On December 14, 2009, the Honourable Jim Flaherty, Minister of Finance announced that the federal government intends to propose amendments to the Excise Tax Act that would explicitly exclude services in the nature of management, administration, marketing or promotional activities from the definition of "financial service" in that Act. If brought into force, the legislative amendments would clarify that services of managing credit (including payment cards and loan accounts), services that facilitate financial services and investment management services are fully taxable unless an exemption is otherwise obtained. From a practical perspective, these legislative amendments may increase the costs of those financial institutions who received such services from third parties on a tax-exempt basis.
A “financial service”, as defined in the Excise Tax Act, is listed as an “exempt supply” and is thus not a “taxable supply” under the Act. Therefore, recipients of financial services are generally not subject to GST/HST on these services.
The federal government's announcement that it intends to enact legislative amendments to clarify the meaning of "financial service" can be seen as a direct response to certain case law, which the federal government indicated, "may have created some uncertainty respecting the scope of the definition of 'financial service' in the Excise Tax Act."
Proposed legislative amendments to clarify what is not a "financial service"
According to the Backgrounder released on December 14, 2009 by the Department of Finance, the proposed legislative amendments would clarify the following:
- Services of Managing Credit – the definition of "financial service" will be amended to clarify that "a service of managing credit in respect of a credit or charge card or similar payment card, or in respect of a credit, charge or loan account or an account in respect of an advance" provided by third parties are excluded from the definition. The following services will therefore not be "financial services" within the meaning of the Excise Tax Act if they are provided to financial institutions by third parties: credit checking; valuation; authorization services; making decisions relating to a grant or an application for a grant of credit; creating and maintaining records relating to a grant or an application for a grant of credit; and monitoring payment records or dealing with payments.
- Services that Facilitate Financial Services – the definition of "financial service" will be amended to clarify that "a facilitatory service that is preparatory to an actual or intended financial service" is excluded from the definition. Pursuant to this proposed amendment, market research, product design, document preparation or processing, customer assistance, advertising, promotional and similar activities and the collection, collation or provision of information will not be "financial services" within the meaning of the Excise Tax Act.
- Investment Management Services – the definition of "financial service" will be amended to clarify that the full range of investment portfolio management and administrative activities are excluded from the definition. As such, research, analysis and advice; determining and directing the acquisition or disposal of assets or liabilities of an investment portfolio; and acting to realize performance targets in respect of an investment portfolio will not be "financial services" within the meaning of the Excise Tax Act when the proposed amendments come into force.
Application of Proposed Amendments
If enacted, the proposed amendments will apply to any of the services described above if they are provided after December 14, 2009, as well as to any of these services that are provided on or before December 14, 2009 if the service providers treated the services as taxable in charging, collecting or remitting GST/HST in respect of them.