A recent audit initiative of the Canada Revenue Agency (CRA) has targeted financial service intermediaries – and in particular, member service providers (“MSPs”) that are engaged in business in the credit card/electronic payment industry. These are the businesses that provide “point of sale” (POS) visa machines to merchants, for customers to use when paying for goods and services purchased in various retail establishments.
While seemingly providing goods and services to the retail merchants, in fact, the MSPs usually enter into contracts with credit card payment processing companies (“Members”), whereby they recruit retail merchants to contract with the Members for the retail merchants’ payment processing needs. The MSPs’ services include negotiating fees with the merchants on behalf of the Members and otherwise acting as the main point of contact for the merchants in respect of their credit card processing matters. The MSPs also provide services in relation to the installation and operation of the point-of-sale credit card processing equipment at the merchants’ retail locations.
The MSPs have generally taken the position that their supplies are exempt financial services under the meaning of “financial services” in subsection 123(1) of the Excise Tax Act (ETA) and section 1 of Part VII of Schedule V of the ETA. One argument that the MSPs are relying on is that, under paragraph (l) of subsection 123(1), the definition of “financial services” includes “arranging for” certain financial services (i.e., the credit card payment processing services).
In contrast, the CRA has taken the position that MSPs are making taxable supplies, and that the MSPs are therefore required to collect and remit GST/HST on their supplies. In particular, the CRA has characterized the MSPs’ supplies in the following manner:
- marketing and promoting the Members’ services;
- recruiting prospective merchants; and
- providing after-sales services (such as installation of credit card/debit card processing machines, customer assistance and training) to the merchants.
The CRA’s usual argument is that these are not financial services, but rather fall under various excluded services.
Audits and assessments are ongoing, and some of these cases have headed to the Tax Court of Canada. Recent case law has also complicated the issues, making the timing of legal assistance essential – lest relevant issues be missed!
MSPs should keep a close eye on these developments, and in the meantime, review their own GST/HST-treatment of their supplies, particularly in their agreements with the Members.
Millar Kreklewetz LLP has extensive experience in this area and is available to assist.
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