The term "arranging for", which is not statutory defined, is generally interpreted to include activities performed by financial intermediaries such as agents, brokers and dealers in financial instruments. If it is determined that an intermediary is providing a supply of a financial service under paragraph (l) of "arranging for" a service (and not excluded by any of paragraphs (n) to (t)) of the definition of “financial service” under section 123(1) of the Excise Tax Act (“ETA”)), the service is exempt under Part VII of Schedule V of the ETA. In Barr v. The Queen (2018 TCC 86), the Tax Court of Canada (“TCC”) determined that the activities performed by the brokers in relation to a private sale of a business were not exempt from GST/HST as “arranging for” services and, therefore, the commission received by the brokers was subject to GST/HST.

In Barr, the Appellant, who was the sole shareholder of a water distribution company, retained two brokers (collectively, the “Brokers”) to find a buyer for the business.   Upon selling of the business in form of shares sale, the Appellant paid each of the brokers a commission plus GST/HST. The Appellant then applied for a refund of the tax paid on such commission on the basis it was paid in error. When the refund application was denied, the Appellant appealed to the TCC.

There was a disagreement between the Appellant and the Respondent as to the character of the services provided by the Brokers. The Appellant argued that the Brokers, pursuant to paragraph (l) arranged for “the transfer of ownership” of the Appellant’s shares, as financial services referred to in paragraph (d) of the definition of “financial service” under section 123(1) of the ETA. The Respondent, on the other hand, argued that the Brokers’ services were not “financial service”, or alternatively, if “financial service”, they would be excluded as exempt supplies as they were preparatory to or supplied in conjunction with financial services which were carved out from the exemption under paragraph (r.4) of the definition of “financial service”.

Following the Federal Court of Appeal decisions in Costco (2012 FCA 160 (FCA)), Global Cash Access (2013 FCA 269 (FCA)), and Royal Bank (2007 FCA 72 (FCA)), the TCC said that it must analyze what services were provided by the Brokers and identify the dominant characteristic of that supply and then determine whether such services fall within the definition of “financial service”. After reviewing the evidence detailing the Brokers’ activities, including preparing a brochure describing the Appellant’s business; conducting online research to identify the likely market for the buyers; attending promotional events to promote the sale of the business, addressing questions of prospective buyers, and referring prospective investors to the Appellant, the TCC determined that the essential duty of the Brokers was to find a buyer for the business. The TCC noted that the agreements between the Appellant and the Brokers did not restrict the form of the transaction as the agreements provided that the sale could be a sale of shares or assets or a water right licence or a combination of these. The TCC found that the fact that a share transaction was ultimately materialized was a result of the negotiation between the solicitors of the Appellant and the buyer, and the Brokers had no control over the form of the sale transaction. Furthermore, the TCC noted that the Brokers were not registered business or securities brokers and there was no evidence as to what the normal practice of such intermediary would be in that particular industry.  

Although the finding that the Brokers’ services did not qualify as a supply of a financial service was sufficient to dispose the appeal, the TCC, in obiter, continued to consider whether the Brokers’ services could fall within the ambit of paragraph (r.4) of the definition of “financial service”, which excludes from the exemption preparatory services such as market research and promotional service. The TCC determined that the Brokers’ services were, at best, merely preparatory to the provision of a financial service. The Appellant’s appeal was dismissed by the TCC.

Barr is an important decision as it shows that not all services provided by intermediaries in relation to financial instruments are exempt “arranging for” service and a number factors need to be considered in determining whether exempt “arranging for” service is provided. It is hard to tell from the decision which factor is more important than the others. When in doubt, it is advisable to seek legal advice before paying GST/HST on commission paid to intermediaries.

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