The Canada Revenue Agency (“CRA”) has been rigorously challenging intermediaries in the financial services industry, categorizing their services as taxable promotional, advertisement or taxable administrative services (as opposed to treating them as GST/HST exempt financial services).

While this aggressive approach seems (at first blush) consistent with the definition of a “financial service” under 123(1) of the Excise Tax Act (“ETA”) (which exempts the “arranging for” processing of credit and debit card payments, while excluding from exemption “promotional or advertising services”), many have suggested that contrary:   that CRA was trying to pigeon-hole what these service providers do in order to find “taxable” services.

In the recent Zomaron Inc. v. The Queen case (“Zomaron”), the Tax Court of Canada (“TCC”) found against CRA, and concluded that the dominant element of the services being provided were “exempt” in nature, and that the promotional, advertisement or administrative elements of the services did not serve to disqualify from GST/HST exemption.

Zomaron Case

Zomaron Inc. (“Zomaron”) was an independent sales organization (“ISO”) for Visa and a Member Service Provider (“MSP”) for Mastercard. Usually, ISO/MSPs like Zomaron partner with payment-processing service providers such as Elavon Canada Company and First Data Loan Company, Canada (the “Acquirers”) to provide merchants with point-of-sale payment processing services (e.g., the point of sale (“POS”) machines that customers use to authorize credit card payments at restaurants, and other retailers). Under the agreement between Zomaron and is Acquirers, Zomaron had the autonomy to negotiate and decide the terms, set pricing, rates and fees for use of these POS machines, albeit within a complex pricing structure. If merchants were accepted by the Acquirers, the pre-negotiated contract would become binding on the Acquirers and the POS retailers. Zomaron was also responsible for preparatory and advertising services. Zomaron received single consideration (a share in the mark-up) for all its services provided to the Acquirers.

The CRA assessed Zomaron on the basis that its services were taxable promotional and advertising services that fell within the exclusions to the definition of exempt financial services under ETA, and assessed for failure to charge GST/HST to the Acquirers.

The TCC overturned the CRA assessments, concluding that although Zomaron did solicit, recruit, train and provide on-going support to the POS retailers, Zomaron was really just “arranging for” the card payment processing services. The predominant factor based on the salient facts of this case was “causing the transaction to occur”. Therefore, Zomaron’s services were exempt financial services under the ETA.

Commentary

This is a welcomed decision for non-traditional intermediaries in the financial services industry such as POS sellers/co-branded card providers who distribute the retail credit cards at commercial places like Costco, Loblaws etc.

It clarifies that even those at the bottom of the vertical consumer-retailer relationship chain in the visa cards supply industry are “exempt” financial service providers.

CRA has not yet appealed the Zomaron decision, but apparently is taking an extremely narrow position on its application. Given that the precedents set down recently in Applewood Holdings Inc. v. The Queen, Zomaron and Canadian Imperial Bank of Commerce v. The Queen, which reiterate that the jurisprudence consistently adopts a low threshold for establishing whether a service constitutes “arranging for” a supply, the CRA’s approach seems unfair if not improper for a government tax administration.  Assessments of POS providers and their customers should almost definitely be challenged!