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14 May 2018

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Canadian Tax Court Holds Commission Fees for Arranging Buyer of Shares Not Eligible for HST Exemption on Financial Services

The Tax Court of Canada recently issued a judgment concerning whether commission fees paid in relation to a sale of shares are considered financial services exempt from Harmonized Sales Tax (HST). The case involved Garibaldi Springs Water Company Ltd (Garibaldi), which retained the services of 0922763 B.C. Ltd and P.V. Gordon Holdings Ltd (the Brokers) to find a buyer for the business. A buyer was found, and total commission of CAD 281,584 was paid, including 12% HST. John Barr, the prior sole shareholder of Garibaldi and the Appellant in the case, subsequently applied for a refund of the HST paid on the commissions on the grounds that service provided was an exempt supply of financial services. The tax authority rejected the claim for refund, taking the position that such services are not "financial services" as defined for the purpose of the exemption or in the alternative, if "financial services", they would fail to be exempt under the provision that carves out services that are preparatory to or supplied in conjunction with financial services in certain circumstances.

Under the Excise Tax Act, the definition of "financial service" includes the issue, granting, allotment, acceptance, endorsement, renewal, processing, variation, transfer of ownership, or repayment of a financial instrument. A "financial instrument" is defined to include an "equity security", which in turn is defined to include "a share of the capital stock of a corporation". The claim for a refund of HST was based on the Appellant's position that the service provided by the Brokers should be considered a "transfer of ownership" of the Appellant’s shares.

In its judgment, the Court found in favor of the tax authority. In coming to its decision, the Court evaluated whether the service provided by the Brokers can be considered arranging for the transfer of ownership of shares and qualifies as a financial service for the purpose of the HST exemption. The Court found that the Brokers' main duty was to find a potential buyer for the business, and not specifically for the shares of the appellant, and that once a potential buyer was found, such person was parked with the Appellant or his attorney who negotiated, drafted and documented the transaction of purchase and sale and the transfer of the shares in question. Although the Court acknowledged that ultimately a sale of shares occurred and that the Appellant made a supply of a financial instrument, it was clear that the service provided by the Brokers was limited to finding a potential buyer, which could not qualify as financial services. The Court also noted that it was not necessary to consider the alternative argument of the tax authority, but if it had, it would have been found that the broker services were merely preparatory to the provision or potential provision of a qualifying financial service, and not eligible for HST exemption.

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