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GST Treatment of Management Fee Distributions and Rebates: The Invesco Case

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In Invesco Canada Ltd. v. The Queen (2014 TCC 375), CRA assessed the taxpayer for GST, arising out an arrangement designed to minimize income tax.  Specifically, at issue was a determination of the value of the consideration paid for the supply of management services provided to mutual fund trusts. 

Invesco was in the business providing investment management services to mutual fund trusts (the “Funds”).  Invesco charged fees to the Funds for these services (the “Management Fee”), which were subject to GST as taxable supplies. 

The investors in the funds could be categorized as either: (1) smaller “Retail Investors” or (2) generally more sophisticated, institutional “Large Investors”.  In the past (pursuant to a “Management Agreement” between Invesco and the investors), Invesco charged the same fees for all investors (the “Maximum Stated Management Fee”) but paid Large Investors a management fee rebate which reflected how the Large Investors benefitted the Funds and how the Large Investors (unlike the Retail Investors) did not require Invesco’s investment expertise and diversification services.  However, CRA released a Technical Interpretation, holding that, pursuant to section 12(2.1) of the Income Tax Act (“ITA”), this rebate attracted double tax – one to the investors in receipt of the rebates and another to the Funds. 

Accordingly, a new arrangement was pursued to avoid this result, which involved giving Invesco the discretion to negotiate with the Large Investors for a reduction in the Management Fee it charged the Funds and subsequently arranging for the Funds to make a distribution of the reduction amount to Large Investors (the “Special Distribution”).  This required amendments to the Trust Declarations and the Management Agreement.  Essentially, the steps were as follows:

  1. The “Net Management Fee” was determined using the following formula: [Net Management Fee = Maximum Stated Management Fee – Amount of Special Distributions]
  2. The Net Management Fee was paid by the Funds to Invesco weekly
  3. GST was collected on the Net Management Fee paid by the Funds to Invesco
  4. The Funds made Special Distributions to Large Investors monthly or quarterly (no GST was collected thereon)

CRA assessed Invesco on the basis that GST applied to the Special Distributions, in addition to just the Net Management Fee.  Essentially the CRA was saying that the Maximum Stated Management Fee was the total amount of consideration paid for Invesco’s management services, and was subject to GST.

Invesco appealed to the TCC, arguing that the Net Management Fee was the sole consideration for the supply of management services and that the Special Distributions were a separate transaction occurring between the Funds and the Large Investors, and did not form part of the consideration for management services. 

The Crown argued that the Special Distributions to the Large Investors did not represent a price adjustment for the management services and, therefore, did not reduce the value of consideration payable by the Funds for the supply of management services.  In that regard, there was no reduction in the total amount payable by the Funds.  In the Crown’s view, the Maximum Stated Management Fee was being paid – just to two different parties (Invesco and the Large Investors).  The Special Distribution was therefore part of the value of consideration for the management services and GST should have been remitted. 

The TCC first considered whether the Special Distributions formed part of the consideration for the management services. If so, the next step would be to determine the fair market value of that consideration.

It was held that the Management Fees were discounted at the point of sale (and accordingly the Net Management Fee did not include the Special Distributions); the Large Investors received the Special Distributions from the Funds as unitholders in the Funds; and Invesco had no obligation, legal or otherwise, to pay Special Distributions to the Large Investors. 

The TCC rejected the Crown’s argument that the guarantee or condition to pay the Large Investors was a form of consideration.  The Crown also failed to provide any assumptions regarding the fair market value of the non-monetary consideration in its Reply.  Finally, the Minister also assumed in its Reply that the Appellant paid the Large Investors the Special Distributions, which the TCC noted was not borne out by the evidence.

Ultimately, the TCC concluded that the Special Distributions paid by the Funds to the Large Investors were not consideration for Invesco’s supply of management services to the Funds.  They were a separate payment made pursuant to the Trust Declarations governing the relationship between the Funds and the Large Investors.  Invesco negotiated a reduced fee (the Net Management Fee) with the Large Investors and the Funds paid the money to Invesco – only this amount was subject to GST. 

In our view, the TCC reached the correct decision in this case, as the CRA’s approach was inappropriate for two primary reasons.

First, the CRA failed to sufficiently analyze the legal relationships established between the parties involved, as provided for in the contractual documentation.  The arrangement for the Special Distribution was strictly between the Trusts and the Large Investors, which implied that Invesco bore no obligation regarding same. 

Secondly, the CRA failed to distinguish between the services that Invesco provided to the Retail Investors and those provided to the Large Investors.  The services provided to the Large Investors were more limited than the services provided to the Retail Investors and that the addition of Large Investors had a distinguishable, positive impact on the fund, as compared to the addition of Retail Investors.  Accordingly, there was a valid rationale behind charging the Large Investors less for the services as compared to the Retail Investors.  

Putting aside the Crown’s failure to make sufficient assumptions regarding valuation in its Reply, this case may have been decided differently had the Management Agreement suggested that the Funds were assuming a legal obligation of Invesco to pay the reduced amounts (equal too the Special Distributions) to Large Investors.  Accordingly, this case serves as a reminder to practitioners to structure these types of arrangements such that the various parties’ obligations are properly delineated for purposes of all tax implications – including GST.  

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