Meaning of the term "Custodial Service"

Please note that the following Policy Statement, although correct at the time of issue, may not have been updated to reflect any subsequent legislative changes.

GST/HST Policy Statement P-189

Date of Issue

August 22, 1995

Subject

Interpretation of the Term "Custodial Service"

Legislative Reference(s)

Section 217 of the Act

Section 17, Part V, Schedule VI to the Act

National Coding System File Number(s)

11640-3

11645-4

Effective Date

January 1, 1991

Text

Issue and Decision:

What is meant by the term "custodial service" for purposes of section 217 of the Act and section 17, Part V of Schedule Vl.

The supply of a custodial service made in Canada is a taxable supply subject to the usual 7% tax rate. A supply of a custodial service in respect of securities made outside Canada to a person resident in Canada will be an "imported taxable supply" and subject to the Division IV Tax imposed under section 218 of the Act. However, a supply made to a non-resident person of a custodial service in respect of securities will be a zero rated supply under section 17, Part V of Schedule VI to the Act.

Both section 217 of the Act and section 17, Part V of Schedule VI refer to custodial service "in respect of securities". The term "securities" can be described as evidence of debts or property, usually in the form of stocks, bonds, notes, convertibles debentures, warrants or other documents that represent a share in a company or a debt owed. The term would generally include the items (other than a precious metal) of the nature listed in the term "financial instrument" as defined under the Act.

The term "custodial service" is not defined in the Act. In the investment community, the term "custodial service" in respect of securities generally refers to the service of safekeeping of the securities and other administrative responsibilities relating to the custody of the securities.

The Department's administrative position is that the term "custodial service" in respect of securities, where a separate fee or charge is made, means

i) the service of safekeeping of the securities,or

ii) the service of safekeeping of the securities together with any of the following related activities that normally pertain to the safekeeping of securities:

- the administrative activities involved with the settlement of securities traded,

- the collection or disbursement of income (dividends/interest) for the client, and

- account maintenance and reporting of securities transactions.

Illustrative Example-1

1. A financial institution in Canada provides safekeeping services in Canada to a non-resident person in respect of share certificates of Canadian corporations.

2. The institution's service is limited solely to the activity of safekeeping the securities of the non-resident persons but does not include any other related activities.

Issue:

Will the safekeeping service provided by the financial institution to the non-resident person qualify as a "custodial service" for purpose of section 17, Part V of Schedule Vl to the Excise Tax Act?

Analysis:

The term "custodial service" is not defined in the Act. Section 17, Part V of Schedule Vl to the Excise Tax Act refers to a custodial service "in respect of securities". In the investment community, the term custodial service in respect of securities refers to the activity of safekeeping the securities as well as other duties relating to the safekeeping of the property. Also, the ordinary meaning of the term custodial service in respect of a property could refer to the activity of safekeeping of the property alone.

In the present example, the financial institution has provided a safekeeping service and hence a "custodial service" in respect of the securities of the person.

Conclusion :

The safekeeping service provided by the financial institution will qualify as a "custodial service" for purpose of section 17, Party V of Schedule VI application.

Illustrative Example- 2

A financial institution provides to its non-resident clients a service for a single fee that includes the following activities:

- safekeeping of the clients' share certificates,

- collection and deposit of income dividends/interest) for the clients,

- administrative activities involved with the settlement of securities traded, and

- accounting and reporting of the clients' securities transactions.

Issue:

Will the service provided by the financial institution qualify as a custodial service for purpose of section 17, Part V of Schedule VI to the Act?

Analysis: and Conclusion:

The service provided by the financial institution includes the responsibilities of safekeeping of the clients' securities and other duties that relate to the custody of the securities. The service will qualify as a custodial service for purpose of section 17, Part V of Schedule VI to the Act.