Financial Services Industry Commodity Tax Update:

Transcription

1 : GST/HST Self-Assessment Rules for Fis & Defining Financial Service For GST/HST Purposes David Douglas Robertson 67 th Annual Tax Conference 67e Conférence fiscale annuelle 2015 AGENDA New GST/HST Self-Assessment Rules for Financial Institutions, including In-Bound Related Party Financial Services Qualifying Taxpayer Loading Reinsurance/Retrocession Clarification Why Amendments Necessary History of Definition / Underlying Tax Policy Case Law CRA Policy TIB B-105 2

2 New Self-Assessment Rules For Financial Institutions New Self-Assessment Rules for FIs Proposed 2005 / Enacted 2010 Response to State Farm Mutual Auto TCC 2003 Retroactive to periods ending after 16 Nov 2005 Significantly Broadened Self-Assessment Requirements Qualifying Taxpayer Any Amount Deductible as Outlay, Expense, or Allocation for Income Tax Purposes In-bound Related-Party Financial Services 4

3 New Self-Assessment Rules for FIs Who Must Self-Assess Before Amendments: Canadian Resident FIs or Non- Resident FIs with Branch in Canada After Amendments: Qualifying Taxpayers FI Resident in Canada Has a PE under Parts IV or XXVI of Income Tax Regulations FI if majority of persons having beneficial ownership of FI s property in Canada are resident in Canada and the FI carries on, engages in or conducts an activity in Canada. 5 New Self-Assessment Rules for FIs Upon What Must Qualifying Taxpayer Self-Assess Before Amendments: Amounts paid to Non-Residents for Services or Intangibles, including payments between branches After Amendments: Qualifying Consideration Any outlay or expense allowed as deduction, allowance, or allocation for a Reserve (or would be so allowed if the ITA applied to the Qualifying Taxpayer) applicable to Canadian activity, less Permitted Deductions 6

4 New Self-Assessment Rules for FIs Upon What Must Qualifying Taxpayer Self-Assess The following are now taxable: Salaries & Wages of Foreign Branch Employees Loading component of related party in-bound financial services: Expense component of price of the financial service, including associated error or profit margin 7 New Self-Assessment Rules for FIs Reinsurance/Retrocession Clarification Dept of Finance 14 Oct 14 Policy Intent Letter: Ceding Commissions/Expense Allowances not taxable Tax to be self-assessed on portion of related-party financial service that is administrative in nature (i.e. the expense load) Tax is not to be self-assessed on portion that is clearly and fundamentally financial in nature Thus: Margin for Risk Transfer exempt 8

5 New Self-Assessment Rules for FIs Reinsurance/Retrocession Clarification Dept of Finance 14 Oct 14 Policy Intent Letter: Service Level Agreements (SLAs): Reinsurance premium charge by reinsurer to primary insurer not subject to any self-assessment if: Reinsurance policy recognized under fed/prov law or by OSFI Primary insurer pays fees under SLA Fees represents exclusively (or almost exclusively) total amount payable for property and services provided by reinsurer or affiliates to primary insurer, including administration of the reinsurance policy (other than best estimate of losses, ceding commissions, and margin for risk transfer) Fees reflect arm s length pricing Primary insurer self-assesses GST/HST on SLA fees. 9 New Self-Assessment Rules for FIs Reinsurance/Retrocession Clarification CRA GST/HST Notice 287 January 2015 Confirms CRA will follow intended tax policy as set out by Finance, but... However, the CRA cannot pay any rebate claims in respect of these matters based on the current legislation. 10

6 New Self-Assessment Rules for FIs Reinsurance/Retrocession Clarification Dept of Finance 26 Feb 15 Comfort Letter: Confirmed: 21 Oct 14 Letter, but added Finance would recommend Legislative Amendment, retroactive to 17 Nov 2005 GST/HST not payable on portion of premium over and above best estimate of losses to reflect transfer of risk, and GST/HST not payable on ceding commissions 11 New Self-Assessment Rules for FIs Challenges With the New Rules: Canadian Activity does the making of a loan by a non-resident of Canada or the assumption of a Canadian risk a Canadian Activity? Foreign Branch Employee Salaries and Wages Permitted Deduction includes property or service upon which GST/HST has become payable including a zero-rated supply. 12

