On December 14, 2009, the federal government released a backgrounder announcing its intention to propose amendments to the Excise Tax Act (the “ETA”) that would explicitly exclude investment management services from the definition of “financial service” for GST/HST purposes. If passed, these amendments would have the effect of subjecting discretionary management fees to the full tax burden that will be imposed by the HST when it comes into effect on July 1, 2010 in the absence of any specific exemptions and/or rebates. Activities that would be considered to be investment management services under the proposed amendments include the full range of investment portfolio management and administration activities, such as:

  • research, analysis and advice;
  • determining and directing which assets or liabilities of an investment portfolio are to be acquired or disposed of; and
  • acting to realize performance targets in respect of an investment portfolio.

These amendments can be seen as the federal government’s response to the decision rendered by the Federal Court of Appeal in The Queen v. The Canadian Medical Protective Association on April 16, 2009, which upheld an argument made by The Canadian Medical Protective Association (the “CMPA”) that investment management services it had received did not constitute the provision of advice where the investment manager was given full discretion to buy, sell, hold and manage its investment portfolio. Instead, the activities at issue were considered by the Court to constitute “arranging for” the purchase and sale of securities and thus fell within the definition of “financial service”, which had the effect of exempting the services from the application of GST/HST. With the backgrounder released on December 14, 2009, the federal government has effectively announced its intention to legislatively reverse the findings in this case.

The proposed amendments would apply to any investment management services provided after December 14, 2009, as well as to any investment management services provided on or before December 14, 2009 where the service providers treated the services as taxable in charging, collecting or remitting GST/HST in respect of them. Thus, the only taxpayers that would avoid paying GST/HST on these types of services are ones where the investment manager has treated the services provided as exempt “financial services” and has invoiced the taxpayer for the services before December 15, 2009. Taxpayers who have paid GST/HST to investment managers and applied for a rebate of tax paid in error would be disadvantaged as the proposed amendments would allow the CRA to deny taxpayer applications for the rebate.

It is our understanding that very few investment managers have followed the CMPA decision that led to these proposed amendments, with most following the government’s published policy regarding the application of GST/HST to management fees. Unfortunately, this means that only a few taxpayers will win under the proposed amendments and the majority will be sadly disappointed.