SLFI Group v. Canada1(SLFI Group) is an important decision from the Federal Court of Appeal (FCA) with respect to the application of GST/HST to fund management activities. The FCA overruled the Tax Court of Canada (TCC) to hold that payments made by a group of investment funds (the Funds) to a U.S. subsidiary of Citibank for financing services was GST/HST exempt. This was the case even though this financing function was originally within the purview of the fund manager (the Manager) and would have been GST/HST taxable if rendered directly by the Manager. By outsourcing the financing function to a third party, the Funds were able to save approximately $45M in otherwise unrecoverable GST/HST.
The FCA reasons are instructive and provide guidance on how to successfully unbundle, outsource and recharacterize certain activities performed by the fund manager so that they can be treated as GST/HST-exempt financial services.