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.
Excise and GST/HST Rulings Directorate
Place de Ville, Tower A, 14th Floor
320 Queen Street
Ottawa ON K1A 0L5
[Addressee]
Case Number: 151267
Business Number: […]
July 6, 2016
Dear [Client]:
Subject: GST/HST RULING
Commission revenue earned by an automobile dealer
Thank you for your fax, concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to commission revenue earned by an automobile dealer. We apologize for the delay in our response.
The HST applies in the participating provinces at the following rates: 13% in Ontario; 14% in Prince Edward Island; and 15% in New Brunswick, Newfoundland and Labrador and Nova Scotia. The Government of Prince Edward Island has proposed to increase the rate of the HST in that province from 14% to 15% effective October 1, 2016. The GST applies in the rest of Canada at the rate of 5%.
All legislative references are to the Excise Tax Act (ETA) unless otherwise specified.
STATEMENT OF FACTS
You have provided the following documents:
* […] (the Dealer Agreement), dated [mm/dd/yyyy], outlining […] (the Dealer’s) services provided to […]([…][Company X]).
* a Credit Agreement between the Dealer, a Buyer, and […] (the Lender) upon assignment.
* the Lender’s […] chart effective [mm/dd/yyyy], and
* a Deal Management chart.
Based on these documents, we understand the following:
1. The Dealer is a GST/HST registrant engaged in the business of selling vehicles.
Dealer Agreement
2. The Dealer Agreement sets out the terms and conditions under which credit, loan administration and other services will be made available by [Company X] to the Dealer in respect of the Dealer’s financing business on the security of vehicles to be financed and assignments of loan payments to be made under the security agreements. […]
3. When all required documents are received by [Company X], [Company X] agrees to pay to the Dealer the proceeds of the loan secured by the Security Agreement in the amount determined by [Company X], collect loan payments due under the loan agreement and follow up with any borrower in default for payment of past due payments, apply collected payments to reduce the amount of the borrower’s obligation to [Company X] secured by the Security Agreement, and monitor and obtain confirmation of any required insurance coverage. […]
4. [Company X] agrees to release its security interest in a financed vehicle upon payment of the borrower’s obligations including accrued interest and fees or costs. […]
Credit Agreement
5. The Credit Agreement provides for the financing of the purchase of the vehicle described in the Credit Agreement and a creation of a security interest in the vehicle. The Credit Agreement sets out the total amount to be repaid on a bi-weekly basis to the Dealer and subsequently the Lender upon assignment, including all fees and interest. […]
6. Under the “Seller’s Agreement and Assignment” in the Credit Agreement, for value received, the Dealer assigns (transfers) all of its rights and benefits under the Credit Agreement to the Lender. […]
7. The Credit Agreement grants the Dealer and subsequently the Lender upon assignment a security interest in the vehicle as security for the repayment of all amounts owed under the Credit Agreement. When the amount owed under the Credit Agreement is paid in full, the Lender’s interest in the vehicle will come to an end. […]
Lender’s […][Chart] Effective [mm/dd/yyyy] […]
8. The […] chart sets out fixed and variable interest rates, maximum amortization based on the vehicle year, minimum loan amounts, and dealer reserves. A dealer reserve is based on the loan amount, and is expressed either as a percentage of the loan amount on fixed rate loans over $[…] or a dollar value ranging from $[…] to $[…] on variable rate loans and fixed rate loans of $[…] to $[…]. As an “extra bonus” the chart also indicates an additional $[…] Dealer Reserve is available for […] applications.
Deal Management chart
9. The Deal Management chart, which sets out the calculation of the amount financed, includes references to “interest rate”, “dealer interest rate” and “actual interest rate”.
RULING REQUESTED
You would like to know if the commission fee (dealer reserve) earned by the Dealer for an assignment to the Lender under the Credit Agreement is subject to GST/HST.
RULING GIVEN
Based on the facts set out above, we rule that the Dealer’s assignment of the Credit Agreement to the Lender is a financial service under paragraph (d) of the definition of “financial service” in subsection 123(1), and is an exempt supply under section 1 of Part VII of Schedule V.
We further rule that the dealer reserve fee received by the Dealer from the Lender for the assignment of rights under the Credit Agreement forms part of the consideration received for the assignment of the Credit Agreement, and therefore is not subject to GST/HST as the assignment is an exempt supply.
EXPLANATION
Financial services
Supplies of financial services are exempt under Part VII of Schedule V unless they are specifically zero-rated under Part IX of Schedule VI. A financial service is defined in subsection 123(1) to mean anything that is included in any of paragraphs (a) to (m) of that definition and that is not excluded by any of paragraphs (n) to (t) of that same definition.
A financial service includes, for example, under paragraph (d) of the definition, the issue, granting, allotment, acceptance, endorsement, renewal, processing, variation, transfer of ownership or repayment of a financial instrument. A “financial instrument” is defined in subsection 123(1) and includes a “debt security” which, in turn, is defined under that provision to include a right to be paid money (e.g., under a loan).
As the Dealer has entered into the Credit Agreement with the Buyer under which the Dealer is entitled to receive a stream of payments from the Buyer, the Canada Revenue Agency (CRA) considers the Credit Agreement to be a “debt security” and a “financial instrument” as it represents a right to be paid money. When the Dealer assigns the Credit Agreement to the Lender, the Lender is acquiring the debt security which includes the right to receive the stream of payments from the Buyer. The assignment of the Credit Agreement is a financial service and is exempt from GST/HST under paragraph (d) of the definition of “financial service”.
The dealer reserve fee received by the Dealer from the Lender for the assignment of the Credit Agreement forms part of the consideration received for the assignment of the Credit Agreement, and is therefore not subject to GST/HST as the assignment of the Credit Agreement is exempt from GST/HST.
In accordance with the qualifications and guidelines set out in GST/HST Memorandum 1.4, Excise and GST/HST Rulings and Interpretations Service, the CRA is bound by the rulings given in this letter provided that: none of the issues discussed in the rulings are currently under audit, objection, or appeal; no future changes to the ETA, regulations or the CRA’s interpretative policy affect their validity; and all relevant facts and transactions have been fully and accurately disclosed.
If you require clarification with respect to any of the issues discussed in this letter, please call me directly at 902-426-6279, or my manager, Luba Baran, at 613-952-9206. Should you have additional questions on the interpretation and application of GST/HST, please contact a GST/HST Rulings officer at 1-800-959-8287.
Yours truly,
Stacy Furlong
Financial Services Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate
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