In a decision rendered on November 13, 20121, the Tax Court of Canada (the "Court"), in the person of Justice Robert Hogan, clarified the definition of "financial service" in the Excise Tax Act ("ETA") in a situation where an intermediary provides on-premises space allowing a third party to render financial services to its clients. In addition, the Court also analyzed the meaning of the expression "relate to" as used in subsection 185 (1) of the ETA.
Context and applicable law
Supplies of financial services are generally exempt for the purposes of the Goods and Services Tax ("GST"). Such exempt financial services include, in particular, "the exchange, payment, issue, receipt or transfer of money, whether effected by the exchange of currency, by crediting or debiting accounts or otherwise"2 and "the operation or maintenance of a savings, chequing, deposit, loan, charge or other account"3. Agreeing to provide, or the arranging for, such services is also defined as a supply of financial services under the ETA4. On the other hand, providing space in a commercial real property is a taxable supply.
Subsection 185(1) of the ETA deals with persons that are not financial institutions but who offer incidental financial services in the course of their commercial activities by deeming those services to be for use in the person's commercial activities. Accordingly, in determining which inputs give rise to input tax credits ("ITCs"), a GST registrant is not obliged to separate inputs acquired for rendering financial services from other inputs.
Mac's Convenience Stores Inc. ("Mac's"), a division of Alimentation Couche-Tard Inc., installed automated banking machines ("ABMs") in its convenience stores. Some of the ABMs were leased by the Canadian Imperial Bank of Commerce or one of its subsidiaries ("CIBC"), while others were either owned by CIBC or owned by Mac's itself. Agreements were concluded under which Mac's granted CIBC a right of exclusivity for the operation of ABMs in its stores in consideration for which CIBC remitted to Mac's a portion of the service fees collected. The Canada Revenue Agency ("CRA") assessed Mac's on the basis that it had made a taxable supply of real property rather than an exempt supply of financial services.
In addition, Mac's also claimed ITCs for the purchase of ABMs arguing that the ABMs allowed it to render financial services "related to" its commercial activities. The CRA asserted however that such financial services were not "related to" Mac's commercial activities within the meaning of subsection 185(1) of the ETA.
Supply of real property or a financial service?
The Court's analysis focused principally on the interpretation of the words "arranging for" in paragraph (l) of the definition of "financial service" in subsection 123(1) of the ETA. After a review of the meaning given to those words in the jurisprudence, Justice Hogan came to the conclusion that the intermediary (Mac's, in this case) would have had required a certain involvement in the supply of the financial service itself (between CIBC and its clients in this case) for it to be characterized as "arranging for" "financial services". Justice Hogan stressed that, in the circumstances, Mac's did not really act as an intermediary. The supply of the financial service was triggered by the decisions of individual Mac's customers to make use of the ABMs. Aside from the fact that the ABMs are located on Mac's premises, Mac's influence on that decision was only minor. In addition, Mac's provided no instructions to users of the ABMs and did not resupply the ABMs with cash. Despite the assertion of Mac's that its customers were withdrawing cash to spend in its establishments, Mac's had no real involvement in the transactions of the clients of CIBC. Finally, employees of Mac's provided no assistance to clients of CIBC. Mac's played only a passive role, which was limited to making space available in its stores where the transactions between CIBC and its clients occurred. The Court accordingly concluded that the supplies by Mac's were tantamount to taxable supplies of real property rather than exempt supplies of financial services.
In addition, since he concluded that Mac's was not rendering financial services to CIBC, Justice Hogan did not consider it necessary to rule on the application of the new exclusions from the concept of financial services found in paragraphs (r.4) and (r.5) of the definition of "financial service".
ITCs and subsection 185(1) ETA
It was not contested that Mac's was rendering financial services to its customers insofar as the ABMs it owned were concerned. The Crown argued, however, that since the activities involving those ABMs consisted mainly of cash withdrawals and operation of bank accounts, those activities were not genuinely connected to the principal activities of Mac's. Mac's had not, therefore, acquired the ABMs for the purpose of rendering financial services related to its commercial activities. After analyzing the meaning given to the expression "relate to" in the jurisprudence, the Court did not endorse that position. Justice Hogan underlined in particular that in this situation, the ordinary meaning of the expression should be given effect, in line with the reasoning of the Supreme Court of Canada in the Canada Trustco Mortgage5 and Nowegijick6 decisions. Therefore, a broad and inclusive meaning should be applied. Since the operation of the ABMs is complementary to the other commercial activities of Mac's and encourages its customers to consume, the test of being "related to the commercial activities" is met in the present case even though the supply of financial services was not similar to, vital to or decisive in relation to Mac's commercial activities.
The Mac's decision constitutes not only a cautionary tale for intermediaries in relation to supplies provided to financial institutions, but also for all taxpayers who may have neglected to make an appropriate analysis of situations where sales taxes have not been collected in a specific transaction with a third party. In addition, the decision also underlines the fact that a simple financial component related to a supply may not be sufficient on its own to classify the supply as one of a financial service. It is essential to verify the terms of the commercial agreement and the circumstances in which the supplies are made before reaching the conclusion that the supplies are exempt (or zero-rated, as the case may be) as a financial service or otherwise.
In a situation where one of the contracting parties insists that sales taxes do not apply to the supplies made to him, the supplier may judge appropriate to insist that an indemnification clause be included in the agreement in question to protect him against the imposition of penalties and interest in the event of a reassessment by the tax authorities (sales taxes are recoverable from the recipient unless the agreement provides that the consideration already includes such taxes). In the event of uncertainty, prudence dictates that the opinion of a tax specialist should be obtained as to the application of sales taxes to the particular supplies. Obtaining an advance ruling from the tax authorities is also an option that could be considered by the taxpayer.
Finally, as to the application of subsection 185(1) of the ETA, it should be underlined that financial services will be considered to be related to the commercial activities of a taxpayer only if the financial services are truly connected to the commercial activities of the taxpayer. This connection does not, however, have to be decisive or important. This approach seems consistent with the objective of simplification in the management of ITCs for GST registrants.
The Mac's decision was not appealed to the Federal Court of Appeal.