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GST/HST and Financial Services: Exempt v. Zero-rated

Posted By: Bobby B. Solhi on June 5, 2018 at 4:32:22 in All , Articles , Case Comments , News

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GST/HST and Financial Services:  Exempt v. Zero-rated

Financial services are generally an exempt supply for which no GST/HST would be charged.  The supplier of the financial services would also not be entitled to claim input tax credits (ITCs) for any GST/HST incurred on their inputs.

The exempt status of financial services is a significant cost for many banks, credit unions, investment funds, and other financial institutions.  It also catches many unsuspecting non-financial institution suppliers as well.

There is a comprehensive definition of “financial services” in s. 123 of the Excise Tax Act (ETA), from (a) to (m), and includes such services as:

  • the exchange, payment, issue, receipt or transfer of money, whether effected by the exchange of currency, by crediting or debiting accounts or otherwise,
  • the operation or maintenance of a savings, chequing, deposit, loan, charge or other account,
  • the lending or borrowing of a financial instrument,
  • the issue, granting, allotment, acceptance, endorsement, renewal, processing, variation, transfer of ownership or repayment of a financial instrument,
  • the provision, variation, release or receipt of a guarantee, an acceptance or an indemnity in respect of a financial instrument, and
  • the payment or receipt of money as dividends (other than patronage dividends), interest, principal, benefits or any similar payment or receipt of money in respect of a financial instrument.

In limited circumstances, financial services may be zero-rated rather than exempt.  For instance, financial services are zero-rated where exported, and satisfy the requirements under section 132 and Schedule VI of the ETA.

Zero-rating status is preferred by suppliers, particularly those providing otherwise exempt financial services, because they can recover GST/HST incurred on their inputs by way of ITCs.

Financial Services and the Section 150 Election

Section 150 of the ETA allows for an election to be filed by a closely related group that includes a member that is a “listed financial institution” (i.e., bank, trustee, credit union, investment dealer/trader, financial broker, lenders, etc.). The election allows members to make supplies within the group without charging GST/HST. The benefit of the election being to reduce the administrative burden of the tax within these groups analogous to services between employee-employer, which are not subject to GST/HST.  Section 150 also deems such supplies to be financial services.

Financial services, other than financial services that are zero-rated under Schedule VI, are exempt pursuant to Schedule V, Part VII of the ETA.

Deemed financial services as per s. 150 are also exempt by operation of Schedule V, Part VII, S.2.

Zero-rated Financial Services

A supply of a service made to a non-resident person, with limited exceptions, is zero-rated pursuant to Schedule VI, Part V, s. 7.

A supply of a financial services made by a financial institution to a non-resident person may also be zero-rated pursuant to Schedule VI, Part IX, s. 1.

Subsection 132(3) provides that a person resident in Canada that has a permanent establishment outside of Canada (e.g., a branch operation) is deemed to be a non-resident person in respect of activities of the person carried on through that establishment outside of Canada.

It should be noted that a supply made outside of Canada is not subject to GST/HST in the first place as per the wording of subsection 165(1).

Accordingly, financial services supplied to a non-resident branch is generally zero-rated.

GST/HST and Financial Services:  Exempt v. Zero-rated

In CIBC World Markets Inc. v. The Queen the main question before the Tax Court of Canada was whether financial services supplied to a non-resident branch of a member, who elected under s. 150, was exempt or zero-rated?

The TCC held that “deemed” financial services as per s. 150 are exempt supplies, and not zero-rated, even if the supply would also fall into the zero-rated, exported financial service provisions.

As per Bocock, J.:

“a taxable supply originating in Canada and also deemed a financial service by virtue of the s. 150 election is an exempt supply even where exported to a non-resident branch.  As such, there is no right to claim ITCs in respect of such financial services.”

Comments

Prior to this case, there was very little jurisprudence to clarify this point. The CIBC decision concluded that a corporation that elects under s. 150 is deemed to make exempt financial services between their members, even if those services could otherwise be zero-rated.

Affected parties may consider re-evaluating their existing structures and s. 150 elections with a view to restructuring such arrangements to carve out any non-resident branches or operations, and, possibly, open up the ability to claim ITCs on supplies made outside of Canada.

*Bobby B. Solhi is a GST/HST tax lawyer and partner at TaxChambers LLP

 

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