Proposed GST/HST Changes Affecting Financial Services

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On March 26, 2010, the Honourable Jim Flaherty, Minister of Finance, issued a statement (the "Statement") "to confirm" that the December 14, 2009 news release and backgrounder (the "Backgrounder"), which outlined proposed technical changes to the definition of "financial service" under the Excise Tax Act was intended only to address "the uncertainty arising from certain court decisions and not as a change in policy".
Canada Finance and Banking

On March 26, 2010, the Honourable Jim Flaherty, Minister of Finance, issued a statement (the "Statement") "to confirm" that the December 14, 2009 news release and backgrounder (the "Backgrounder"), which outlined proposed technical changes to the definition of "financial service" under the Excise Tax Act was intended only to address "the uncertainty arising from certain court decisions and not as a change in policy". In our tax update of February 26, 2010, we noted that the Canada Revenue Agency (the "CRA") released GST/HST Notice No. 250 ("Notice 250") in response to the Backgrounder, and that while the Backgrounder stated that the proposals were to "clarify" and confirm the government's policy, in Notice 250, the CRA went beyond clarifying, and actually reversed a number of the CRA's own published positions with respect to what constitutes an exempt service of "arranging for" a financial service. The proposed changes contained in the Notice of Ways and Means Motion as announced in the budget and tabled in the House of Commons on March 22, 2010 were extremely broad and when combined with Notice 250, suggested a significant change in policy.

The Minister of Finance appears to be responding to critics from the industry, stakeholders and professionals that Notice 250 and the proposed rules would result in a large increase in taxes. In the Statement, the Minister mentions that the legislative proposals were only intended to "confirm [its] long-standing policy intent and restore the situation that existed prior to the court decisions." Mr. Flaherty also clearly states that the government is not imposing new taxes. In this respect, the Statement provides that the CRA is currently "reviewing and updating the technical guidance it has provided in regard to these matters" in Notice 250, in order to be in line with the expressed intent of the legislative proposals. Based on the Minister of Finance's comments, we believe that the CRA will likely decide to reverse the positions it took in Notice 250 which were contrary to previously published interpretations. In other words, if the CRA had previously stated in writing that something was not taxable (such as automobile dealerships' financing departments arranging for loans, and trailer commissions on mutual funds), we believe the CRA is likely to state that these supplies will continue to be exempt in the revised version of Notice 250.

Unfortunately, as the draft legislation proposed by the Department of Finance is still extremely broad, unless the draft proposal language is changed, there will continue to be much uncertainty, and a number of services which were previously considered exempt under the old legislation will likely be considered taxable under the revised legislation even if the CRA revises Notice 250.

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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