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: 166499
July 8, 2016
Dear [Client]:
Subject: GST/HST INTERPRETATION
Commission revenue earned by automobile dealers
Thank you for your fax to Gunar Ozols, on behalf of […][Client 1] and […][Client 2], concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to commission revenue earned by automobile dealers (Dealers). 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.
You previously requested the Canada Revenue Agency’s (CRA) position on commission revenue earned by Dealers, specifically, under the assignment of conditional sales contracts and under financing contracts. We provided our response to you on August 8, 2014, case number 157867. You are now seeking further guidance on the CRA’s position regarding commission revenue received by a Dealer under financing contracts.
In your submission of [mm/dd/yyyy] under case number 157867, you stated that under a Dealer Agreement entered into by a Dealer and a financial institution, the Dealer receives a fee for facilitating a loan with the financial institution for the Dealer's customer. You indicated that under these arrangements the Dealer is required to perform the following services:
(i) the Dealer meets with the customer and explains the loan application process;
(ii) the Dealer outlines the likelihood of successfully assisting the customer to obtain credit and the anticipated available terms of credit given the customer's credit history;
(iii) the Dealer verifies the customer's identity;
(iv) working with the customer, the Dealer completes a loan application and obtains the customer's consent to obtain a credit bureau report and proceed with the application;
(v) the Dealer submits the credit application and consent to the financial institution;
(vi) if the loan application is acceptable to the financial institution, the Dealer ensures the vehicle being financed is free and clear of liens or encumbrances;
(vii) if the loan application is acceptable to the financial institution, the Dealer enters into a purchase agreement with the customer;
(viii) after entering into the purchase agreement, the Dealer will obtain and provide the customer's direction to the financial institution to have the customer's loan proceeds paid to the Dealer's bank account; and
(ix) the Dealer receives the customer's loan proceeds and applies the proceeds to the outstanding purchase price of the vehicle.
Some of these functions are provided for in the underlying Dealer Agreements (for example, verifying the identity of the customer and entering into an agreement with the customer once the financial institution has approved financing), while others are not (for example, meeting with the customer and explaining the loan application process and likelihood of the customer obtaining credit).
You indicated that throughout this process there is no direct contact between the customer and the financial institution. The Dealer is held liable under the Dealer Agreement for failing to carry out any of the above activities, most notably the failure to properly identify the customer and to ensure the vehicle is free and clear of liens or encumbrances.
You also indicated that the Dealer will then typically receive a fee from the financial institution for facilitating the financing. This fee usually varies depending on the embedded interest rate in the Loan Agreement.
You were unable to provide any financing contracts under case number 157867 or with this request. The documentation that was provided in case 157867 pertained to conditional sales contracts only.
INTERPRETATION REQUESTED
You wish to confirm that, given the specific facts set out in your [mm/dd/yyyy] submission, the service provided by Dealers as consideration for commissions under the financing contracts constitutes a “financial service” as defined in subsection 123(1) of the ETA.
INTERPRETATION GIVEN
Assignment of conditional sales/instalment sales contracts and similar arrangements
It is our understanding that the assignment of conditional sales contracts is the most commonly used financing arrangement by automobile dealers. As noted in our response to you of August 8, 2014, conditional sales contracts and assignments of those contracts provide a financing vehicle to the customer. The CRA considers a conditional sales contract to be a “debt security” and a “financial instrument” as it represents a right to be paid money. When the conditional sales contract is assigned to a third-party, the third-party is acquiring the right to receive the stream of payments from the customer. The assignment of a conditional sales contract by a Dealer to a financial institution, as described in the agreements you previously provided, is a financial service.
A Dealer may enter into similar agreements with a customer which provide the Dealer with a right to receive a stream of payments from the customer, such as an installment sales contract or credit agreement. For example, a credit agreement may provide for the financing of the purchase of a vehicle described in the agreement and create a security interest in the vehicle. The agreement would set out the total amount to be repaid to the Dealer on a periodic basis and subsequently to the Lender upon assignment. Such an agreement would also be considered to be a “debt security” and a “financial instrument”. When the Dealer assigns this financial instrument to a financial institution, this assignment would be an exempt financial service.
A fee or commission received by a Dealer from the financial institution for the assignment of an agreement which includes the Dealer’s right to receive a stream of payments from a customer, such as a conditional sales contract, installment sales contract, or credit agreement, would form part of the consideration received from the assignment of the agreement, and would not be subject to GST/HST where the assignment of the agreement is exempt.
Facilitating a loan (financing contracts)
Given that you have not provided any specific agreements to reflect this type of financing arrangement which is described above and in your submission of [mm/dd/yyyy], and that we have not seen such an agreement, we can only reiterate that in some cases the commissions earned in respect of these arrangements may be exempt while in others they may be subject to the GST/HST. As mentioned above, it is our understanding that conditional sales contracts, installment contracts and credit agreements are the most commonly used financing arrangements. For those limited situations where a Dealer may be facilitating a loan, the CRA’s position on the tax status of a Dealer’s service of facilitating a loan between a financial institution and the Dealer's customer, as provided to you on August 8, 2014, under case number 157867, remains unchanged. It is the CRA’s position that whether a Dealer is “arranging for” a financial service provided by a financial institution in respect of a financing contract entered into between the financial institution and the customer is a question of fact and must be determined on a case by case basis. Where a Dealer is actively involved in the loan application process and effects the financial institution’s supply of a financial service, the Dealer may be considered to be “arranging for” a financial service under paragraph (l) of the definition of financial service in subsection 123(1). Where a Dealer provides only preparatory services and does not effect the supply of a financial service by the financial institution the supply of the preparatory services is excluded from the definition of financial service by paragraph (r.4) of the definition.
Paragraph (r.4) specifically excludes a service (other than a prescribed service) that is preparatory to the provision or the potential provision of a service referred to in any of paragraphs (a) to (i) and (l), or that is provided in conjunction with a service referred to in any of those paragraphs, and that is
(i) a service of collecting, collating or providing information, or
(ii) a market research, product design, document preparation, document processing, customer assistance, promotional or advertising service or a similar service.
Currently no services are prescribed or proposed to be prescribed for purposes of paragraph (r.4).
GST/HST Technical Interpretation Bulletin B-105, Changes to the Definition of Financial Service (TIB B-105), provides a number of examples to aid in determining whether a supply of services may be “arranging for” a financial service. A “Notice to the reader” was added to TIB B-105 on June 29, 2016, indicating that this publication is in the process of being updated. The notice also includes a clarification (albeit in the insurance context), as follows:
…a promotional or administrative service does not become a financial service of “arranging for” the issuance of insurance simply because the person is the only point of contact between the customer (insured) and the insurer.
It is the CRA’s position that there is no single factor that is determinative of whether a Dealer is arranging for a financial service. For example, a service provided by a Dealer is not “arranging for” only because the Dealer is the only point of contact between the financial institution and the customer.
As indicated in the “Notice to the reader” pertaining to TIB B-105, referenced above, the CRA anticipates providing additional examples to clarify the application of the legislation where an automobile dealer earns a commission when it assigns a conditional sales contract or similar agreement to a financial institution.
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 CRA 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 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
Rulings Officer
Financial Services Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate
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