May 2009

GST Storm hits Bay Street
 

The Federal Court of Appeal recently upheld a decision of the Tax Court of Canada in the Queen v The Canadian Medical Protective Association (“CMPA” ) that “discretionary” investment management services are “financial services” and therefore exempt from GST. Accordingly, it was held that the CMPA was entitled to its claim for a refund of all GST paid on amounts invoiced by its investment managers.

A distinction was made between discretionary and non-discretionary clients. Non-discretionary clients are those to whom investment advice is generally given, who would be subject to GST. Discretionary clients are those who have not retained investment managers for their advice, but instead have selected managers for their expertise at buying and selling securities and obtaining desired returns within stipulated guidelines, who would not be subject to GST.

In a nutshell, the CMPA was a discretionary client, and the investment managers were held not to be giving advice but providing a GST exempt financial service in selecting, buying and selling securities on behalf of the client. Consistent with standard industry practice, orders were executed by brokers and settled by a custodian who retained title to and possession of the securities. The same principles were held to be applicable to both segregated and pooled funds. Segregated funds are funds that are not co-mingled with the assets of other clients.

The CMPA decision runs contrary to what was previously the common belief, that investment management fees are in respect of advisory services that are subject to GST as opposed to financial services that are GST exempt.

It won’t be long before the news of the CMPA decision spreads and clients will be demanding refunds of GST paid. However, clients should note that they will have to request refunds from the Canada Revenue Agency and not from their investment managers. Claims will be limited to a 2 year period. As a retroactive legislative amendment to the definition of a “financial service” is possible, it would be prudent for clients seeking GST refunds to file their refund requests as quickly as possible to protect their interests. Taxpayers like pension funds who self-assessed and remitted GST on discretionary management fees paid to foreign investment management firms should also consider taking steps to protect their interests.

Unfortunately, until the Canada Revenue Agency makes a formal announcement to confirm that it accepts the CMPA decision and that it will not seek any legislative amendments to make discretionary investment management services taxable, investment management firms will likely be reluctant to stop charging the GST.

On the flip side, should the Canada Revenue Agency concede that discretionary investment management services do qualify as GST exempt financial services, investment management firms should brace themselves for the possibility of having to repay any GST input tax credits claimed on expenditures related to their discretionary management services. Given that up to 4 years are open for reassessment, Bay Street firms could be facing some large GST bills in the near future. The pending harmonization of Ontario’s 8% sales tax in July 2010 will only serve to complicate matters.

Regardless of the final outcome, let’s hope that the Federal government and the Canada Revenue Agency don’t take too long to make a decision to restore some tax certainty in these uncertain financial times on Bay Street.

For further information please contact a member of the Shimmerman Penn taxation team at 416 964 7200 or via email:

Doug Hartkorn, Tax Partner: dhartkorn@spllp.com

Mark McGinnis, Tax Partner: mmcginnis@spllp.com

Cara Orzech, Tax Manager: corzech@spllp.com

Derek Wagar, Tax Manager: dwagar@spllp.com

© 2009 Shimmerman Penn LLP

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