Please note that the following document, although correct at the time of issue, may not represent the current position of the Canada Revenue Agency. / Veuillez prendre note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'Agence du revenu du Canada.
[Addressee]
Excise and GST/HST Rulings Directorate
Place de Ville, Tower A, 15th floor
320 Queen Street
Ottawa ON K1A 0L5
Case Number: 125334
Business Number: [...]
January 17, 2011
Dear [Client]:
Subject:
GST/HST INTERPRETATION
Application of the GST/HST to certain services provided by automobile dealers
Thank you for your letter of June 29, 2010, [...] concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to certain services provided by automobile dealers as a result of changes to the definition of financial service in subsection 123(1) of the Excise Tax Act (ETA). [...]. We apologize for the delay in responding to your enquiry.
HST applies at the rate of 15% in Nova Scotia, 13% in Ontario, New Brunswick and Newfoundland and Labrador, and 12% in British Columbia. GST applies at the rate of 5% in the remaining provinces and territories.
All legislative references are to the ETA unless otherwise specified.
We understand that [...] represents [...].
You have indicated that example 3 of GST/HST Notice 250 issued on February 10, 2010, does not accurately reflect the marketplace reality as automobile dealers originate loans to finance their customers' acquisition of an automobile.
We have reproduced this example below for ease of reference:
An automobile dealership has a financing department where employees assist customers in obtaining financing for the purchase of an automobile. For every successful loan, the dealership receives a commission from the financial institution. The employees of the dealership perform the following activities:
• obtaining the credit information from the customer;
• completing a loan application form;
• explaining to the customer the different loan terms and interest rates available;
• helping the customer select the type of loan which best suits the customer's needs;
• determining the interest rate and payment stream; and
• screening and verifying the loan application, making a recommendation on acceptance or rejection of the application and forwarding it for final approval to the financial institution which will grant the credit.
The supply made by the automobile dealership to the financial institution would not be a supply of a financial service.
You are recommending the above example be removed from GST/HST Notice 250 to avoid confusion in the industry.
[...] loans are generally contracts between the automobile dealers as lender and the customer. The automobile dealer may conduct various administrative activities as set out in example 3. However, these activities are generally provided in the normal course of the automobile dealer's activities in granting a loan to a customer. These loans are subsequently assigned to a third party (the assignee). The automobile dealer is not acting as agent or in any other capacity for the assignee. The assignment of the loan is the sale of a receivable, a stream of revenue to the potential assignee. Any consideration received by the automobile dealer on the sale of the loan to the assignee is consideration received for the sale of a receivable. It is your view that this transaction has always been and, notwithstanding the changes to the definition, remains a financial service.
You have provided the following information detailing the relationship and transactions between automobile dealers and assignees:
• Most automobile dealers have relationships with multiple alternative potential assignees to whom a loan could be sold (e.g. the finance affiliate of an automobile manufacturer; a bank; independent finance company; etc.). In offering a loan, the automobile dealer must negotiate a number of different financing variables with the customer, such as:
• amount to be financed;
• term;
• down payment;
• security deposit;
• addition/reduction of accessories or ancillary products (e.g. supplementary warranties);
• a co-buyer to support the credit risk; and
• co-guarantor to support the credit risk.
• As the automobile dealer negotiates the terms and conditions of a loan with a customer, the automobile dealer is always cognisant of the quality criteria required by its various potential assignees.
• If an automobile dealer hopes to eventually assign a loan to an assignee, the automobile dealer will generally submit the loan application to the assignee in advance. The automobile dealer will not submit an application until it appears to satisfy the criteria of the potential assignee. The customer does not pay the automobile dealer to do this, nor does the assignee pay the automobile dealer to provide services to the customer. The automobile dealer submits the loan documents with its customer to ensure the automobile dealer will be able to assign the receivables/loan in order to receive proceeds from such assignment (i.e. to obtain cash payment for the sale of the loan). The automobile dealer may decide to submit the loan application simultaneously to one or more of its potential assignees in effect to find which one will offer the best terms. It is clearly stated in the loan agreement that the loan is between the automobile dealer and the customer. The assignee is not party to that initial agreement. The assignment of the loan is expressly provided for in the loan. The automobile dealer will then proceed with the assignment of the loan.
• The consideration for the assignment of the stream of revenue can be paid in different ways. Among the most common examples, the potential assignee can choose to pay:
• a fixed amount for its purchase of the loan;
• an amount calculated on a percentage of the sum financed;
• nothing - example where the auto manufacturer decides to subsidize the rate of interest paid by the customer;
• at a premium or discount to the face amount based on the assignee using a different interest rate target than the loan rate.
• At any particular time, an automobile dealer can find out from different potential assignees what they may be willing to offer in terms of accepting assignment of a loan. It is up to the automobile dealer to negotiate with its customer at that time to determine whether or not the customer can satisfy the credit criteria of the potential assignee.
You would like confirmation that the supply of the assignment of loans by an automobile dealer to third party assignees as described above is a financial service.
Interpretation Given
Under the ETA, all supplies, such as the sale of automobiles, are taxable unless they are specifically exempt.
All supplies of financial services are exempt under Part VII of Schedule V unless they are specifically zero-rated under Part IX of Schedule VI (which generally requires that the supply be made by a financial institution to a non-resident and that certain other conditions are met). A service will be a financial service where it is included in any of paragraphs (a) to (m) of the definition of financial service in subsection 123(1) and is not otherwise excluded by any of paragraphs (n) to (t) of that same definition.
Paragraph (g) of the definition of financial service in subsection 123(1) provides that the making of any advance, the granting of any credit or the lending of money is a financial service.
Paragraph (d) of that same definition provides, among other things, that the issue, granting and transfer of ownership or repayment of a financial instrument are financial services. A "financial instrument" is defined in subsection 123(1) and includes a "debt security" which is in turn defined and includes a right to be paid money (e.g. a loan) but does not include a lease, licence or similar arrangement for the use, or the right to use, property (e.g. lease of a automobile).
As financing arrangements may vary among automobile dealers across Canada the facts and circumstances of particular transactions have to be examined to determine whether a supply is a financial service.
Where the activities undertaken by an automobile dealer is predominantly lending money to a customer for the purchase of an automobile, the supply of the loan made by the automobile dealer to the customer would be a supply of a financial service. Furthermore, where an automobile dealer assigns that loan (i.e. a debt security) to a third party, that supply by the automobile dealer to the assignee would be a supply of a financial service.
Please note that GST/HST Notice 250, issued on June 30, 2010, replaced the version issued on February 10, 2010. Examples 13 and 14 of this notice address certain financing situations where the automobile dealer is not lending money to customers. Specifically, these examples further explain the application of GST/HST to activities that may be performed by automobile dealers in assisting customers with financing for an automobile purchase in those situations where the automobile dealer is not the lender.
The foregoing comments represent our general views with respect to the subject matter of your request. These comments are not rulings and, in accordance with the guidelines set out in GST/HST Memorandum 1.4, Excise and GST/HST Rulings and Interpretations Service, do not bind the Canada Revenue Agency with respect to a particular situation. Future changes to the ETA, regulations, or our interpretative policy could affect this interpretation.
If you require clarification with respect to any of the issues discussed in this letter, please call me directly at 613-952-9248 or Dawn Weisberg at 613-952-9210.
Yours truly,
Ivan Bastasic
Director
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate
UNCLASSIFIED
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