Like Jack in Jack and the Beanstalk, the Minister hoped everyone would share his implacable faith in the two magic beans he held out in his palm—''There is no intention of changing tax policy'' and ''We are not imposing new taxes''.
Reprinted from CCH GST Monitor
On the subject of what qualifies as a service of financial intermediation, exempt from GST/HST, we have witnessed a dramatic spectacle in the period between the very scant Department of Finance announcement on December 14, 2009, and the passage of the final, problematic legislation, which became just one of a number of prominent bolts protruding from the neck of the Frankenstein monster that was the 2010 federal budget.1
The theatrical genre veered towards pantomime on March 26, 2010, when the federal Minister of Finance reassured folks that Canada Revenue Agency Notice No. 250, issued in February 2010, ''...may have gone beyond what the Department of Finance intended''. Knowledgeable listeners in the crowd must have experienced a strong urge to shout in unison ''The legislation is behind you!'' Like Jack in Jack and the Beanstalk, the Minister hoped everyone would share his implacable faith in the two magic beans he held out in his palm—''There is no intention of changing tax policy'' and ''We are not imposing new taxes''. You can decide after reading this article if those beans are a 'buy' decision for you. The Monitor articles from January 2010 (A New, Lower, Low) and March 2010 (Semantics Antics: More on ''arranging for'') commented on the alarming process that eventually produced the legislation. The purpose of this article is to focus on the troublesome aftermath for those that either make, or advise respecting, the vast range of supplies that are impacted.
Sorting the Beans
The first task is to sort any supplies of intermediation (in the very broadest sense, including affinity and support roles) into categories, following which you will have some decisions to make respecting from when the GST/HST treatment should be changed if in fact it has changed. What are the categories of supply that need to be addressed?
Keep Calm and Carry On
First, there will be some supplies that were exempt before the changes and, based on the revised CRA Notice No. 250, remain exempt. Examples here would include full service equity brokerage commissions paid to mutual fund dealers for the sale of mutual fund units, and mortgage brokerage commissions paid to a licensed mortgage broker. While the initial February 2010 version of Notice No. 250 cast these as newly taxable, the revised version confirms their continued exemption—so after an alarming incident of threatened retroactive taxation, continuous exemption is maintained.
What about the concern that the wording of the new legislation might tax these supplies? A very good point, which is the dominant feature of the new odd world suppliers must now understand. First, to the extent you are writing new agreements, the agreements should take the wording of the legislation into account, and make sure to fully describe the intermediary nature of the role performed.
Secondly, it is fair to say that tax legislation becomes less relevant with every instance of retroactivity. What is increasingly significant in this particular area of Canadian taxation is not what the law actually says, but what Finance intends, or will in future, after extensive cogitation, eventually decide it intended today. Legislation enacted as long as 10 years hence could retroactively apply today, even if it contains novel and convoluted concepts that evolve some years after now (as was the case with, for example, imported services). On this specific concern, we also have another comment by the Federal Minister of Finance from March 26, 2010 to consider:
We will have the tools in the first Budget Implementation Act to make sure we get back to the status quo before the court cases, so people can rest assured that the treatment of financial services will not change.
Now, are we to take this comment only in the limited context of certain class actions by investors against investment managers, or is this a broader admission that the wording of the legislation is, as suggested by a wide range of commentators (including the Canadian Bar Association in its submission to the House of Commons Finance Committee)2 a potentially massive overreach at worst, and the cause of great uncertainty at best?
Having effectively obliterated the exemption, Finance will selectively restore it by Regulation on a case-by-case, just-in-time, basis. If that is in fact the case (and one has to believe the Canadian Bar Association knows a thing or two about legislative interpretation), then it would appear we have moved away from legislative taxation to an extra-statutory ''voucher'' system for this particular exemption. What do I mean by this? Whether the legislation taxes a supply is no longer the primary consideration here—the amended definition potentially taxes almost all intermediation. Against that backdrop, the new regime confers exemption in two ways, one of which is charmingly uncomplicated by the law.
The first route to exemption is by CRA's acceptance, or what I will refer to as a ''voucher''—if the CRA treats your supply as exempt, you need not worry about technical taxation by the letter of the law. So your first recourse would be to ask nicely for your voucher, make sure it fully and accurately describes your supplies, and keep it safe. Should the CRA take the view that your supply is not exempt, however, your second recourse is to seek the issue of a regulatory indulgence from Finance, which is effectively another specific form of voucher that modifies the law in the case of particular supplies. If neither department chooses to protect you from the unilateral taxation in the new law, your supply is taxable.
So, putting the new universe for financial intermediation and support services very simply into three rules:
- Almost everything is taxable.
- The CRA may agree to ignore Rule 1.
- If the CRA does not agree to ignore Rule 1, Finance now has the option to quickly and specifically modify Rule 1 without recourse to Parliament.
