April 18, 2023
Canadian federal budget | Changes to the definition of 'financial service' under the Excise Tax Act
On 28 March 2023, Canada's Deputy Prime Minister and Minister of Finance, Chrystia Freeland, tabled the 2023 federal budget, which includes changes affecting financial institutions. The budget proposed a significant GST/HST amendment to the definition of financial service in the Excise Tax Act (ETA) by introducing paragraph (r.6) in the exclusionary paragraphs (Proposed amendment) of the definition. Paragraph (r.6) operates to exclude the supply of certain services rendered by a "payment card network operator" from the definition of a "financial service," causing these services to be considered as a taxable supply and therefore subject to the GST/HST.
This Proposed amendment impacts financial institutions (i.e., card issuers, payment acquirers, banks and other financial institutions) that acquire certain services (i.e., payment card authorization and clearing/settlement services) from payment card network operators. Accordingly, these entities can expect to face significant administrative and financial burdens stemming from the proposal, especially given that the rules could apply retroactively.
The Proposed amendment is particularly significant for the industry in light of a recent Federal Court of Appeal decision confirming payment card clearing services to be exempt financial services. The Federal Court of Appeal overturned a Tax Court of Canada decision and concluded that the service provided by a credit card operator to a Canadian bank was a GST/HST exempt supply, rather than a taxable administrative service.
As a result of the appellate decision, many taxpayers have attempted to recover the tax that was previously paid by filing for a rebate of tax paid in error, as well as amended returns. The Canada Revenue Agency has refunded many of the rebates. These taxpayers will have to consider the implications of the Proposed amendment, including whether there is an obligation to repay the refunds received.
The coming-into-force provisions extend the limitation period for the Minister of National Revenue (Minister) to assess taxpayers for "any amounts payable or remittable" in respect of a supply of a service referred to in proposed paragraph (r.6). This provision allows the Minister to assess on or before the later of:
Given the broad nature of the language in the coming-into-force provisions, it appears that all open years may be potentially assessed subject to the one-year time limit.
A supply of a financial service is exempt from GST/HST under Schedule V, Part VII, section 1 of the ETA.
"Financial service" is defined under subsection 123(1) of the ETA. The definition comprises inclusionary paragraphs (a) to (m) followed by exclusionary paragraphs (n) to (t). The characterization of a particular supply within these paragraphs determines the taxability of that supply.
Proposed exclusionary paragraph (r.6) describes a service (other than a prescribed service) that is supplied by a payment card network operator for a payment card network, and that is (referred to herein as the Services):
Payment card network and payment card network operator are defined terms under section 3 of the Payment Card Networks Act.1
Payment card network is defined as "an electronic payment system … used to accept, transmit or process transactions made by payment card for money, goods or services and to transfer information and funds among issuers, acquirers, merchants and payment card users."
Payment card network operator is defined as "an entity that operates or manages a payment card network, including by establishing standards and procedures for the acceptance, transmission or processing of payment transactions and by facilitating the electronic transfer of information and funds."
The Proposed amendment will apply to Services for which any consideration becomes due, or is paid without having become due, after 28 March 2023 (i.e., budget day).
In addition, the Proposed amendment will apply with respect to consideration for the supply that became due, or was paid, on or before 28 March 2023, except where the following two conditions were both met (retroactive exclusions):
Furthermore, it should be noted that the retroactive exclusions do not include "Division IV" amounts (i.e., amounts subject to self-assessment under Division IV of the ETA). As a result, amounts invoiced by nonresident payment card network operators may be subject to self-assessment.
The Proposed amendment is a significant change to the GST/HST treatment of certain services that are rendered by payment card network operators in respect of payment card networks.
Given the potential retroactive implications of the Proposed amendment, taxpayers should consider:
For additional information with respect to this Alert, please contact the following professionals:
Ernst & Young (Canada), East
Ernst & Young (Canada), West
Ernst & Young (Canada), Central
Published by NTD’s Tax Technical Knowledge Services group; Carolyn Wright, legal editor
1 Payment Card Networks Act (S.C. 2010, c. 12, s. 1834).