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Ottawa, September 13, 2001
2001-077

Proposed Amendment to GST/HST Group Relief Rules for Supplies of Clearing Services

Related documents:

• Explanatory Note.
• Proposed Amendments.

Finance Minister Paul Martin today announced an amendment to the Excise Tax Act relating to the goods and services tax and harmonized sales tax (GST/HST). The proposed amendment pertains to services in relation to the clearing or settlement of cheques and other payment items under the national payments system.

Clearing and settlement services fall into the definition of exempt financial services under the GST/HST only when supplied by the Canadian Payments Association (CPA) or by any of its member deposit-taking institutions. The Association and its members are the only entities that can perform the financial component of the service, which is the settling of accounts among financial institutions once the payment items have been processed.

A clearing service that is separated from that financial component and is supplied by a non-CPA member can also be treated as exempt when it is supplied between members of a closely related group of companies in the financial sector. This provision is intended to ensure that closely related companies, such as a parent financial institution and its subsidiary, do not have to charge each other tax when one supplies services for the use of the other.

However, in some cases, the group relief rule can result in exempt treatment for otherwise taxable clearing services that are in fact provided to persons outside the group. A data-processing company that is closely related to a CPA member may benefit from an exemption for its services rendered to third parties by contractually supplying the services through the closely related CPA member.

To prevent this unintended consequence of the group relief rule, the proposed amendment restricts its application in the case of services in relation to the clearing or settlement of cheques and other payment items. The amendment ensures that where a financial institution acquires such services from a closely related company in order to resupply them to an unrelated entity such as another financial institution, the services will be taxable.

A financial institution would continue to be able to purchase clearing services on an exempt basis from a closely related company where those services were acquired for the purpose of processing cheques and other payment items deposited with that financial institution by or on behalf of its own account holders.

The financial services sector, including the Canadian payments system, is evolving rapidly. The Government recognizes the need to continue to monitor these developments to ensure the fair application of the GST/HST rules.

In making today’s announcement, Minister Martin emphasized that the proposed amendment does not affect services supplied between related companies for their own use. The matter of related-party transactions continues to be examined as part of the Government’s ongoing review and industry consultations on the tax implications of financial sector reform.

The proposed amendment is set out in draft form and explained in further detail in the attached documents. The amendment is proposed to apply generally to services provided after today. However, it would not apply where a financial institution’s contract with an unrelated third party for services in relation to clearing or settlement was entered into on or before this date.

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Explanatory Note

Section 150 of the Excise Tax Act entitles two corporations that are members of the same closely related group that includes a listed financial institution to make an election to treat certain transactions between them as exempt supplies of financial services. Subsection 150(2) describes transactions that are excluded from the application of this rule.

New paragraph 150(2)(c) excludes certain supplies of services in relation to the clearing or settlement of cheques and other payment items. Specifically, group relief would not apply to a supply of such services if they were acquired, in whole or in part, by the first purchasing group member or by any subsequent closely related purchaser for the purpose of supplying clearing or settlement services on an exempt basis to a person outside the group.

This provision would apply in circumstances in which the resupply to the outside purchaser were made by a member of the group that is a deposit-taking institution belonging to the Canadian Payments Association (CPA). Further, the outside purchaser would have to be acquiring the services for the purpose of providing services in relation to clearing or settlement to its own customers.

The result of the proposed amendment is that a corporation that is not itself a CPA member would have to charge tax on clearing services provided in respect of payment items that are deposited at financial institutions outside the corporation’s closely related group. Group relief would still apply to services supplied between members of the group for their own use, that is, for clearing payment items deposited at financial institutions that are part of the closely related group.

New paragraph 150(2)(c) comes into force on September 14, 2001, but applies only to services provided on or after that day. It should also be noted that the amendment does not apply if the agreement for the supply to the outside purchaser was entered into before September 14, 2001.

A special transitional rule deals with circumstances in which a supply excluded from the application of section 150 because of new paragraph 150(2)(c) involves the provision of services before and after September 14, 2001. Subsection 136.1(2) of the Act already deems a separate supply of a service to be made for each billing period under the agreement for the supply. The transitional rule further divides a supply of services for any billing period that includes September 14, 2001, by deeming the provision of the services before that day and the provision of the services on or after that day to be two separate supplies.