Financial Services Exemption & Administrative Services
“Financial services” are GST/HST exempt but applying the definition to specific services is notoriously difficult. Part of the problem is that it’s not always clear how services are to be characterized; a service could have many aspects, some of which are financial in nature and some of which are administrative. Another difficulty is that the definitions themselves can be very convoluted. Financial institutions have a lot stake because they provide GST/HST-exempt services and, as a result, generally cannot recovery any GST/HST they pay on inputs (in contrast, taxable businesses can claim input tax credits).
A recent decision of the Federal Court of Appeal, Great-West Life, is a good example of how this problem arises when financial institutions fragment their activities and outsource parts to third parties, thereby creating a potentially taxable input. The case involved benefits processing services provided by a third party to an insurance company who offered benefits plans for expenses like prescription drugs. The third party provided an automated processing service whereby plan members could present a benefits card when purchasing prescription drugs and obtain instant claim adjudication and payment of benefits at the point of sale. (This replaced the need for the member to pay for purchases and then submit receipts for reimbursement.) The service enabled benefit payments to be made although, importantly, the funds came from the insurer and not the third party.
The case arose because the third party charged the insurer GST/HST, and insurer sought a refund on the basis the services were exempt. The FCA upheld a lower court decision that these benefits processing services were in fact subject to GST/HST. While the definition of “financial services” includes payment of insurance benefits in paragraph (f.1), it excludes prescribed administrative services in paragraph (t). Prescribed services specifically cover “administrative service in relation to the payment or receipt of… benefits,” unless the supplier is financially at-risk. The difficulty here was that the lower court had determined, on one hand, that the essential character of the benefits processing service was a single supply of the payment of benefits under paragraph (f). Yet, on the other hand, it concluded that the essential character fell also within the exclusion for administrative services (and remained excluded because the third party did use its own funds and was not financial at-risk). Tasked with resolving this apparent contradiction, the FCA concluded that there was in fact no inconsistency. As a matter of interpretation, the text, context and purpose of the rules indicated that the administrative services exclusion could limit the exemption under paragraph (f.1). Since the processing services at issue fell squarely within the exclusion, they were not financial services.
The outcome in this case is perhaps best regarded as the result of the specific exclusion for administrative services covering the very services at issue. Importantly, it should not detract from the growing body of cases like Global Cash Access on the exclusions in paragraphs (r.3)-(r.4) which hold that the predominant elements of a supply should govern the GST/HST status, notwithstanding that components would otherwise be excluded. Great-West Life is unique in that the predominant element of the benefits processing was both the payment of benefits and an excluded administrative service.
For a detailed analysis of the GST/HST exemption for financial services, see the Canadian chapter by Simon Thang in VAT and Financial Services: Comparative Law and Economic Perspectives (Springer, 2017).
Simon Thang, LL.B, LL.M (Taxation) is Toronto tax lawyer practising exclusively in the areas of sales tax (GST/HST, PST), and customs and trade. He is the principal of Thang Tax Law.