2010 CICA Commodity Tax Symposium: GST Exemption of Financial Intermediation or “arranging for”

The current Canadian structure for the exemption of financial intermediation and support services concentrates a number of recurring problems with the twenty year old GST as it applies to the financial sector. We now have legislation that does not exempt to an appropriate degree, to be buttressed on an ongoing basis by concessions from the Canada Revenue Agency (“CRA”) and regulations from the federal Department of Finance (“Finance”). The new regime will be time consuming and costly for both taxpayers and government. It is now legislatively inequitable between segments of the finance sector, and administratively inequitable between segments, distribution models and particular products.

As a function of what was patently a hasty implementation process, much of the detailed design for the latest changes clearly took place after the announcement creating their effective date. Taxpayers and advisors must now deal with yet another aspect of the GST system that has become largely administrative and extra statutory, further devaluing the relevance of the law and the Courts.

A coherent guiding policy vision seems to be completely absent. The structure now completed as a result of legislation included in the 2010 federal budget appears to be purely a reaction (many would say an overreaction) to various Tax and Appeal Court decisions illuminating the scope of the preexisting provisions. There is no evidence of a pause to reflect on whether the margin between taxation and exemption delineated by the Courts was in fact appropriate from a policy perspective which must be informed on two critical factors; the significant global revisions in Value Added Tax (“VAT”) as it is applied to intermediation and support services relevant to financial services, and the imperative for financial institutions to outsource functions in order to remain competitive.

This brief document revisits the compelling policy rationale for the exemption of intermediation (in its broadest sense including support services) of financial services, and the current moves in the European Union (“EU”) VAT system to correct an admitted over-restriction of the exemption resulting from legislative disputes. It also attempts to provide practical guidance to determining the appropriate GST in the new and very peculiar Canadian environment. The disconnections in the implementation process are identified in the hope that we can do better in future.

In short, the current state of the exemption of “arranging for” services in Canada is a poor show. The legislated margin now set for exemption is grossly inadequate, and uninformed by global VAT developments and their motivation. The administrative and extra statutory remedies offered to taxpayers as a counterweight to bad legislation will be costly, tardy and inequitable. The alarming implementation process, complete with harsh retroactivity and a complete lack of cohesion between the CRA and Finance will damage Canada’s credibility among global corporate tax directors. After reading this document, it should be apparent that Canada’s financial sector deserves a wholesale and urgent revision of this critical aspect of the tax.