The Canadian Federal Court of Appeal recently released its
much-anticipated decision in the case of The Queen v. The
Canadian Medical Protective Association (CMPA)1.
This decision potentially impacts the application of the GST and
the QST on portfolio management fees and may affect investment
management firms as well as their clients.
In CMPA, the Federal Court of Appeal found that discretionary
investment management services rendered through the management of
either segregated or pooled funds are exempt "financial
services" that should not be subject to GST. As the QST
legislation is substantially similar to the GST legislation, the
CMPA decision will likely have the same impact for QST
The decision runs counter to the historical position taken by
the federal and Quebec tax authorities to the effect that
investment management services are merely the provision of advice
that is taxable for GST and QST purposes. In particular, the
Court ruled that discretionary investment management services
involve the provision of analytical research and stock picking
services. As such, they are directed at the "transfer of
ownership or repayment of a financial instrument" and to the
"arranging for" such services within the meaning of
paragraphs 123(1)(d) and (l) of the term "financial
service" in the Excise Tax Act (Canada) (the "Act"),
and are therefore exempt from GST under the Act. As a result,
the Court concluded that such services do not constitute the
"service of providing advice" under paragraph 123(1)(p)
that is specifically excluded from the definition of
"financial service" and is therefore subject to GST.
In reaching that conclusion, the Court noted that "the
final [buy or sell] order is an essential characteristic of the
management of funds by the investment manager. Otherwise, the
investment manager does not manage at all." The Court
also found that investment managers "do not
provide advice, since there is no one to provide advice to except
themselves. The end result is to 'cause to occur a
transfer of ownership of a financial instrument'"
[emphasis added]. Interestingly, the decision does not discuss the
securities regulatory dimension of the investment management
relationship, including the fact that the provision of investment
advisory services (which are not exempt) is generally taken to be
embedded in the discretionary portfolio management relationship and
that a portfolio manager is generally regulated as an
"adviser" under provincial securities laws.
The Minister of National Revenue has until June 15 to file a
notice of application for leave to appeal with the Registrar of the
Supreme Court of Canada. Since the CMPA decision is still subject
to appeal, the tax authorities are of the view that such services
currently remain fully taxable. As a result, it would be unwise for
investment management firms to stop charging GST and QST on
portfolio management fees until the CMPA decision is no longer
subject to appeal.
Based on the Court's decision in CMPA, however, clients of
investment management firms that receive discretionary investment
management services and have not claimed or are not entitled to
claim an input tax credit or refund may be in a position to apply
for a rebate of GST and QST paid on portfolio management fees. Such
clients should consider doing so as soon as possible in order to
preserve their rights in case of legislative amendment to the
applicable laws and since the normal limitation period to apply for
a rebate is generally two years after the payment.
1. 2009 FCA 115.
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.
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