Canada: GST And QST On Portfolio Management Fees - Recent Developments

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 purposes. 

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.

Footnote

1. 2009 FCA 115.

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