administrative services to an investment plan, corporation, partnership or trust.
Note that in addition to its ordinary meaning, the term "management or administrative service" is defined in subsection 123(1) to include an "asset management service" (discussed below).
Prescribed services referred to in paragraph (q) are discussed in subsection 3.1(2) of the Financial Services (GST/HST) Regulations and mean:
(a) the issuance of a financial instrument by, or the transfer of ownership of a financial instrument from, the supplier to the person;
(b) the operation or maintenance of a savings, chequing, deposit, loan, charge or other account that the person has with the supplier; and
(c) if the person is a trust governed by a "self-directed registered retirement income fund" or a "self-directed registered retirement savings plan" (per their meanings assigned by subsection 248(1) of the Income Tax Act), the arranging for the issuance, renewal, variation or transfer of ownership of a financial instrument for the person.
Paragraph (q.1) of the definition of financial service excludes asset management services. An "asset management service" is defined in subsection 123(1) and includes a full range of investment portfolio management and administration services (other than a prescribed service) rendered by one person in respect of the assets or liabilities of another person, such as:
• managing or administering the assets or liabilities with or without discretionary authority granted by the other person to manage those assets or liabilities.
• providing research, analysis, advice or reports in respect of those assets or liabilities;
• determining which assets or liabilities are to be acquired or disposed of; and
• acting to realize performance targets or other objectives in respect of the assets or liabilities.
Paragraph (r.4) excludes from the definition of financial service, a service (other than a prescribed service) that is preparatory to the provision or the potential provision of a service referred to in any of paragraphs (a) to (i) and (l) of the definition of financial service, or that is provided in conjunction with such a service referred to in any of those paragraphs, that is
• a service of collecting, collating or providing information, or
• a market research, product design, document preparation, document processing, customer assistance, promotional or advertising service or a similar service;
Currently, no services are prescribed or proposed to be prescribed for the purposes of paragraphs (q.1) and (r.4).
The Dealer's Fee paid to the Dealer may be consideration for a supply of an exempt service of arranging for a financial service under paragraph (l) depending on all of the facts and circumstances. This may be the case where the original Dealer (the person who facilitated the initial sale of the shares) provides services that are predominantly services of arranging for the sale. In such a case, there must be a direct and clear connection between the payment made to the Dealer (lump-sum or periodic) and the services provided in relation to the initial sale of the [...] Shares to the Client.
However, if the Dealer's services are predominantly to "service" the Client's account, the Dealer's Fee received for such services would generally be consideration for a taxable supply. In such circumstances, even if the Dealer provided services that included services described under paragraph (l), those services would generally be excluded from the definition of financial service.
To "service" a Client's account may include, but is not limited to, regularly contacting the Client to review the status of the account and the appropriateness of the [...] Shares held in the account in light of the Client's financial needs and investment objectives (e.g., holding the Client invested in those Shares, performing research and analysis), offer advice by recommending any appropriate change in the account, and provide assistance to the Client by answering any questions the Client may have regarding the [...] Shares and on exercising any right or privilege connected to those Shares or to the account.
Please note that examples 1, 2 and 4 in TIB B-105 illustrate situations that relate to supplies made by persons which may be of assistance when determining the GST/HST status of the supply provided by the Dealers.
The foregoing comments represent our general views with respect to the subject matter of your request. These comments are not rulings and, in accordance with the guidelines set out in GST/HST Memorandum 1.4, Excise and GST/HST Rulings and Interpretations Service, do not bind the Canada Revenue Agency with respect to a particular situation. Future changes to the ETA, regulations, or our interpretative policy could affect this interpretation.
If you require clarification with respect to any of the issues discussed in this letter, please call me directly at 613-952-9262. Should you have additional questions on the interpretation and application of GST/HST, please contact a GST/HST Rulings officer at 1-800-959-8287.
Yours truly,
Paul Lafond
Financial Institutions Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate
UNCLASSIFIED
Email this Content