7 Amended Definition of Financial Service Proposed Dec 2009 / Enacted 2010 Response to CMPA, Costco, President s Choice Bank, et. al Retroactive to Inception of GST in 1991 Purpose: Reaffirm the long-standing policy intent underlying the concept of financial service for GST/HST purposes 14

8 Amendments (q.1) Defined asset management service and confirmed such services are excluded financial service Defined management or administrative service to include an asset management service 15 Amendments (r.3), (r.4), (r.5) Following are not a financial service (r.3) a service of managing credit in respect of credit cards, charge cards, credit accounts, loan accounts provided to a person granting credit in respect of those accounts; (r.4) a service that is preparatory to an otherwise financial service or provided in conjunction with such a service that is Collecting, collating or providing information, or Market research, product design, document preparation, document processing, customer assistance, promotional or advertising (r.5) property delivered in conjunction with the rendering of an otherwise financial service. 16

9 Sources of Long-Standing Policy Intent August 1989 Technical Paper October 1989 Draft Legislation & Draft Explanatory Notes December 1989 Technical Notes January 1990 Bill C-62 First Reading April 1990 Bill C-62 Third Reading May 1990 Explanatory Notes December 1990 GST Financial Services (GST) Regulations and associated Regulatory Impact Statement Minutes of House of Commons Standing Committee on Finance August 1989 to April Why History & Long-Standing Policy Intent Relevant Placer Dome Canada Ltd. v. R. (SCC 2006) The words of [a tax statute] are to be read in their entire context and in their grammatical and ordinary sense harmoniously with the scheme of the Act, the object of the Act, and the intention of Parliament. Will-Kare Paving & Contracting Ltd. v. R. (SCC 2000) To apply a plain meaning interpretation of the concept of a sale in the case at bar would assume that the Act operates in a vacuum, oblivious to the legal characterization of the broader commercial relationships it affects. It is not a commercial code in addition to a taxation statute. Previous jurisprudence of this Court has assumed that reference must be given to the broader commercial law to give meaning to words that, outside of the Act, are well-defined. 18

10 Why History & Long-Standing Policy Intent Relevant Financial Services (GST) Regulations Regulatory Impact Statement (December 1990) Generally, what would be included or excluded as financial services was set out in the Goods and Services Tax Technical Paper released in August Following extensive consultation on these proposals with representatives of the business community, refinements were made to the proposals and these were set out in the proposed GST legislation. The inclusion or exclusion of financial services determined for purposes of these Regulations was based on information obtained during the GST consultation process and during consideration of the enacting legislation by Parliament. 19 Summary of Policy Intent 1. Financial Service for GST purposes includes (a) Financial intermediation (b) Market intermediation (c) Risk pooling 2. Financial Service also includes services closely related to intermediation such as operation and maintenance of accounts (including transaction fees, withdrawal fees, cheque cashing fees, ATM fees, fees for account statement), and regardless of whether account is a bank account or investment account held by an investment dealer 20

11 Summary of Policy Intent (con t) 3. All credit card fees whether charged to merchants or charged to cardholders would be in respect of an exempt supply of a financial service. 4. Supply of insurance would be a financial service including receipt of premiums and payment of claims. 5. Arranging for the purchase, sale or placement of a financial instrument will be a financial service... And therefore Commissions earned by independent agents selling insurance policies will be considered in respect of an exempt financial service. 21 Summary of Policy Intent (con t) 5. Arranging for the purchase, sale or placement of a financial instrument will be a financial service And therefore Commissions earned by independent agents selling insurance policies will be considered in respect of an exempt financial service. Reason: This will ensure consistent treatment of independent insurance agents and employees of insurance companies. Also included within the definition of a financial service are the services associated with the arrangement of the services or activities described above which are normally performed by an insurance agent, a mortgage broker and an investment dealer. 22

