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.
The authors would like to thank Glenn A. Cranker for his
collaboration in writing this article.
Footnote
1 2009 FCA 115.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
