Whether or not a supply is a financial service is a significant issue for suppliers because suppliers of financial services are unable to claim ITCs for the GST/HST they pay on their inputs. Accordingly, financial service providers scrutinize their own suppliers carefully to ensure they are only paying GST/HST where appropriate.
In the recent case of The Great-West Life Assurance Company v. The Queen (2015 TCC 225), Great-West was seeking a rebate for tax paid in error to one of its suppliers whom Great-West claimed was actually providing financial services. Interestingly the supplier testified against Great-West in a case which revisits how the exemptions to the definition of financial services apply. Great West has filed an appeal to the Federal Court of Appeal.
On the facts, Great-West had entered into two agreements over a period of 5 years with its supplier, Emergis Inc. and their successor Telus Health Solutions (collectively "Emergis"). Under the Agreements Emergis provided Great-West with payment agent and administration services in respect of the Assure Card pharmacy benefits coverage system. Through the Assure Card system, a pharmacist could submit a claim to Emergis on behalf of a Great-West plan member who possessed an Assure Card to determine. If the claim was approved the pharmacist would net out the value of the benefits and only charge the Great-West plan member the amount, if any, not covered by Great-West. Emergis facilitated payments from Great-West to the pharmacies of the claim amount.
Emergis viewed itself as a provider of taxable services, and charged and collected GST/HST from Great-West accordingly. Great-West disagreed, and filed rebate applications with the CRA, seeking rebates of tax "paid in error" on the basis that Emergis was providing an exempt financial service and should not have been charging GST/HST on its services.
The TCC began by noting that both parties had argued this was a case of a single compound supply, and not multiple supplies that could be analyzed separately. The TCC nevertheless undertook some brief analysis to determine that it agreed with the parties.
The TCC then moved on to consider whether that single supply constituted a financial service, and applied the test as formulated by the FCA in Global Cash Access case (2013 FCA 269). The TCC determined that the substance of the supply was the provision of real-time electronic pharmacy transaction, verifying and adjudicating claim eligibility, and confirming transaction payment (the "Pay Direct Drug Services"). Agreeing with Great-West, as to the "essential character" of the supply, the TCC stated that "...it is clear that the essence of the service is the payment of the plan benefit to the plan member... All of the other services simply support this objective."
After considering the various paragraphs in the definition of "financial service" the TCC concluded that the supply fell within paragraph (f.1): "the payment or receipt of an amount in full or partial satisfaction of a claim arising under an insurance policy." However, the TCC then went on to consider whether the supply was excluded by paragraphs (n) to (t) of the definition.
The TCC ruled out the possibility of paragraphs (r.4) or (r.5) applying because although some of the Pay Direct Drug Services fell within these paragraphs, "those services [did] not represent the essential character or substance of the supply, which [was] paying drug benefits to plan members." The TCC then considered paragraph (t) which excludes a prescribed service as set out in the Financial Services and Financial Institutions (GST/HST) Regulations. The Regulations provide an exemption for any administrative services including those in relation to payment or receipt of benefits, but excluding a service that was solely the payment or receipt of benefits.
The TCC held that Emergis' services came within paragraph (t) and were administrative services in relation to payment for two reasons: First, the Pay Direct Drug Services did not involve any independent decision making by Emergis. Second, the Pay Direct Drug Services themselves were "quintessentially administrative" because the Assure Card system only simplified and computerized the previous benefit claim system and did not alter the substance of what was being done. Accordingly, Emergis was acting as an administrator of the drug benefits plan, and the Pay Direct Services it provided to Great-West were excluded from the definition of financial services by paragraph (t).
By way of commentary, one of the interesting aspects of this case was that the supplier, Emergis, testified for the CRA in its dispute with Great-West. Emergis' motive to testify was likely at least partially self-centered: If the TCC determined Emergis' supplies were exempt financial services, Emergis would no longer be entitled to claim ITCs, and would have to "eat the tax" that it paid on its own inputs (e.g. IT support, hardware, etc.). It is refreshing to see the supplier take part in the TCC proceeding (even though not as a party) given the serious repercussions the TCC's decision could have had on the supplier.
In terms of the TCC's decision, we are of the view that this case successfully builds on the approach developed in prior jurisprudence, particularly the FCA decision in Global Cash Access. As we continue to see more cases considering the exclusionary paragraphs of the definition of financial services we hope that a consistent body of caselaw continues to develop so that practitioners will be able to advise clients with greater certainty in this complex area of law.
From a policy perspective, administrative services in respect of financial services should be taxable. The TCC's finding that the essential character of the supply was the payment of benefits to plan members did not change the administrative nature of the group of services within the bundled supply. This finding is consistent with the disincentives currently in the ETA for financial institutions and other exempt suppliers who desire to outsource their administrative functions: those outsourced administrative functions represent a taxable supply and there is no ITC for the GST/HST paid on related inputs. That disincentive has always been a part of the fabric of the ETA and the rules were designed with this purpose in mind. From the supplier's standpoint, there is a clear legislative intent to allow a supplier of administrative services to charge GST/HST on its supplies and to claim full ITCs on its inputs.
* A version of this article appeared in the November 2015 edition of Canadian Tax Highlights.
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