The GST/HST is a tax that applies to most supplies (sales) of goods and services made in Canada. The term supply means the provision of property or services in any manner whatever and is broad enough to encompass virtually all transactions such as sale, lease, license or rendering of services. However, some supplies are exempt from GST/HST which means you do not charge the GST/HST on these supplies of property and services, and you are generally not entitled to claim Input Tax Credits (ITC) on property or services acquired to provide these supplies. One of the exempt supplies is financial services under subsection 123(1) of the Excise Tax Act. The case of Applewood Holdings Inc. v The Queen, 2018 TCC 231 sheds some light on this exception by analysing the predominant element of the financial service from the consumer’s perspective.
A car dealership’s exempt service was reassessed by the Canada Revenue Agency for GST/HST
Applewood Holdings Inc. (the “Appellant”) operated a car dealership and sold vehicles to customers who often leased or financed their purchases. It entered into a dealer agreement with Walkaway Canada Incorporated (Walkaway), a company that acquired a group insurance policy from a third-party pursuant to which the Appellant could sell to its customers various types of credit insurance to cover their lease or finance payment obligations. Under the dealer agreement, the Appellant could receive a commission of 55% of the premium from the sale of a higher-grade insurance policy and remit the rest to Walkway.
The issue in dispute was whether the compensation for services provided by the Appellant was a taxable supply or exempt from GST/HST under subsection 165(1) of the Excise Tax Act. The Appellant’s experienced Canadian tax litigation lawyer took the position that the services it provided in connection with the insurance products qualified for “financial service” as defined in subsection 123(1) of the Excise Tax Act, because they amounted to “agreeing to provide, or arranging for financial service”, namely the insurance products. The Canadian tax litigation lawyer for the Canada Revenue Agency (the “CRA”), on the other hand, held the position that the services provided by the Appellant did not constitute financial services and should instead be characterized as only preparatory promotional or administrative activities.
The predominant element of a supply should be from the perspective of the purchaser
The Tax Court of Canada (TCC) reviewed case law and decided that the definition of “financial services” can refer to two situations: (1) the act of agreeing to provide a service; and (2) the act of arranging for a service. The first concerns the person who, in the final analysis, provides the “financial service” while the latter situation concerns intermediary persons that arranged for the “financial service”. The Tax Court of Canada then adopted the two-fold test set out in Global Cash Access (Canada) Inc. v The Queen, 2013 FCA 269 to determine what services were provided to earn the compensation and then whether the service falls within the definition of “financial service”. The two-fold test is:
- The first step is to determine what services were provided for the consideration received. At this stage, the services should include all services and not just the predominant elements.
- The second step requires a determination as to whether the supply is included in the definition of “financial service”. It is necessary to determine the predominant elements of the supply if