On February 11, 2010, the Canada Revenue Agency (the
"CRA") released GST/HST Notice No. 250 (the "CRA
Notice") in response to the proposal to change the definition
of "financial services" in the Excise Tax Act
(the "Act") announced in a News Release and Backgrounder
issued by the Department of Finance on December 14, 2009 (the
"Backgrounder"). The Department of Finance stated that
such proposal is intended to "clarify" and confirm the
government's policy intent that certain services such as
management, administration, marketing and promotional services do
not constitute financial services and are therefore subject to
GST/HST.
In the CRA Notice, the CRA states that the proposals to change the
legislation "reaffirm the longstanding policy intent and
provide certainty with respect to the application of GST/HST".
Surprisingly, the CRA uses the CRA Notice to completely reverse a
number of its own published positions with respect to what
constitutes an exempt service of "arranging for" a
financial service. Financial institutions and businesses dealing
with financial institutions should carefully examine whether or not
they are affected by these policy changes, and whether services
previously considered exempt from GST/HST are now taxable.
The new legislative proposals
According to the Backgrounder, the legislative proposals, once
drafted, will specifically provide that the following activities
will not constitute exempt financial services under the Act
and will therefore be subject to GST/HST: (i) investment portfolio
management and administration activities, (ii) certain facilitatory
services that are preparatory to an actual or intended financial
service such as market research, product design, document
preparation or processing, customer assistance, advertising,
promotional or similar activities; and the collection, collation or
provision of information, and (iii) credit management services such
as credit checking, valuation, authorization services, making
decisions relating to a grant or an application for credit,
creating and maintaining records relating to a grant or an
application for a grant of credit on behalf of the credit provider,
and monitoring payment records or dealing with payments. The
Backgrounder also states that "The proposals would apply to
all supplies of these services made after today, as well as to past
transactions where the suppliers treated these services as
taxable."
The CRA Notice
Investment portfolio management and administration services
In the CRA Notice, several examples are provided to illustrate
the CRA's interpretation of how certain investment management
services will be subject to GST/HST once the proposed changes have
been drafted and enacted. In one example, the CRA examines services
rendered by an investment dealer who arranges to purchase units of
a mutual fund for an investor and who receives a commission for
such purchase as well as a "trailer commission or fee"
paid annually from the fund manager. It is specified in this
example that the prospectus states that the trailer commission or
fee is "being paid in recognition of the investment advice and
ongoing administrative services rendered by the investment dealer
to the investors". Based on these facts, the CRA concludes
that these services would not be a supply of a financial service,
and that the trailer commission or fee would be subject to GST/HST.
This answer is contrary to the CRA's previously published
position in GST Policy Statement P-119 (dated February 22, 1994)
where the CRA stated in an identical fact situation that trailer
commissions or fees are not subject to tax.
According to the Backgrounder, the amendments will apply to all
supplies of investment management services rendered under an
agreement where (i) consideration for the supply becomes due or was
paid without becoming due after December 14, 2009; or where (ii)
all the consideration for the supply became due or was paid on or
before December 14, 2009, unless the supplier did not charge,
collect or remit GST/HST in respect of the supply or in respect of
any other supply that includes an investment management service and
that is made under the agreement. In other words, according to the
Backgrounder, the amendments, once drafted, should treat all future
supplies of these services, all current supplies which have not yet
been billed, and all past supplies where the manager charged
GST/HST, as being taxable.
Notwithstanding the wording in the Backgrounder, the CRA appears to
be taking a fairly aggressive stand on the retroactivity of the
legislation. Indeed, in the CRA Notice, the example is provided of
an investment manager who enters into an agreement with an investor
to provide management advice, collects and remits GST/HST for a
certain period of time under the agreement, and then decides to
stop collecting and remitting GST/HST in June 2009 under that same
agreement. According to the CRA, the investment manager would still
have been required to collect and remit GST/HST in respect of the
consideration paid by the investor for the investment management
services provided prior to December 14, 2009, notwithstanding they
may have stopped charging GST/HST based on case law which held that
their services were not subject to GST/HST. In this example, the
CRA essentially takes the position that if tax was ever charged
under a particular agreement, all services that have ever been
rendered under that agreement will retroactively become taxable.
