Please note that the following document, although correct at the time of issue, may not represent the current position of the Agency. / Veuillez prendre note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'Agence.
TO:
XXXXX
XXXXX
XXXXX
XXXXX
FROM:
Eleanor Struth
Rulings Officer
Financial Institutions Unit
Excise & GST/HST Rulings Directorate
320 Queen Street, 15th Floor
Ottawa ON K1A 0L5
DATE:
November 13, 2008
CASE NUMBER:
104707
BUSINESS NUMBER:
XXXXX
SUBJECT:
_GST/HST Interpretation
Application of GST/HST to XXXXX completion guarantees
Thank you for your enquiry regarding the application of the Goods and Services Tax (GST) / Harmonized Sales Tax (HST) to XXXXX performance completion guarantees. We apologize for the delay in our response.
All legislative references are to the Excise Tax Act (ETA) and the regulations thereunder, unless otherwise specified.
We understand from the information provided that XXXXX (the Guarantor) is a Canadian company which is involved in providing completion guarantees XXXXX. The Guarantor is not an insurer for GST/HST purposes. It is registered for GST/HST.
The Guarantor enters into contracts with the XXXXX of these XXXXX wherein it agrees to issue a completion guarantee to the person who finances the XXXXX which guarantees that the XXXXX will be completed and delivered within a specified time period. It also guarantees that the investors will not have to pay more than their specified investment to complete the XXXXX and that should the XXXXX not be completed, they will be reimbursed for their investment. The Guarantor closely monitors the progress of the XXXXX through progress and cost reports, as well as on-site visits, to mitigate risks which may prevent the XXXXX from being completed on time and within budget. Should certain conditions occur, the Guarantor will step into the shoes of the XXXXX and complete the XXXXX.
We were provided with one such contract, XXXXX, and its schedules (hereinafter jointly referred to as the "Contract") which was entered into on XXXXX by the Guarantor with XXXXX, a Canadian company. In the Contract, the Guarantor agreed to provide a completion guarantee (the Completion Guarantee) with respect to XXXXX). The relevant terms of the Contract are as follows:
• XXXXX of the Contract XXXXX, states that for consideration of XXXXX, the Guarantor agrees to issue the Completion Guarantee to XXXXX (the Financier), in form mutually approved by the Guarantor and the Financier, and upon the terms and conditions set forth in XXXXX to the Contract, XXXXX. Pursuant to XXXXX of the Contract XXXXX XXXXX, the Guarantor is obligated to ensure the timely completion and delivery of the XXXXX, in accordance with the delivery schedule XXXXX to the Contract.
• The XXXXX provides the Guarantor with certain rights under the Contract with respect to the XXXXX. For example, XXXXX to the Contract provide that other contracts that the XXXXX enters into for the XXXXX of the XXXXX, such as financing, XXXXX agreements, as well as employment contracts, are subject to approval of the Guarantor.
• Furthermore, pursuant to XXXXX to the Contract, if the XXXXX is in default in the performance of any of its material obligations under any of the provision of the Contract, and fails to remedy such default within the specified time period, or if at any time it seems to Guarantor that the XXXXX is likely to involve the Guarantor in a risk of incurring liability under the Completion Guarantee, then, subject to certain conditions, the Guarantor has the right to either intervene in the XXXXX or take over the control of the XXXXX.
• XXXXX.
• Pursuant to XXXXX of the Contract XXXXX, if the Guarantor expends any XXXXX, and if such XXXXX are not otherwise repaid, the Guarantor has the right to recoup the unpaid balance of the XXXXX from the gross receipts of the XXXXX.
• Also under the XXXXX of the Contract, the Guarantor is granted a security interest by the XXXXX in its accounts receivable, including the gross receipts of the XXXXX, to secure the repayment of the XXXXX.
