In a decision rendered on November 13, 20121, the Tax Court of Canada (the "Court"), in the person of Justice Robert Hogan, clarified the definition of "financial service" in the Excise Tax Act ("ETA") in a situation where an intermediary provides on-premises space allowing a third party to render financial services to its clients. In addition, the Court also analyzed the meaning of the expression "relate to" as used in subsection 185 (1) of the ETA.
Context and applicable law
Supplies of financial services are generally exempt for the
purposes of the Goods and Services Tax ("GST"). Such
exempt financial services include, in particular, "the
exchange, payment, issue, receipt or transfer of money, whether
effected by the exchange of currency, by crediting or debiting
accounts or otherwise"2 and "the operation or
maintenance of a savings, chequing, deposit, loan, charge or other
account"3. Agreeing to provide, or the arranging
for, such services is also defined as a supply of financial
services under the ETA 4. On the other hand, providing
space in a commercial real property is a taxable supply.
Subsection 185(1) of the ETA deals with persons that are not
financial institutions but who offer incidental financial services
in the course of their commercial activities by deeming those
services to be for use in the person's commercial activities.
Accordingly, in determining which inputs give rise to input tax
credits ("ITCs"), a GST registrant is not obliged to
separate inputs acquired for rendering financial services from
other inputs.
Facts
Mac's Convenience Stores Inc. ("Mac's"), a
division of Alimentation Couche-Tard Inc., installed automated
banking machines ("ABMs") in its convenience stores. Some
of the ABMs were leased by the Canadian Imperial Bank of Commerce
or one of its subsidiaries ("CIBC"), while others were
either owned by CIBC or owned by Mac's itself. Agreements were
concluded under which Mac's granted CIBC a right of exclusivity
for the operation of ABMs in its stores in consideration for which
CIBC remitted to Mac's a portion of the service fees collected.
The Canada Revenue Agency ("CRA") assessed Mac's on
the basis that it had made a taxable supply of real property rather
than an exempt supply of financial services.
In addition, Mac's also claimed ITCs for the purchase of ABMs
arguing that the ABMs allowed it to render financial services
"related to" its commercial activities. The CRA asserted
however that such financial services were not "related
to" Mac's commercial activities within the meaning of
subsection 185(1) of the ETA.
Supply of real property or a financial service?
The Court's analysis focused principally on the
interpretation of the words "arranging for" in paragraph
(l) of the definition of "financial service" in
subsection 123(1) of the ETA. After a review of the meaning given
to those words in the jurisprudence, Justice Hogan came to the
conclusion that the intermediary (Mac's, in this case) would
have had required a certain involvement in the supply of the
financial service itself (between CIBC and its clients in this
case) for it to be characterized as "arranging for"
"financial services". Justice Hogan stressed that, in the
circumstances, Mac's did not really act as an intermediary. The
supply of the financial service was triggered by the decisions of
individual Mac's customers to make use of the ABMs. Aside from
the fact that the ABMs are located on Mac's premises, Mac's
influence on that decision was only minor. In addition, Mac's
provided no instructions to users of the ABMs and did not resupply
the ABMs with cash. Despite the assertion of Mac's that its
customers were withdrawing cash to spend in its establishments,
Mac's had no real involvement in the transactions of the
clients of CIBC. Finally, employees of Mac's provided no
assistance to clients of CIBC. Mac's played only a passive
role, which was limited to making space available in its stores
where the transactions between CIBC and its clients occurred. The
Court accordingly concluded that the supplies by Mac's were
tantamount to taxable supplies of real property rather than exempt
supplies of financial services.
In addition, since he concluded that Mac's was not rendering
financial services to CIBC, Justice Hogan did not consider it
necessary to rule on the application of the new exclusions from the
concept of financial services found in paragraphs (r.4) and (r.5)
of the definition of "financial service".
ITCs and subsection 185(1) ETA
It was not contested that Mac's was rendering financial services to its customers insofar as the ABMs it owned were concerned. The Crown argued, however, that since the activities involving those ABMs consisted mainly of cash withdrawals and operation of bank accounts, those activities were not genuinely connected to the principal activities of Mac's. Mac's had not, therefore, acquired the ABMs for the purpose of rendering financial services related to its commercial activities. After analyzing the meaning given to the expression "relate to" in the jurisprudence, the Court did not endorse that position. Justice Hogan underlined in particular that in this situation, the ordinary meaning of the expression should be given effect, in line with the reasoning of the Supreme Court of Canada in the Canada Trustco Mortgage5 and Nowegijick6 decisions. Therefore, a broad and inclusive meaning should be applied. Since the operation of the ABMs is complementary to the other commercial activities of Mac's and encourages its customers to consume, the test of being "related to the commercial activities" is met in the present case even though the supply of financial services was not similar to, vital to or decisive in relation to Mac's commercial activities.
Conclusion
The Mac's decision constitutes not only a cautionary tale
for intermediaries in relation to supplies provided to financial
institutions, but also for all taxpayers who may have neglected to
make an appropriate analysis of situations where sales taxes have
not been collected in a specific transaction with a third party. In
addition, the decision also underlines the fact that a simple
financial component related to a supply may not be sufficient on
its own to classify the supply as one of a financial service. It is
essential to verify the terms of the commercial agreement and the
circumstances in which the supplies are made before reaching the
conclusion that the supplies are exempt (or zero-rated, as the case
may be) as a financial service or otherwise.
In a situation where one of the contracting parties insists that
sales taxes do not apply to the supplies made to him, the supplier
may judge appropriate to insist that an indemnification clause be
included in the agreement in question to protect him against the
imposition of penalties and interest in the event of a reassessment
by the tax authorities (sales taxes are recoverable from the
recipient unless the agreement provides that the consideration
already includes such taxes). In the event of uncertainty, prudence
dictates that the opinion of a tax specialist should be obtained as
to the application of sales taxes to the particular supplies.
Obtaining an advance ruling from the tax authorities is also an
option that could be considered by the taxpayer.
Finally, as to the application of subsection 185(1) of the ETA, it
should be underlined that financial services will be considered to
be related to the commercial activities of a taxpayer only if the
financial services are truly connected to the commercial activities
of the taxpayer. This connection does not, however, have to be
decisive or important. This approach seems consistent with the
objective of simplification in the management of ITCs for GST
registrants.
The Mac's decision was not appealed to the Federal Court of
Appeal.
Footnotes
1Mac's Convenience Stores Inc. v. The Queen., 2012 TCC 393.
2Paragraph a) of the definition of "financial service" in subsection 123(1) LTA.
3Paragraph b) of the definition of "financial service" in subsection 123(1) LTA.
4Paragraph l) of the definition of "financial service" in subsection 123(1) LTA.
5Canada Trustco Mortgage Co. v. Canada, 2005 SCC 54.
6Nowegijick v. The Queen, [1983] 1 S.C.R. 29.
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