Noteworthy 2020 GST/HST Developments For The Financial Services Industry

• Published date: 11 January 2021
• Subject Matter: Finance and Banking, Tax, Financial Services, Sales Taxes: VAT, GST
• Law Firm: Borden Ladner Gervais LLP
• Author: Mr Bobby Solhi and Braek Urquhart

Despite a year that included court closures and a CRA shutdown, there were a number of noteworthy and interesting decisions from the Tax Court of Canada (the TCC) and Federal Court of Appeal (FCA) with respect to Goods and Services Tax/Harmonized Sales Tax (GST/HST) that affect various stakeholders in the financial services industry. Here are four of the key judgments.

Payment from a GST/HST debtor to a Secured Creditor deemed to be held in trust for the CRA in priority to Secured Creditor: Toronto-Dominion Bank v. Canada, (TD Bank)¹.

In TD Bank, TD granted a mortgage and secured home equity line of credit (HELOC) to a customer that, unbeknownst to TD, was also a GST/HST debtor in relation to operating as a sole proprietor of a landscaping business.

After having repaid the mortgage and HELOC, the CRA issued a demand letter to TD and later, commenced a legal action to collect the proceeds received by TD from the repayment of the mortgage and HELOC. The CRA asserted a deemed trust over the funds pursuant to section 222 of the Excise Tax Act. Section 222 grants the Minister priority over all other secured creditors with limited exceptions. The CRA was successful before the Federal Court and FCA, which confirmed that the amounts collected by the GST/HST debtor were held by him in trust for the Crown in priority to secured creditors.

The FCA's judgment confirmed that the deemed trust operates without any notice or triggering event, and without providing any sort of due diligence or bona fide purchaser defence to the prudent creditor. Many secured creditors have now revisited their lending practices and/or arranged for updated insurance coverage to protect against the CRA's super priority. For more details and commentary on the TD Bank judgment, see BLG's previous TD Bank commentary.

Merchant payment processing services were a GST/HST exempt supply of "arranging for" financial services and not a taxable administrative or marketing service: Zomaron Inc. v. The Queen (Zomaron)²:

The Zomaron judgment considered what activities constitute "arranging for" financial services. Zomaron involved a complex relationship between credit card payment processors, merchants, and merchant service providers. While the relationships were complex, the judgment itself offers practical guidance for all intermediaries in the financial services industry that may not fit within traditional "broker" or "agent" type roles.

A service of "arranging for" financial services generally...