12 Summary of Policy Intent (con t) 6. The service of providing advice financial or otherwise would not constitute a financial service. 7. Management services provided to investment funds, such as daily supervision, or administration and management of the fund s portfolio would not constitute a financial service. 8. If other services were bundled together with a financial service for which a single consideration was charged, the entire transaction would be a financial service if the financial service was the primary supply. 23 Summary of Policy Intent (con t) 9. Because a financial service can involve both an administrative element and a financial element, the service will only be a financial service if performed or provided by: (a) A person at risk with respect the financial service; (b) A person closely related to the person at risk; or (c) An agent, salesperson, or broker who arranges for the issuance, renewal or variation, or the transfer of ownership, of the instrument for a person at risk. 24

13 Case Law Those That Caused The Amendments Canadian Medical Protective Association (FCA 2009) Concluded that investment management services provided by portfolio managers to investment funds were GSTexempt financial services Court unfortunately described the August 1989 Technical Paper and the December 1989 Technical Notes as no useful, and then applied a plain meaning dictionary definition to management service. 25 Case Law Those That Caused The Amendments President s Choice Bank (TCC 2009) Concluded fees paid by CIBC to Loblaws/PC Bank for each account opened under the PC Financial brand and payments for associated loyalty points were consideration for arranging for a financial service by PC Bank on behalf of its customers. Costco (TCC 2009) Concluded amounts paid quarterly by Amex to Costco in respect of co-branded Costco Amex Card were simply a reduction in the credit card merchant fee charged by Amex to Costco 26

14 Case Law Post Amendments Global Cash Access (FCA 2013) Key Facts: Global Cash Access paid casinos per transaction fee for each cash advance paid by casino to credit cardholder using Global Cash Access payment instrument (Credit Card voucher + Cheque payable to Casino) Transaction fee increased with value of cash advance If cardholder successfully challenged transaction and casino failed to properly complete the payment instrument, the casino was liable for not only it s transaction fee, but the entire amount of the transaction. 27 Case Law Post Amendments Global Cash Access (FCA 2013) Crown s Argument: Casino s merely performed an administrative service of filling out the payment instrument in accordance with Global Cash Access instructions. Accordingly, service precluded as being a financial service under new (r.4) as merely being collecting information, document preparation, and customer assistance. 28

15 Case Law Post Amendments Global Cash Access (FCA 2013) FCA Decision: Parties agreed casino made a single composite supply of a service to Global Cash Access Court found predominant element of the service was the making of any advance, the granting of any credit or the lending of money under paragraph (g) of the definition of financial service. (r.4) did not apply because the completion of the payment instrument was not the predominant element of the service. It was not what the casinos provided to Global to earn the commissions. The commission was paid to advance cash to the cardholder. 29 Case Law Post Amendments Great-West Life Assurance Company (TCC 2015) Key Facts: GWL underwrote employee prescription drug benefit plans GWL contract with Emergis to use Emergis Assure Card system to pay benefits. Pharmacies would electronically transmit claim to Emergis, whose systems would determine whether employee s claim eligible and to what extent, so that at point of sale, employee only paid amount net of benefit. 30

16 Case Law Post Amendments Great-West Life Assurance Company (TCC 2015) Key Facts (con t): GWL paid amounts for all claims to Emergis following day. Emergis then used those funds to pay pharmacies. Emergis was paid a per transaction fee (per drug claim) regardless of whether claim approved, denied, or voided. 31 Case Law Post Amendments Great-West Life Assurance Company (TCC 2015) Decision: Emergis made a single composite supply of a service to GWL The predominant element of the service was the payment of an amount in full or partial satisfaction of a claim arising under an insurance policy (paragraph (f.1) of financial service ). However, service was specifically excluded under paragraph (t) and section 4 of the Financial Services (GST/HST) Regulations as Emergis was providing an administrative service that was more than merely the payment of benefits and Emergis was not a person at risk with respect to the transaction. 32