Pursuant to the Contract, the Guarantor issued the Completion Guarantee to the Financier, dated XXXXX. A copy was provided to us, and its terms include the following:
• Pursuant to XXXXX, the Guarantor:
(a) guarantees the completion and delivery of the XXXXX,
(b) agrees to procure or provide the money needed to pay the costs of completing and delivering the XXXXX, which are in excess of the budgeted amounts, if any are needed to complete and deliver the XXXXX if the XXXXX shall fail to do so. The Guarantor also agrees to itself complete and deliver the XXXXX if the XXXXX fails to do so, and
(c) agrees that if the Guarantor fails to complete and deliver the XXXXX, it will make payments to the Financier specified in XXXXX. Pursuant to XXXXX of the Completion Guarantee, the Guarantor's liability to do this is limited to making payments that are equal to the amounts advanced by the Financier under its financing agreement, plus interest but less certain amounts, such as the amounts paid to the Financier by insurance or other parties in connection with the XXXXX. The Guarantor's liability is also limited to the payment of additional costs or expenses of the XXXXX that the Guarantor is required to pay under the Completion Guarantee.
• Pursuant to XXXXX of the Completion Guarantee, the Guarantor is not obligated to provide funds for the payment of certain costs to complete and deliver the XXXXX except to the extent such costs are specified in the budget, required to correct technical defects, or are to conform the XXXXX to any contractual specifications for which the Guarantor is responsible under the Completion Guarantee.
• Under XXXXX of the Completion Guarantee, the Guarantor subordinates any rights and claims it may have against the XXXXX, its principal and affiliates, and any security interest which it has in any collateral of the XXXXX, to the Financier's security interests in the collateral of the XXXXX. However, pursuant to XXXXX of the Completion Guarantee, where the Guarantor pays amounts as outlined in XXXXX of the Completion Guarantee to the Financier, all of the Financier's rights, claims, causes or action and security interests in relation to the XXXXX are subrogated to the Guarantor.
You would like to know whether the Guarantor is engaged in commercial activity with respect to providing the Completion Guarantee, or whether it is providing an exempt supply of a financial service.
COMMENTS:
Paragraph 1 of Part VII of Schedule V exempts the supply of a financial service, other than a supply that is zero-rated under Part IX of Schedule VI.
Paragraph (l) of the definition of "financial service" in subsection 123(1) includes the agreeing to provide a service referred to in any of paragraphs (a) to (i) of that definition. Paragraph (d) of the same definition includes the issue, granting, allotment, acceptance, endorsement, renewal, processing, variation, transfer of ownership or repayment of a financial instrument.
Whether the Completion Guarantee is a financial instrument:
Pursuant to subsection 123(1), a financial instrument means the following:
(a) a debt security,
(b) an equity security,
(c) an insurance policy,
(d) an interest in a partnership, a trust or the estate of a deceased individual, or any right in respect of such an interest,
(e) a precious metal,
(f) an option or a contract for the future supply of a commodity, where the option or contract is traded on a recognized commodity exchange,
(g) a prescribed instrument,
(h) a guarantee, an acceptance or an indemnity in respect of anything described in paragraph (a), (b), (d), (e) or (g), or
(i) an option or a contract for the future supply of money or anything described in any of paragraphs (a) to (h).
Debt Security:
A "debt security" is defined in subsection 123(1) to mean a right to be paid money and includes a deposit of money, but does not include a lease, licence, or similar arrangement for the use of, or the right to use, property other than a financial instrument. Furthermore, a debt security does not include a contingent right, where the payment of money is conditional upon the occurrence or non-occurrence of some future event that may never happen.
When the Guarantor provides the Completion Guarantee, one of the things it promises to do is to make payments to the Financier, up to an amount equal to the amounts advanced by the Financier under its financing agreement, plus interest but less certain other amounts. It also promises to pay money to third parties, as necessary, to complete and deliver the XXXXX. When it provides these promises to the Financier, it is essentially providing the Financier or third parties with a right to be paid money; however, these promises are conditional.
