July 6, 2009 No. 2009-21
	Have You Overpaid GST on Investment Management Services? The GST status of some investment management services remains uncertain despite the recent release of two much-anticipated decisions by the Federal Court of Appeal, which were in the taxpayers’ favour. Though confusion remains about the GST status of discretionary investment management services for both providers and purchasers of these services, purchasers may wish to file protective rebate claims for GST paid in error or claim input tax credits, provided their own facts and circumstances mirror the facts in these decisions. With the issues still unresolved, it is not yet known whether the government will introduce clarifying legislative amendments. The government has not appealed the Federal Court of Appeal’s decisions nor issued any official reaction to them but we understand that it continues to consider discretionary investment management services to be GST-taxable. These two cases, General Motors of Canada Limited v. The Queen and The Canadian Medical Protective Association v. The Queen, have made their way through the courts over the last few years. Last year, the Tax Court of Canada (TCC) ruled that General Motors of Canada Limited (GM Canada) was entitled to input tax credits for GST paid on investment management services and noted that these services were indeed GST-taxable. In the second case, the TCC ruled that the investment management services purchased by the Canadian Medical Protective Association (CMPA) were GST-exempt services. While the services provided in these cases may appear similar at first glance, the court decided the cases differently based on their specific facts. The government appealed both decisions to the Federal Court of Appeal (FCA), which dismissed both appeals. In the General Motors case, the FCA dismissed the case without having to address the GST status of the services, one of the underpinning questions that created the confusion. This TaxNewsFlash-Canada summarizes the TCC and FCA decisions in both of these cases. General Motors of Canada Limited Facts GM Canada, a manufacturer of vehicles, is the administrator of two registered pension plans for its employees. GM Canada entered into agreements with investment managers (the managers) to administer and invest the pension plan contributions. The managers collected GST on their services. GM Canada claimed input tax credits for the GST paid on these services but the Canada Revenue Agency (CRA) denied the ITC claims. Issues The main issue was whether GM Canada was entitled to claim input tax credits for the GST paid on the investment management services and alternatively, whether such services were GST-exempt financial services.  Tax Court of Canada’s decision The TCC reviewed the three main elements of the test to claim input tax credits and determined that GM Canada had fulfilled all three elements: · GM Canada had acquired the services · GST on the services was payable or paid by GM Canada · GM Canada had acquired the services for consumption or use in the course of its commercial activities. Thus, the TCC ruled that GM Canada was entitled to the input tax credits. The TCC then analyzed whether the services were GST-exempt financial services, even though such an analysis was unnecessary to decide the case. In this case, the managers provided the buy and sell orders but the trustee was not required to fulfil the orders; the trustee could call GM Canada to obtain approval for the transaction. As such, the managers did not posses the access or the means to “arrange for” the transfer of ownership of financial instruments. As a result, the court found that the dominant element of the managers’ services was their knowledge and expertise to determine which trades to complete (i.e., providing advice, generally a taxable service), rather than making the actual trades, which would be a GST-exempt service of “arranging for” the transfer of ownership of a financial instrument. Thus, the services were subject to GST. Federal Court of Appeal’s decision The FCA reviewed each of the three elements analysed by the TCC. On the element of “consumption or use in the course of its commercial activities”, the CRA argued that: · Pension plan trusts are a third person involved in the process and, as the administrator of the pension plans, GM Canada was involved in a separate activity. · A notion of indirect nexus was insufficient to rule that the services were used in the course of GM Canada‘s commercial activities, and · The TCC judge erred in applying an “economic substance over form” analysis. In order words, while the court must be sensitive to commercial realities, commercial realities should not recharacterize a bona fide legal relationship or supplant unambiguous legal provisions. The FCA rejected all three arguments. The court noted the collective agreement between GM Canada and its employees and that the pension plans would not exist without that collective agreement. The court also found that, as a matter of law, pension plans are not necessarily separate from other businesses and added that the circumstances of each case must be examined. The court concluded that there was no recharacterization of GM Canada’s legal relationship and noted that the TCC had found as a fact that the pension plans were an integral component of GM Canada’s commercial activities. The FCA ruled that