17 Case Law Post Amendments Great-West Life Assurance Company (TCC 2015) Comments: Decision is consistent with underlying tax policy. Financial Services (GST) Regulations Regulatory Impact Statement (December 1990): The decision to exclude particular administrative services was based on the view that financial services should encompass financial intermediation as well as services integral to financial intermediation. Administrative services when offered by third parties to a financial transaction are not an integral part of financial intermediation and, accordingly, will be taxable in the same manager as the provision of other goods and services, in accordance with the broadbased nature of the GST. GWL has appealed to the Federal Court of Appeal. 33 CRA Policy Post Amendments TIB B-105 CRA Steps to Determining if Financial Service 1. Single Supply or Multiple Supplies? 2. If Multiple Supplies, does Incidental Supply Rule (ETA s.138) or Financial Services Mixed Supply Rule (ETA s.139) apply? 3. If Single Supply, determine the predominant element of the supply, based upon written agreements between the person providing the service and their client, detailing the actions, responsibilities and obligations of the person. 4. Determine if an arranging for service is provided and whether it is the predominant element of the supply. 34

18 CRA Policy Post Amendments TIB B-105 Determining if Service is Arranging For Refers to intermediation activities normally performed persons whose principal business is as a trader or dealer in, or as a broker or salesperson of, financial instruments or money. 35 CRA Policy Post Amendments TIB B-105 Determining if Service is Arranging For Degree of direct involvement and effort of intermediary in the provision of the financial service Time expended by intermediary in the provision of the financial service Degree of reliance on parties to transaction on the intermediary Intention of the intermediary to effect the supply of the financial service The normal activities of an intermediary in a given industry, including whether intermediary is in the business of providing financial services. 36

19 CRA Policy Post Amendments TIB B-105 Comment What s Missing Form of Consideration and Trigger Point For Payment Relevant Example: Commission or Fee based upon value of the underlying transaction and is only payable if underlying transaction closes Fixed Fee payable regardless of whether underlying transaction closes (i.e. an application fee or referral fee) Fee based on hourly rates Fee based on net assets under management Bundled or Unbundled Pricing/Consideration 37 CRA Policy Post Amendments TIB B-105 Comment What s Missing Is the person providing the service: At financial risk with respect to the transaction, Closely-related to a person at risk, or An agent, salesperson, or broker who arranges for the issuance, renewal or variation, or transfer of ownership of the instrument for a person at risk? 38

20 CRA Policy Post Amendments TIB B-105 Comment What s Missing With respect to arranging for : consideration of provincial regulation of intermediaries Example: BC s Financial Institutions Act requires insurance agents to be licensed: "insurance agent" means a person, other than an insurance company or an extraprovincial insurance corporation, who solicits, obtains or takes an application for insurance, or negotiates for or procures insurance, or signs or delivers a policy, or collects or receives a premium; BC s Insurance Licensing Exemption Regulations then exempts from licensing: Bank employees selling creditor insurance, travel agents selling travel insurance, funeral directors selling funeral services insurance, etc. 39 CRA Policy Post Amendments TIB B-105 Current Problem Areas With CRA Current Interpretation Mutual Fund Dealer & Salesperson Trailer Fees B-105: Whether exempt is a question of facts and circumstances. Coverholders & Managing General Agents (Insurance) 2011 Interpretation Letter suggests commissions received are taxable as service is preparatory. Automobile Dealer Loan Referral Fees B-105 suggests whether taxable or exempt depends on degree of dealer s involvement CADA February 2015: Fees paid by financial institutions to dealer s in respect of conditional sales and financing contract exempt from GST/HST. 40

21 Thank You David Douglas Robertson Direct: (403)