Canada: Bobby Solhi Of TaxChambers LLP Quoted By Bloomberg BNA International Tax Monitor
Last Updated: July 28 2017

Bobby Solhi of TaxChambers LLP Quoted by Bloomberg BNA International Tax Monitor:

Canada Court: Invesco Owes $33 Million Tax for Services Deal

Ruling will prompt financial institutions operating in Canada to evaluate their relationships with important suppliers to determine if the services are GST-exempt

Company will appeal, Invesco representative says

By Peter Menyasz

Canada's tax court has upheld C$44.7 million ($33.1 million) in goods and services tax owed by Invesco Canada Ltd. for financing transactions with Citibank N.A. that the court found weren't financial services that are exempt from the goods and services tax.

The May 25 ruling, published June 5, confirms that financial institutions operating in Canada must clarify whether their relationships with suppliers include services that are subject to GST to ensure that they are reporting and remitting the appropriate amount of tax, says one Canadian tax lawyer (Invesco Canada Ltd. v. The Queen, Tax Court of Canada, No. 2013-1914 (GST)G, 05/25/17).

Invesco's arrangement with Citibank for the payment of commissions was a management function, so doesn't meet the definition of a "financial service" under Section 123(q) of Canada's Excise Tax Act and is subject to GST, Tax Court of Canada Judge V.A. Miller said.

"The financing transaction was an imported taxable supply," Miller added, dismissing the appeal with costs.

Invesco, which retails mutual funds under its own brand, as well as Aim, Trimark and Powershares, appealed the Canada Revenue Agency's C$44.7 million ($33.1 million) assessment of its goods and services tax returns for the 2002-2011 years.

The tax was assessed on deferred sales charges—broker/dealer commissions deferred by investors when purchasing certain securities.

Although the commissions were deferred as far as investors were concerned, they were actually paid to the brokers/dealers at the time or shortly after the securities were bought.

Invesco was prohibited by Ontario securities laws from borrowing money to pay the commissions. However, in early 2001, it entered into an agreement with Citibank and its bankruptcy securitization entity, Funding Corp., for a recurring financing transaction to finance the commissions.

In 2010 Invesco became a "selected listed financial institution" under Canadian law. It then self-assessed GST for a significant portion of the commissions it collected, but then claimed rebates for the full amount. The tax agency denied Invesco's claims.

Invesco appealed the matter before the Tax Court. It originally also sought return of provincial value-added tax collected along with the GST, but later dropped that appeal.

Tax Court Ruling

According to the court, Invesco argued that the payments weren't a taxable supply of services under the Act and alternatively that, if the court found it was a taxable service, it was an exempt financial service. The tax agency argued that it wasn't a financial service, and that even if it was, there were management or administrative services involved that prevented it from meeting the definition, the court said.

The agreements between Invesco and Citibank were written by teams of Canadian and U.S. lawyers working together. The agreements referenced and depended on each other, the court said. Their terms and conditions, including functions that were clearly management and not financial, were "necessarily intertwined, interdependent and integral to each other," it noted.

Invesco will challenge the ruling before the Federal Court of Appeal, Aysha Mawani, the company's vice-president of corporate affairs, said June 6.

"We have reviewed the decision of the Tax Court and believe that there are grounds for an appeal," Mawani told Bloomberg BNA in an email.

Institutions Need Clarity on Services

As a technical matter, the Tax Court's ruling is significant in clarifying that the exception in paragraphs (n) to (t) of the definition of "financial service" in Section 123(1) of the Excise Tax Act overrides the exemption for financial services provided in paragraphs (a) to (m), Toronto tax lawyer Bobby Solhi said June 5.

The ruling is also significant because it will motivate certain financial institutions operating in Canada to evaluate their relationships with important suppliers to determine if the services performed are GST-exempt financial services, Solhi, a partner with TaxChambers LLP, told Bloomberg BNA.

"That analysis may now require a closer examination of the parties' contractual responsibilities to one another and how integral those duties are to the business of the recipient of the supply," he said.

 Solhi said that if, for instance, the duty is one that is contractually for a manager or administrator of an investment fund to perform but was outsourced for whatever reason, "it may retain its character as a management or administrative service and no longer be an exempt financial service."

The Tax Court found that the various services provided to Invesco were a "single compound supply" and that the process of arranging for payment of the commissions and related services represented a single supply of an exempt financial service, but also that it was a management or administrative service, Solhi said.

It then concluded that where both of those situations apply, the exception in paragraph (q) of Section 123(1) must prevail and the supply is taxable under the GST or Harmonized Sales Tax (in provinces that combine their provincial sales tax with the federal GST), he said. That hasn't been clear in previous rulings on the subject, including the Federal Court of Appeal's 2012 ruling in Canada v. Costco Wholesale Canada, he said.

Solhi suggested an argument could also be made that the services could never be considered exempt because the Act precludes from the definition of a financial service any situation where the supplier is a person who provides management or administrative services to an investment plan.

"From a strictly technical reading, I am not certain that paragraph (q) should have applied," he said.

The ruling confirms that paragraph (q) of the definition of financial service is a very powerful tool, and the court used it to find that the transactions were "tainted" because the supplier provided a management service, Allan J. Gelkopf, a partner in the Toronto office of Blakes LLP, said June 6.

It's like a black hole. Once you are in it, you can't get out," Gelkopf told Bloomberg BNA in an email.

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