TAX NEWS - DECEMber 2009

Canada Tax: Proposed changes to the GST definition of financial service

Earnst & Young Canada - On 14 December 2009, the Department of Finance announced proposed amendments to the Excise Tax Act that would make investment management services, certain facilitatory services and credit management services subject to goods and services tax (GST) by excluding them from the definition of "financial service" under the GST.

The proposal is in response to recent court decisions that ruled such services were exempt from GST, contrary to what Finance alleges to be the longstanding policy intent.


Application

For the most part, the amendments are retroactive. The impact of the effective dates will be determined based on whether GST was charged on the services by the supplier. To the extent GST was charged, the amendments are retroactive. If GST was not charged, the amendments are prospective.


Potential impact

This is a particularly unwelcome development for suppliers and recipients of investment management services. Despite a Federal Court of Appeal decision that investment management services were exempt supplies, the Canada Revenue Agency (CRA) consistently advised those supplying investment management services to collect tax on those services, and not to refund any tax previously charged.

Unfortunately, the services provided by those who abided by the CRA's advice would be subject to the new rules retroactively, much to the consternation of the recipients of the services, many of whom vehemently protested paying the tax, and some of whom threatened legal action against the suppliers for refusing to refund tax previously charged. Ironically, it is those who defied the CRA's advice that reap the benefits of Finance's peculiar approach to enacting the amendments.


Investment management services

The amendments would exclude investment management services from the definition of "financial service," thereby confirming that a full range of investment portfolio management and administration activities are subject to GST.

These services include the following:
- Research, analysis and advice
- Determining and directing which assets or liabilities of an investment portfolio are to be acquired or disposed of
- Acting to realize performance targets in respect of an investment portfolio


Facilitatory services

The amendments will also treat a facilitatory service as taxable if it is preparatory to an actual or intended financial service.

Such services include the following:
- Market research
- Product design
- Document preparation or processing
- Customer assistance
- Advertising
- Promotional or similar activities
- Collection, collation or provision of information


Credit managing services

Credit managing services will be taxable. These include services in respect of a credit or charge card or similar payment card, or services in respect of a credit, charge or loan account or an account in respect of any advance, where the service is supplied by one person to another person who is granting, or prospectively granting, credit.

Such services include the following:
- 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 a grant or an application for a grant of credit on behalf of the credit provider
- Monitoring payment records or dealing with payments


Effective dates

The proposed amendments would generally apply to investment management services, facilitatory services and credit management services in respect of which consideration is due, or paid without becoming due, after 14 December 2009.

The amendments would also apply retroactively to these supplies where the consideration for the supply became due, or was paid without becoming due, on or before 14 December 2009 if the supplier charged GST in respect of the supply.

Where the consideration for such supplies became due, or was paid without becoming due, on or before 14 December 2009, and the supplier did not charge GST in respect of the supply, the determination of whether the supplies are exempt or taxable will be made by reference to the affected legislative provisions as they read before the amendments.