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Significant changes to the definition of financial service – more than just clarification


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Canadian Indirect Tax News - Special edition, February 12, 2010

The Canada Revenue Agency (CRA) released GST/HST Notice No. 250 on February 11, 2010 further to proposed legislative amendments announced by the Department of Finance (the Department) in the News Release and Backgrounder dated December 14, 2009.

The CRA noted that these proposals are meant to clarify the application of the goods and services tax/harmonized sales tax (GST/HST) in respect of the definition of financial service. However, it is believed that the proposals go beyond legislative clarification and, in some cases, represent a significant policy shift as to what is and is not an exempt financial service, especially in respect of “arranging for” financial services as historically interpreted by the CRA itself and by the courts.

Proposed taxable services (i.e., no longer exempt financial services)

Investment management services Facilitatory services Credit management services
Investment management services, with or without discretionary authority over the managed assets, including research, advice, directing purchase/sale of financial instruments

Facilitatory services, described as:

  • market research, product design, document preparation or processing, customer assistance, advertising;
  • promotional or similar activities; and
  • collection, collation or provision of information

 

Managing credit, including:

  • credit checking;
  • valuation;
  • authorization services;
  • making decisions relating to a grant or an application for a grant of credit;
  • creating and maintaining records relating to granting credit on behalf of lender; and
  • monitoring payment record or dealing with payments

 

Investment management services (as noted above) specifically defined as taxable “management and administrative services” rendered to most investment structures (e.g., trusts, partnerships, etc.) Distributing credit card applications, assisting in their completion, including checking for missing information etc., and forwarding to the financial institution for approval

Services provided by investment dealers,  for which they receive consideration such as “trailer commissions or fees”, including:

  • arranging for the purchase of financial instruments (e.g. mutual fund units); and
  • ongoing administrative services

 

Assisting with completion a loan application based on information from the customer, explaining to the customer the loan terms and rates, assisting the customer in selecting the type of loan, screening the application and forwarding to the financial institution for approval Managing a bank’s credit card portfolio
Brokerage services to facilitate the sale of a business by means of selling the company’s shares, which appear to include merger and acquisition type services culminating in a transfer of financial instruments

Proposed coming into force

These proposed amendments would apply to the various services summarized above rendered under an agreement for a supply thereof if any consideration for the supply becomes due or is paid without becoming due after December 14, 2009. They would also apply to such services rendered under an agreement for a supply thereof if all of the consideration for the supply became due or was paid on or before December 14, 2009, unless the supplier did not, on or before that day, charge, collect or remit any amount as or on account of tax in respect of the supply or in respect of any other supply that includes such services and that is made under the agreement.

Effectively, these proposed amendments are, in addition to being prospective from and including December 15, 2009, retroactive from that date for all taxpayers who have rebates in for consideration by the CRA for GST/HST determined to have been paid in error on the impacted services. As such, if the proposals are enacted as proposed, these rebates will be denied and assessed accordingly.

Further, registrants who, under an agreement for the making of supplies of the impacted services, charged GST/HST in the past under that agreement and then stopped charging GST/HST under that same agreement, the proposed amendments would apply to them in that they are exposed for not having collected GST/HST in the past. The challenge for them will be whether they can collect the past GST/HST from their customers. To this end, the Notice indicates that the Minister of National Revenue would be able to reassess the net tax of a person in respect of a reporting period of the person to take into account any difference between the net tax that was reported by the person for the reporting period and the net tax of the person for the reporting period that would result after applying the proposed amendments. However, any such reassessment would have to be made on or before the later of:

  • the day that is one year after the day on which an Act containing these proposed amendments is assented to, and
  • the last day of the period for reassessment otherwise allowed under the GST/HST legislation for making the reassessment.

 

This publication is produced by Deloitte & Touche LLP as an information service to clients and friends of the firm, and is not intended to substitute for competent professional advice. No action should be initiated without consulting your professional advisors. Your use of this document is at your own risk.