To: Payment Service Providers
This letter is in reference to the letter published by the Bank of Canada on September 8, 2025, indicating that there may be unintended consequences under the Income Tax Act for Payment Service Providers (PSPs) seeking to comply with the Retail Payment Activities Act (RPAA). Specifically, the September letter noted that there could be tax consequences or administrative burden under the Income Tax Act for PSPs seeking to safeguard end-user funds using the “in trust in a trust account” method while retaining interest income on the end-user funds they hold.
Consequently, the Department of Finance Canada issued a letter to the Bank of Canada, stating its intent to amend the Income Tax Act to address the unintended tax consequences for PSPs. The letter specifies that: “trusts that are established by a payment service provider under the RPAA (or an entity contracted by a payment service provider to establish such a trust) to hold funds pursuant to the requirements of the RPAA be deemed to not be a trust for the purposes of the Income Tax Act and that funds deposited in those accounts be deemed to be loans from the end-users to the respective payment service providers. The trust would be required to at all times meet the requirements for a trust as set out in the RPAA. The payment service provider would also be required to have applied for, and not to have been denied, registration under the RPAA and would need to maintain registration once registered.” These intended amendments would apply to the Income Tax Act as of September 8, 2025, subject to approval by the Minister of Finance and Parliament as part of the legislative process.
The Bank commenced its supervisory activities on September 8, 2025. As of that date, applicants and registered PSPs are expected to comply with regulatory obligations related to operational risk and end-user funds safeguarding provisions of the RPAA. PSPs are also expected to provide information to demonstrate their operational risk and end-user fund safeguarding practices in response to the Bank’s supervisory inquiries.
If a PSP chooses to safeguard end-user funds by holding them in trust in a trust account, it must ensure that retaining the interest earned from the end-user funds does not compromise or invalidate the trust arrangement. The Bank expects that a PSP will seek advice from legal advisors with appropriate expertise to confirm that the PSP is adequately safeguarding the funds and has established and maintained a valid trust arrangement.
As a result of the letter from the Department of Finance, the Bank expects that PSPs will now be able to establish valid trust arrangements that comply with the RPAA when safeguarding end-user funds by using the “in trust in a trust account” method. The Bank recognizes that some PSPs may require additional time to take all necessary steps to meet trust requirements. In these circumstances, the Bank will seek information confirming that a PSP has taken steps towards meeting its obligations in a reasonable time.
Research Topic(s):
Retail payments supervision