Contributing Lawyers

Canada

Cyndee Todgham Cherniak

United States

Susan Kohn Ross

Australia

Andrew Hudson



Canada's Dept of Finance Taking Away GST/HST Exemption for Financial Advisors Re Share Transactions

It used to be that persons, such as financial advisors, that provided advice regarding share transactions (as opposed to asset transactions), were considered to be "arranging for a financial service", which is exempt from Canada's goods and services tax (GST) and harmonized sales tax (HST).

On February 11, 2010, the Canada Revenue Agency release GST/HST Notice 250 "Proposed Changes to the Definition of Financial Service" in which it provides its changed view in Example 7:

"As part of a reorganization of its business Company D wants to sell the business carried on by its subsidiary. Company D enters into an agreement with BBC Co [a financial advisor], a GST/HST registrant, whereby BBC Co will provide a business broker service in order to facilitate the sale of Company D's subsidiary by means of a sale of the shares of Company D's subsidiary. BBC Co performs the following:

  • obtains "listing" for the sale of the business;
  • assists Company D is calculating the likely worth of he subsidiary and the price at which the subsidiary's shares will be offered;
  • assists Company D is putting together financial and operating information sufficient to allow BBC Co to solicit expressions of interest;
  • advertises the subsidiary's business as being for sale;
  • contacts likely purchasers and/or persons who might identify likely purchasers, such as lawyers, accountants and bankers;
  • prepares or obtains an offer to purchase the subsidiary's business from a potential purchaser;
  • acts as an intermediary between Company D and the purchaser in negotiating the terms of the purchase and sale;
  • assists the purchaser in arranging for financing and advising Company D on providing financing; and
  • liaises with legal counsel for Company D, the purchaser or both in preparing the sales documentation.

The punch line provided by the CRA is that the transaction between Company D and BBC Co will not be considered to be a supply of a "financial service". This means that BBC Co will be required to charge, collect and remit GST (and HST if applicable) in connection with all consideration received with the transaction. The remittance of the GST/HST would be required with their GST/HST return for the period in which the transaction occurred. For example, if BBC Co is a monthly filer and receives consideration in October 2010, the GST/HST must be remitted by the end of November 2010.

This position may put some small advisory firms out of business in the current economic climate because "consideration" will include the value of shares received. Many advisory firms receive shares instead of cash for the services they perform. As a result, the BBC Co-type advisory firms will be required to remit GST/HST whether or not they receive any money.

When BBC Co type advisors complete their GST/HST return, they will face CRA audit risk because an auditor may disagree with the valuation used relating to the shares at the time of the calculation of GST/HST.

This CRA administrative position is a significant one. The big question is how the CRA will view transactions reported after December 14, 2009 (the date of the Department of Finance announcement for the proposed changes to the definition of "financial service").

If you require more information, please contact Cyndee Todgham Cherniak at 416-307-4168.

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