This is particularly troubling, as companies which stopped charging
GST/HST on their supplies in good faith, will now be subject to
interest and penalties for failing to collect a tax which the
courts had said was not payable. Further, they will now have to go
back to their customers to claim several months of additional
GST/HST, if they are able to do so under their agreements.
Finally, we had indicated in a previous Tax Law Update that, based
on the proposals to change the legislation, the rebate claim of a
person for GST/HST charged by an investment manager in good faith
on discretionary investment management fees would now appear to be
obsolete. In this respect, the CRA mentions that rebate application
forms for GST/HST "paid in error" with respect to GST/HST
paid on investment management services will not be processed at
this time, and if the proposals to change the legislation are
enacted as they are described in the Backgrounder, such rebate
claims will be denied.
Facilitatory services and credit management services
The CRA also provides certain factual examples to illustrate how
GST/HST will apply to so-called facilitatory services and credit
management services pursuant to Finance's proposals. Several of
the examples set out in the CRA Notice appear to be virtually
identical to examples previously published by the CRA in GST/HST
Policy Statement P-239 dated January 30, 2002 ("P-239"),
with the only real difference being that where the CRA formerly
stated that these services were exempt financial services, the CRA
now states that they are taxable.
In the first example of facilitatory and credit management
services, an automobile dealership has a financing department where
employees assist customers in obtaining financing for the purchase
of an automobile (i.e. obtaining credit information, completing
loan application forms, explaining the different types of loans,
determining the interest rate, making recommendations to the bank,
etc.). For every loan provided to a customer, the dealership
receives a commission from the financial institution. While the CRA
formerly considered that this service fell within the definition of
"arranging for" a financial service, and was thus exempt
from GST/HST, the CRA is now of the view that such supply would be
taxable for GST/HST purposes.
In the second example, a corporation that provides specialized
group insurance coverage for members affiliated with particular
organizations such as banks and large retailers hires a
telemarketing agency to conduct the necessary insurance
coverage-placing activities with the group members. The
telemarketing agency explains the insurance coverage available,
answers questions regarding the insurance coverage, screens the
eligibility of the person, prepares the application and forwards
the completed applications to the corporation who grants final
approval. The telemarketing agency is compensated on a per-hour
basis. In this example, the CRA has also changed its position from
P-239 and now considers that these supplies will be taxable.
In a third example, a corporation wants to sell the business
carried on by its subsidiary and enters into an agreement with a
business broker service whereby the broker will facilitate the sale
of the shares of the subsidiary. In this respect, the broker has to
perform various services including: obtaining "listing"
for the sale of the business; assisting the corporation in
calculating the price at which the subsidiary's shares will be
offered; assisting the corporation in putting together financial
and operating information; advertising the subsidiary's
business as being for sale; contacting potential purchasers; acting
as intermediary between the corporation and the purchaser in
negotiating the terms of purchase and sale; etc. Again, contrary to
what is provided for in P-239, the CRA states that such brokerage
services would now be taxable.
The CRA also provides numerous other examples of services which
will now be considered taxable. We note that the CRA did not
provide a single example of a service which would still be
considered to be "arranging for" a financial service
under paragraph (l) of the definition of "financial
services" in the Act and thus exempt from GST/HST, and based
on the CRA's interpretation of the proposed (but not yet
drafted) legislation, it is unclear what services would still be
exempt from GST/HST under this provision. In this respect, the CRA
confirmed to the authors during a phone conversation that
facilitatory services offered by an intermediary in the financial
services industry, such as mortgage brokerage services, are likely
to be taxable under the new regime.
Reassessment by the CRA
In respect of all the legislative proposals, the Department of
Finance indicated in the Backgrounder that any reassessments based
on the proposed amendments would have to be made on or before the
later of: (1) the day that is one year after the day the proposed
amendments enter into force; and (2) the last day of the period for
reassessment otherwise allowed under the Act for making the
reassessment. While we would expect that the additional one year
period should only apply to periods which are not already
statute-barred, the wording in the Backgrounder implies that the
CRA could assess periods which were already statute-barred so long
as the assessment is made within a year of the proposed amendments
receive royal assent. In the CRA Notice, the tax authorities simply
restate Finance's comments without any further explanation. In
any event, service providers to financial institutions who
previously regarded their services as exempt should be aware that
they might be reassessed beyond the normal reassessment
period.
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.