A specific concern for taxpayers with the operation of Rule 3 is Finance's past record on issuing promised GST Regulations (as for example relating to activities covered by s. 273 joint venture elections). The attraction of this new system, if you are the revenue policeman or the legislator, is that you will never again have to worry about taxpayers surprising you by successfully arguing that their supply is exempt under the legislation because, well, see Rule 1. The CRA controls Rule 2, and Finance controls Rule 3 without having to consult Parliament. There is a problem, however. Watch for the next case where a taxpayer argues that the law taxes a supply that the CRA or Finance would prefer were treated as exempt. There have been cases in the past where the government argued the broadness of the pre-existing exemption because it maximized the overall tax yield in that particular instance. Someone will have to quietly explain to a Tax Court of Canada (TCC) judge how the Canadian system really works now.
Subject to the ''KnowNew'' Tax
The second certain category is those supplies which were clearly treated as exempt by the law (accepted as so by the CRA), and in some cases even having had the exemption confirmed by the TCC, but which are now identified by the CRA as taxable in the reissued Notice No. 250. This category includes discretionary investment management services provided to individuals, other credit and asset management services and a range of telemarketing services. For supplies clearly in this category, despite what the Minister of Finance may say, the supplier at least has the certainty that the formerly exempted supply is now subject to the new tax. Let's call it the ''KnowNew'' tax. Its specific application date is discussed later.
The Don't Know Club
There will be a vast range of supplies that do not fit squarely within either the confirmed continued exemptions, or the set of supplies clearly intended to be newly taxed. It is beyond the scope of this article to attempt a list. Clearly, because of the infinite range of ways that financial institutions get their product to market and support their customers, many entities that support financial products will be left puzzling over Notice No. 250 because the role they perform has some of the characteristics of a supply described in the notice, but not all, and some others in addition. These supplies, which are legion, will show us why the ''voucher'' exemption system is not the way to go. A taxpayer facing an uncertain tax treatment would normally consider obtaining a legal opinion to assist it. A legal opinion would likely default towards taxation in any event, but is useless in this case, because the exemption has effectively become an extra-statutory gift, and we can already see extra-statutory aspects such as licensing being relevant to the gifting process. In a voucher system, certainty is only available by getting in the queue for a voucher, and that queue will become a very long one. While you are queuing, can you continue assuming exemption, or should you levy tax and risk upsetting your client with an effective price increase, despite what Minister Flaherty clearly said on March 26, 2010? It will be a long wait for an answer, and depending on how lengthy and transient your client base is, you might end up with a retroactive tax bill and no client from whom to collect. Given HST rates, can you run that risk?
When to Apply the KnowNew Tax?
Whether you make supplies which are certainly subject to the KnowNew tax, or are in the queue for an exemption voucher from the CRA or the Department of Finance, you have a problem—from what date does the KnowNew tax apply? The law taxes it either from December 14, 2009, or January 1, 1991. Given that the CRA position originally set out in February 2010 was dramatically reversed, and that the federal Minister of Finance admitted it was ''just badly worded'' in March 2010—followed by a reissued Notice much later—from when should you apply the tax? If you think you are entitled to an exemption, and the CRA declines your request a year later, even though you filed the request in early 2010, can you apply the tax prospectively at that point? There is no definitive answer, because given the Minister of Finance's statement, administrative flexibility is now an obligation, and so a range of implementation dates may result. No one can advise you with certainty; they can only commiserate with you.
TCC Decisions—The Downside of Winning
It seems that the CRA will now assess any supplies subject to the KnowNew tax in the following manner. In the event the taxpayer obtained a decision from the TCC supporting exemption of its supply, that taxpayer will now be assessed KnowNew tax on any supplies made after the actual period of the supplies specifically considered by the Court. Consequently, any taxpayer having received a favorable exemption decision from the TCC which is not appealed by the government has an immediate problem. Unless there is a way to revisit the Tax Court on a regular basis thereafter, to seek protective decisions for subsequent periods, the winning taxpayer must immediately develop a strategy to handle a possible assessment which may result from retroactive legislation emerging some years later. If the CRA is aware Finance is concocting a retroactive amendment, it is unlikely to facilitate access to the Tax Court with a subsequent assessment. The longer the interval between the TCC decision and the eventual retroactive fix, the greater the jeopardy. The problem is particularly acute where the supplies are at the retail level, and the subsequently imposed tax is effectively all a penalty for the registrant.
Here is a new and peculiarly Canadian behaviour for a sales tax registrant—after winning a TCC case confirming exemption of supplies it makes, it must probably continue/start collecting tax from the period after that considered by the Court, in direct contravention of the effect of the current law as interpreted by the Court, because the CRA is likely to obstruct further access to the courts, for the period of years it now takes Finance to develop a retroactive fix. An interesting discussion with its customers—no doubt, beginning with something like ''First, promise you won't laugh...'' Now, who wants to buy some magic beans?
1. The Senate Finance Committee recommended that four clauses, including the GST clause (55), be struck from the Budget Bill.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.