The above-noted draft legislation is not related to the recent Federal Court of Appeal decision in Her Majesty the Queen v. The Canadian Medical Protective Association (the "CMPA Decision"), in which investment management services were found to be GST/HST exempt supplies.
In the CMPA Decision, the Court of Appeal upheld the finding of the Tax Court of Canada that the investment management services provided to CMPA were exempt from GST/HST. The Court found that the investment managers had been "arranging for" a "financial service" that included the "transfer of ownership ... of a financial instrument" such as equities and debt. The CMPA Decision had been heard together with Her Majesty the Queen v. General Motors of Canada Limited (the "GM Decision"). In the GM Decision, the Court held that it did not need to decide whether the services of investment managers provided to General Motors were taxable or exempt, as General Motors was entitled to fully recover the GST it had paid to the investment managers on investment services for its pension plan trusts. It does not appear that there was a relevant difference in the nature of the services between the CMPA Decision and the GM Decision.
The loss of GST/HST revenues from investment management services would be significant, as GST/HST payable on investment management services is far greater than the GST/HST payable by investment managers on taxable inputs. This is particularly so, as the services of investment managers based in Ontario and British Columbia will become subject to the HST from July 1, 2010 onwards. It is widely believed that the Department of Finance once again will amend the definition as necessary to subject these services to GST/HST. The Department of Finance has retroactively amended the definition of exempt "financial services" on several occasions in response to adverse Court decision.
In the meantime, the Canada Revenue Agency (the "CRA") is taking a very hard line on the CMPA Decision. At a conference of the commodity tax community earlier this week, a senior representative of the CRA took the position that the CRA would restrict the CMPA Decision to its very narrow facts. In essence, the CRA will not support the interpretation that most investment management services are GST/HST exempt, notwithstanding the clear decision from the Federal Court of Appeal in the CMPA Decision.