The appellant, which was the manager (and also trustee) for various mutual fund trusts (the "Funds"), arranged that large investors in the Funds, such as pension funds, would bear lower Fund management fees than those which otherwise would be charged by it to the Funds. Initially, this was accomplished through fee refunds paid by the appellant to the large investors. However, in 1994 CRA indicated (in 9332265) that these refunds would be treated as "inducement payments," to be included in the Funds' incomes under ITA s. 12(2.1) (thereby resulting in double taxation.)
Under restructured arrangements:
- the weekly management fees charged by the appellant to the Funds were reduced to reflect the "net" management fees agreed with the larger investors, with a corresponding reduction in the GST collected; and
- the Funds made special "Management Fee Distributions" to the large investors on a monthly or quarterly basis equal to the difference between the "gross" management fees they otherwise would have borne and the net management fee amounts.
The Minister considered that the Fund obligations to pay the Management Fee Distributions to the large investors was part of the consideration that the Funds provided in exchange for the appellant's services, and assessed the appellant for failure to charge GST on the gross amounts.
Campbell J allowed the appellant's appeal. The Minister's position depended on the special distribution amounts being owed by the appellant to the large investors (para. 53). However, it was the Funds' own trust declarations that created the obligation to make the special distributions - the obligation was never the appellant's (paras. 64, 68, 85). In other words, the management fees were "discounted at the point of sale" and it was only this net amount that was payable to the appellant (para. 80). Furthermore, there was a time lapse between the weekly payment of the reduced management fees and the eventual monthly or quarterly special distributions (para. 54).