Bill C-9 receives Royal Assent – what a ride! And it’s still not over for financial intermediation services
Canadian Indirect Tax News, August 6, 2010 (10-6)
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After a dramatic attempt by the Senate Committee on National Finance (Committee) to have Bill C-9 amended on four fronts, the Senate — with a 48 to 44 margin — voted to pass the Bill without amendment. It received Royal Assent on July 12, 2010. Included in Bill C-9, and now law, are the long-awaited changes to the Excise Tax Act (ETA) affecting financial institutions that were announced as far back as 2005. Among these changes are rules dealing with the claiming of input tax credits, self-assessment on cross-border transactions, rebates in respect of GST paid on employer pension plan costs and the requirement to file an annual information return.
Also included in the Bill are changes to the definition of “financial service” that were first announced on December 14, 2009 (see our coverage in Canadian Indirect Tax News). In fact, the Committee proposed an amendment to the Bill that would have deleted the clause that contains these changes. Why did the Committee make this recommendation? The timeline that follows provides an answer to this question.
December 14, 2009 — the Department of Finance (Finance) Releases “Government of Canada responds to recent court decisions on the GST and financial services”
On December 14, 2009, Finance announced proposed changes to the definition of “financial service” in the ETA to ensure taxability of:
- Discretionary investment management services
- Facilitatory services related to financial services
- Credit management services
These changes were proposed in response to the outcome of certain court decisions and to “reaffirm the policy intent” on the taxability of certain services. However, the changes appear to have been too broad, encompassing more than what troubled Finance.
February 11, 2010 — the CRA publishes GST/HST Notice 250: “Proposed Changes to the Definition of Financial Service”
In response to the December 14, 2009 release by Finance, the CRA published Notice 250 on February 11, 2010, which appears to “scope in” many services that were well understood to be exempt. For example, trailer commissions paid to mutual fund dealers were identified as being taxable despite being considered exempt since January 1, 1991 and enumerated as such in the CRA’s Policy Statement P-119. Following the release of Notice 250, further comments made by Finance and the CRA began to call into question the long-standing exempt status of many other financial intermediary services, such as brokerage services (e.g., in respect of insurance, stock, mortgages, etc.) plus redemption fees and other mutual fund sales commissions. None of these services had been identified by Finance as areas of concern leading up to the changes announced on December 14, 2009.
March 26, 2010 — the Minister of Finance clarifies the intent of the December 14, 2009 proposals
In response to the understandable lobbying that ensued, especially once Notice 250 was released, Finance Minister Jim Flaherty issued the following statement on March 26, 2010:
… the December 14, 2009 release, which outlined certain technical proposals with respect to the definition of “financial service” under the Excise Tax Act, was intended to address the uncertainty arising from certain court decisions and not as a change in policy ... We are not imposing new taxes. [emphasis added]
As a result of Minister Flaherty’s statement, the CRA began a review of the various financial intermediary services being provided with input from industry and with the intention of revising Notice 250 to keep within the spirit of the Minister’s statement. Further, the original wording in the December 14, 2009 release was amended slightly once it was incorporated into Bill C-9. In particular, in addition to changing “facilitatory” to “preparatory”, the proposals provided for the ability to prescribe out certain property and services from being excluded from the definition of “financial service”; however, nothing was proposed to be prescribed.
June 29, 2010 — Finance revises the explanatory notes for clause 55 in Bill C-9
On June 29, 2010, Finance revised the explanatory notes to clause 55 in Bill C-9, which contains all of the changes proposed to the definition of “financial service”. The revised explanatory notes communicate Finance’s intention that the amended definition of “financial service” be administered in such a way as to ensure that so-called traditional financial intermediation services offered by insurance, mortgage, stock and mutual fund brokers, dealers and agents remain exempt, as was the case prior to the proposed amendments.
This is in keeping with the Minister’s announcement on March 26, 2010 that there was no intention to shift tax policy when it came to well understood exempt financial intermediation services.
June 30, 2010 — the CRA reissues Notice 250
In response to the revised explanatory notes to clause 55 and further to its review of various financial intermediary services, the CRA reissued Notice 250. New Notice 250 provides guidance that appears to conclude that, under the right facts and circumstances, previously exempt financial intermediation services will remain exempt. Some of the new examples in new Notice 250 are a complete turnaround of what was contained in the original version of the Notice.
July 8, 2010 — the Committee recommends that clause 55 be deleted from Bill C-9
After more than 45 meetings and hearings held in respect of Bill C-9, including specific representations made concerning clause 55 and consideration of Finance’s revised explanatory notes and the CRA’s new Notice 250, the Committee recommended to the Senate that clause 55 be deleted from Bill C-9.
July 12, 2010 — the Senate votes to pass Bill C-9 without amendments
After several hours of debate, the Senate voted 48 to 44 to pass Bill C-9 without any amendments and the Bill received Royal Assent. The changes to the definition of “financial service” in the ETA are now law in essentially the same form as originally proposed on December 14, 2009.
So why did the Committee recommend deletion of clause 55 despite the changes to the explanatory notes and new Notice 250? Quite simply, the answer to this question lies in the ambiguous statutory language that now exists as the definition of “financial service”. While they provide guidance to registrants and taxpayers, the explanatory notes and Notice 250 do not form the law and cannot be relied upon for a definitive conclusion as to what the statute is intended to include. The better approach would have been a clarification of the law itself. We expect that challenges from the CRA, registrants or taxpayers as to the meaning of the statute, the explanatory notes and Notice 250, could end up in court. This is a real risk and makes for uncertain times — the only certainty is that we are still on a ride with respect to the tax status of financial intermediation services.
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