On December 14, 2009, the Department of Finance released a backgrounder containing legislative proposals in response to the recent Federal Court of Appeal decision The Queen v. The Canadian Medical Protective Association ("CMPA")1 rendered in April 2009.

The CMPA Decision

In CMPA, the Federal Court of Appeal found that discretionary investment management services rendered through the management of either segregated or pooled funds were exempt "financial services" that should not be subject to GST/HST. In particular, the Court ruled that discretionary investment management services are directed at the "transfer of ownership or repayment of a financial instrument" and to the "arranging for" such services within the meaning of paragraphs 123(1)(d) and (l) of the term "financial service" in the Excise Tax Act (Canada) (the "Act"), and are therefore exempt from GST/HST under the Act. As a result, the Court concluded that such services do not constitute the "service of providing advice" which is specifically excluded from the definition of "financial service" under paragraph 123(1)(p) of the Act and is therefore subject to GST/HST. The decision ran counter to the historical position taken by the tax authorities to the effect that investment management services are GST/HST taxable as the provision of advice.

The New Legislative Proposals

Following the CMPA decision, the tax authorities stated that they disagreed with the decision and that they were disregarding the case. At that time, there were even certain rumors concerning the implementation of retroactive legislation by the Department of Finance to reaffirm the policy intent regarding the GST/HST treatment of investment management services. The legislative proposals finally released on December 14, 2009 are, according to the Department of Finance, intended to clarify that investment management services do not constitute financial services under the Act, and are therefore taxable for GST and HST purposes.

In this respect, the Minister of Finance proposes to amend the definition of financial service in the Act by excluding investment management services. According to the backgrounder: "Investment management services comprise the management by one person of the assets or liabilities of another person, with or without discretionary authority granted by the other person to manage the assets or liabilities. Investment management services 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." It is also proposed that paragraph (q) of the definition of financial service be amended to exclude from the definition any investment management services (as described above) rendered to a recipient that is either an investment plan or a corporation, trust or partnership whose principal activity is the investment of funds.

While the proposals themselves were expected, what was not expected was how they will apply. Indeed, the proposed amendments will apply to all supplies of these services where (i) consideration for the supply becomes due or was paid without becoming due after December 14, 2009; or where (ii) all the consideration for the supply became due or was paid on or before December 14, 2009, unless the supplier did not charge, collect or remit GST/HST in respect of the supply. In other words, the proposed amendments will treat all future supplies of these services, all current supplies which have not yet been billed, and all past supplies where the manager charged GST/HST, as being taxable.

In practice, any taxpayer who claimed a rebate for GST/HST charged by the investment managers in good faith on discretionary investment management fees will find that their claims are now obsolete and will not be granted. However, clients of investment managers who did not take into account the tax authorities' statements that they would be ignoring the CMPA case and disregarded the risks of retroactive legislation by ceasing to charge GST/HST on discretionary investment management fees will be rewarded as the new provisions should not apply to them.