Credit Card Intermediaries and the GST/HST
Canadian businesses are required to register for the goods and services tax (GST) or in some provinces, the harmonized sales tax (HST). Businesses involved with the supply of most types of goods and services in Canada are required to register for the GST or HST. However, certain types of businesses may be exempt from these tax requirements. The Canada Revenue Agency has been challenging some of these exemption claims, but some recent court decisions have sparked optimism among those in the financial services industry. For more information about VISA card intermediaries exempt from the GST/HST tax, contact the Canadian tax lawyers of Jeremy Scott Law at 902-403-7201.
What is the GST/HST Tax in Canada?
In Canada, the GST applies to most supplies of goods and services that originate in Canada. The GST also usually applies to the supply of real properties, such as land and real estate, and intangible personal properties like trademarks, patent-use rights, and digital products. The GST is a federal tax, but certain provinces have combined their provincial taxes with the GST to create the harmonized sales tax (HST), which applies to the same types of goods, services, and properties as the GST. However, the HST rate may vary from province to province.
Businesses that are registered for the GST/HST are required to collect tax on the sales of taxable supplies at the applicable HST rate, or at 5 percent for the GST rate. Nearly everyone in Canada is required to pay the GST/HST when they purchase taxable supplies of property and services – with the exception of specific groups and organizations, including certain provincial and territorial governments.
GST/HST Exempt Financial Services
Financial services are generally considered exempt from the GST/HST, according to subsection 123(1) of the Excise Tax Act. According to this law, most of the services offered by financial institutions are exempt from the GST/HST, including lending money, operating checking accounts, and processing credit and debit card payments. However, many other types of business operations offered by financial institutions are still bound by the GST/HST. In general, business activities that support the delivery of financial services are considered separate from financial services, and thus, taxable. For example, advertising, promotions, administration, and management are usually deemed taxable.
While Canadian tax law allows exemptions for financial services, the Canada Revenue Agency has challenged VISA card intermediaries exempt from the GST/HST tax. The CRA has reportedly classified financial services as taxable promotional, advertisement, or administrative services instead of GST/HST exempt financial services. Financial services providers have argued that the CRA has misclassified their services in order to unfairly collect taxes for services that should legally be considered exempt from the GST/HST.
A recent court case called Zomaron Inc. v. The Queen examined the question of exempt services in the Canadian financial sector. Zomaron Inc. is an independent sales organization (ISO) for VISA and a Member Service Provider (MSP) for Mastercard. ISOs and MSPs typically partner with payment processors like Elavon Canada Company (also known as acquirers) to distribute point-of-sale (POS) payment processing services – most commonly POS machines that allow businesses to authorize credit card payments from customers. Zomaron made legal agreements with its acquirers, which granted Zomaron the authority to set terms, pricing, rates, and fees for the use of these machines, along with a complex pricing structure. Merchants that were accepted by the acquirers agreed to pre-negotiated contracts that were binding for both the acquirer and the merchant. Zomaron also had an obligation to provide preparatory and advising services and received a mark-up share for all services provided to the acquirers.
The Canadian Revenue Agency determined that Zomaron’s services should be classified as taxable promotional and advertising services and that these services were not exempt from the GST/HST taxes. The CRA also ruled that Zomaron failed to charge the required GST/HST to the acquirers. This CRA decision was challenged in the court case, and the Tax Court of Canada (TCC) overturned these CRA rulings. The TCC ruled that even though Zomaron had solicited, recruited, trained, and provided ongoing support for POS retailers, Zomaron had technically only arranged for the processing of credit card payments. Legally speaking, Zomaron had only caused the transaction to occur, rather than processed it themselves. Thus, the court ruled that Zomaron’s services should be considered exempt financial services according to the Excise Tax Act.
The Tax Court of Canada’s recent ruling has been celebrated by other non-traditional financial services industry intermediaries, who believe that the decision could set the precedent that other types of intermediaries could be exempt from the GST/HST. For example, other types of point-of-service sellers and co-branded card providers who sell retail cards are commercial chains like Costco may also be deemed as exempt financial service providers. These exemptions could apply to all intermediaries in the consumer-retailer relationship.
This court ruling essentially redefined the notion of “arranging for” financial services, lowering the threshold for meeting this requirement. Thorough documentation remains crucial for receiving this exemption, as the TCC relied on extensive documentation from Zomaron Inc. to make their final ruling.
Canada’s tax laws are complex, and compliance with these tax laws can be complicated for business owners. While financial services providers may be exempt from the GST/HST for some of the services they offer, providing sufficient documentation to receive these exemptions is not always straightforward. Businesses that fail to provide sufficient evidence for their GST/HST exemption could face serious fines and other penalties from the Canadian Revenue Agency. Due to the complex nature of the Canadian tax system, many businesses that operate within Canada seek assistance from an experienced Canadian tax lawyer. If you have Canada tax questions related to VISA card intermediaries exempt from the GST/HST tax (or other tax concerns), you can learn more about your business’s options by calling Jeremy Scott Law at 902-403-7201.
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