Tax Insights: Arranging for the provision of payment processing services is GST/HST exempt

Issue 2020-11

In brief

On February 28, 2020, the Tax Court of Canada (TCC) released its decision in Zomaron Inc. v. The Queen (2020 TCC 35). The TCC’s decision confirms that independent sales organizations (ISOs) are providing an exempt financial service to payment processors that are members of the credit card payment network (Acquirers) when they:

• are retained to find prospective merchants that require payment processing services, and
• negotiate the contracts for the Acquirer’s provision of payment processing services to the merchants

Although this decision is particularly relevant for those in the card payment processing industry, the decision also:

• provides meaningful guidance on the scope of the financial service exemption, and
• confirms that an intermediary does not need to be involved in each and every financial transaction, or have the authority to bind the supplier of the financial service

In detail

General overview of participants involved in card payment processing

The following illustration provides a general overview of the various parties involved in a typical credit card transaction, as reported in Payments Systems: The Credit Card Market in Canada, Library of Parliament (Canada), John Bulmer, International Affairs, Trade and Finance Division (September 24, 2009):

For GST/HST purposes, the Acquirer and the card issuer are considered to be providing an exempt financial service, which includes “any service provided pursuant to the terms and conditions of any agreement relating to payments of amounts for which a credit card voucher or charge card voucher has been issued.” As a result:

• the Acquirer does not collect GST/HST on the “merchant discount fee” that it charges the merchants for processing their credit card payments, and
• the card issuer does not collect GST/HST on the interchange fee that it receives from the Acquirer

As confirmed by the TCC in Canadian Imperial Bank of Commerce v. The Queen (2018 TCC 109), which is being appealed to the Federal Court of Appeal, credit card companies (e.g. Visa and MasterCard) are generally considered to be providing a taxable administrative service that is expressly excluded from being a financial service pursuant to:

• paragraph (t) of the definition “financial service” in the Excise Tax Act (ETA), and
• section 4 of the Financial Services and Financial Institutions (GST/HST) Regulations

Zomaron decision

Facts

The facts in Zomaron are fairly complicated. Zomaron Inc. (Zomaron) was registered as an ISO with Visa and was retained by two Acquirers (Elavon Canada Company and First Data Loan Company, Canada) to seek out prospective merchants to receive card payment services and negotiate the terms governing the Acquirer’s provision of services, including rates, fees and term. Zomaron’s duties and obligations included:

• locating prospective merchants
• negotiating terms and conditions on behalf of the Acquirer, including rates, pricing and length of contract
• completing application forms, verifying information and performing various checks (credit background and regulatory)
• verifying the legitimacy of the merchant’s business, including whether they continue to comply with the payment network requirements, and
• educating and training the merchants on the Acquirer’s services

Zomaron did not have authority to bind the Acquirers to provide payment processing services, because the Acquirer retained the right to accept or deny a potential merchant. For each payment processing transaction that was provided by the Acquirer to the “referred” merchants, Zomaron was paid a separate fee, which was generally calculated based on the difference between:

• the fees that Zomaron negotiated with the merchant, and
• the sum of the interchange fee that was payable by the Acquirer to the card issuer and the Acquirer’s fees (buy rate)

Issues

The TCC acknowledged that the card payment processing services rendered by the Acquirers to the merchants constituted a financial service. The primary issues were:

• whether Zomaron was “arranging for” the Acquirer’s provision of a financial service, and
• if Zomaron was arranging for the service, was the service expressly excluded from being a financial service pursuant to paragraph (r.4) of the definition “financial service” in the ETA, which excludes a service that is preparatory to the provision or the potential provision of a financial service (or that is provided in conjunction with a financial service) and that is:
  • a service of collecting, collating or providing information, or
  • a market research, product design, document preparation, document processing, customer assistance, promotional or advertising service or a similar service

Was Zomaron “arranging for” the provision of a financial service?

The TCC considered whether Zomaron was “arranging for” the Acquirer’s provision of a financial service, and concluded that Zomaron was “arranging for” the Acquirer’s card payment processing services, because it:

• brought the parties together by delivering “fully-negotiated merchants,” and
• caused the Acquirers to accept the merchants so that the Acquirers could deliver the processing services

In determining whether a single supply of a service is a financial service, the TCC noted that only the “predominant elements” of the supply are to be considered and that it would be an error to consider any services that are not a predominant element. Before discussing the “predominant element” of Zomaron’s supply, the TCC discussed the scope of the “arranging for” exemption and the impact of the December 2009 amendments which, among other things, added new exclusions to the type of service that qualifies as a financial service, including paragraphs (q.1), (r.3), (r.4) and (r.5).

From a textual perspective, the TCC noted that the meaning of “arranging for” is straightforward — “to plan or provide for, cause to occur,” to “make preparation for” or “plan.” The TCC then considered whether the context of the “arranging for” exemption and its linkage to specific types of financial services in paragraphs (a) to (i) of the definition “financial service,” narrowed the scope of the exemption by requiring an intermediary to be “arranging for each and every financial transaction.”

In concluding that the amendments did not narrow the scope of the “arranging for” exemption by requiring “involvement in every transaction,” the TCC reasoned that the concept of “arranging for” means to “bring together parties,” which requires the intermediary’s involvement to “cause to occur” or effect the transaction without being involved in every transaction. The TCC also expressly rejected the notion that an intermediary must have “authority to bind” the supplier of the underlying financial service.   

Was the service excluded from being a financial service because it was promotional?

The TCC considered whether Zomaron’s service of “arranging for” the Acquirer’s card processing services should be excluded from being a financial service because it was a promotional service. The TCC concluded that Zomaron did not provide promotional services and that the predominant element of its supply was to arrange for merchants to use the Acquirer’s card payment services.

The TCC’s decision was based on the following principles:

• the predominant element must be found objectively by looking at what was supplied, as perceived by the purchaser
• the supply can be a culmination of its various inputs (i.e. the “end result”) and not the individual inputs, which produce the end result
• the predominant element depends on what is critically dependent for the commercial efficacy of the transaction and whether the supplier is being compensated for that particular element

The takeaway

Although we expect that the Crown will appeal the decision, the Zomaron decision is relevant for all intermediaries that assist in facilitating the supply of a financial service. The decision broadens the type of service that may be considered an “arranging for” service, because it confirms that the intermediary:

• does not need to be involved in the specific transactions, and
• needs merely to “bring the parties together” and does not need to have the authority to bind the parties to purchase or supply a financial service

The TCC’s approach to determine the “predominant element” of the supply is also helpful because it further reinforces the importance of looking at the end result of the transaction — highlighting that the focus should not be on “individual inputs” that are merely undertaken with other activities to produce the end result.