there was no reviewable error in the TCC analysis of the three main elements of the test to claim input tax credits, and as such, it did not have to analyze the issue of whether the services were GST-exempt financial services. KPMG observation Before claiming input tax credits on GST-taxable investment management services based on this decision, taxpayers should carefully compare their specific facts with the ones described in this decision and determine whether they are similar. Despite the General Motors decision, taxpayers should note that the Department of Finance announced on January 26, 2007 a new GST rebate for pension plan trusts that may basically render the General Motors decision irrelevant to other taxpayers. Under the proposed rebate, an employer would claim input tax credits on all taxable inputs used in relation to the pension trusts. However, the employer would be required to remit GST for all of those taxable supplies, while the pension plan trust would be deemed to have paid the tax. Thus, the employer’s input tax credit would essentially be cancelled by the deemed collected tax. An eligible plan trust would be entitled to 33% of the GST charged on all pension plan-related expenses. At the time of writing, the Department of Finance has not issued any further information with regards to this proposed new rebate since the original announcement in 2007. The Canadian Medical Protective Association Facts CMPA is a not-for-profit entity that provides, among other things, professional liability protection for physicians in Canada as a mutual defence organization. CMPA retain the services of managers to invest on a fully discretionary basis a fund generated from physicians’ contributions. CMPA claimed it paid GST in error on these services on the basis that the services were GST-exempt financial services. The CRA denied the claim. Issues The issue in this case was whether the investment management services were GST-exempt financial services. Tax Court of Canada’s decision The TCC found that the investment managers were retained to buy and sell securities on CMPA’s behalf. Thus, the TCC ruled that the services qualified as GST-exempt as the arranging for the transfer of ownership of financial instruments and none of the exclusions in the definition of financial services applied. Federal Court of Appeal’s decision The FCA analysed the nature of the managers’ services and noted that the skill to choose the investments (i.e., the research behind the managers’ buy and sell orders) was the managers’ core activity. However, as the TCC noted, the managers did actually buy and sell securities on CMPA’s behalf. The FCA ruled that the managers’ services could not be divided between these activities. As such, the court concluded that the services qualified as GST-exempt financial services of “arranging for” the transfer of ownership of a financial instrument. The FCA confirmed that the managers had not provided any advice to anyone (which would generally be a taxable service). KPMG observation This decision may affect both the purchasers and the providers of discretionary investment management services. Purchasers of such services may wish to file protective claims of tax paid in error for GST paid on similar discretionary investment management services. While some taxpayers may decide to wait until the Department of Finance clarifies the GST status of such services before investing the time to prepare rebate claims, these taxpayers should note that such a rebate claim must generally be filed within two years after the day the amount was paid. For providers, as noted earlier, the CRA continues to consider all investment management services to be GST-taxable services. In light of the CRA’s position, it would be prudent for providers to continue to charge GST on discretionary investment management services to avoid assessments. However, should the CRA review its position at a later date to treat these services as exempt or should legislative amendments clarify that these services are indeed GST-exempt services, providers of discretionary investment management services could be reassessed for input tax credits claimed for GST paid on inputs used in rendering such services. We can help Your KPMG adviser can help you with this or other federal or provincial indirect tax matters that may affect your business. We can help you manage your indirect tax compliance obligations in all relevant jurisdictions and also help you ensure that you are not missing refund opportunities. For details, contact your KPMG adviser.
	Information is current to June 30, 2009. The information contained in this TaxNewsFlash-Canada is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG’s National Tax Centre at 416.777.8500. KPMG LLP, a Canadian limited liability partnership established under the laws of Ontario, is the Canadian member firm affiliated with KPMG International, a global network of professional firms providing Audit, Tax, and Advisory services. Member firms operate in 145 countries and have more than 123,000 professionals working around the world. The independent member firms of the KPMG network are affiliated with KPMG International, a Swiss cooperative. Each KPMG firm is a legally distinct and separate entity, and describes itself as such. KPMG's Canadian Web site is located at www.kpmg.ca © 2009 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.