The Guarantor agrees to pay the costs of completing the XXXXX only if the XXXXX fails to pay those costs, and they are needed to complete and deliver the XXXXX. Furthermore, the Guarantor agrees to pay an amount to the Financier only if the Guarantor fails to complete and deliver the XXXXX. It is clear that the right to be paid money which is provided by the Guarantor to the Financier or to third parties is conditional upon the occurrence or non-occurrence of future events that may never happen. Therefore, neither of these rights meet the definition of debt security in the ETA.
Insurance Policy:
An "insurance policy" is defined in subsection 123(1) to mean:
(a) policy or contract of insurance (other than a warranty in respect of the quality, fitness or performance of tangible personal property, where the warranty is supplied to a person who acquires the property otherwise than for resale) that is issued by an insurer, including:
(i) a policy of reinsurance issued by an issuer,
(ii) an annuity contract issued by an insurer, or a contract issued by an insurer that would be an annuity contract except that the payments under the contract
(A) are payable on a periodic basis at intervals that are longer or shorter than one year, or
(B) vary in amount depending on the value of a specified group of assets or on changes in interest rates, and
(iii) a contract issued by an insurer all or part of the insurer's reserves for which vary in amount depending on the value of a specified group of assets or on changes in interest rates, and
(b) a policy or contract in the nature of accident and sickness insurance, whether the policy is issued, or the contract is entered into, by an insurer, and
(c) a bid, performance, maintenance or payment bond issued in respect of a construction contract.
The Completion Guarantee issued by the Guarantor is not considered an insurance policy under paragraphs (a) or (b) of the above definition as the Guarantor is not an insurer and the Completion Guarantee is not in the nature of accident and sickness insurance.
Although the Completion Guarantee may be similar to a performance bond that is described in paragraph (c) of the definition of insurance policy, it is issued in respect of the XXXXX, and not in respect of a construction contract. Paragraph (c) of the definition of insurance policy in subsection 123(1) includes only performance bonds that are in respect of construction contracts.
As the Completion Guarantee provided by the Guarantor does not meet the conditions in paragraphs (a), (b) or (c), it is not an "insurance policy" pursuant to the definition in subsection 123(1).
Guarantee:
A guarantee in respect of a debt security, equity security, interest in a partnership, trust or the estate of a deceased individual (or any right in respect of such an interest), or a precious metal, is a financial instrument under paragraph (h) of the definition in subsection 123(1).
The main purpose of the Completion Guarantee is to guarantee the completion and delivery of the XXXXX, and not to guarantee a financial instrument such as a debt security. Consequently, the Completion Guarantee is not a guarantee described under paragraph (h) of the definition of financial instrument.
Therefore, as the Completion Guarantee is not an insurance policy, a debt security, or a guarantee under paragraph (h), it is not a financial instrument. Furthermore, the Guarantor is not making a supply of "agreeing to provide" a financial instrument which is a financial service under paragraph (l) of that definition in subsection 123(1). Consequently, the supply to the XXXXX of agreeing to provide the Completion Guarantee to the Financier, for which the Guarantor is paid consideration of XXXXX is not exempt under section 1 of Part VII of Schedule V. As the Guarantor's supply to the XXXXX is not exempt elsewhere in the ETA, it will be taxable.
Whether GST or HST should be collected in respect of the supply by the Guarantor to the XXXXXdepends on where the supply is being made. Section 144.1 provides that a supply is deemed to be made in a province if it is made in Canada and is, under the rules set out in Schedule IX, made in the province. Section 144.1 also states that a supply made in Canada that is not made in a participating province is deemed to be made in a non-participating province. Technical Information Bulletin B-078, Place of Supply Rules Under the HST, provides further explanation on these rules.
Should you have further questions or require clarification on the above please contact me at XXXXX.
Yours truly,
XXXXX
Financial Institutions Unit
Excise & GST/HST Rulings Directorate
UNCLASSIFIED
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