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, 15th floor
320 Queen Street
Ottawa ON K1A 0L5
[Addressee]
Case Number: 157873
December 21, 2016
Dear [Client]:
Subject: GST/HST RULING
[…][Automobile dealer] and various sales contracts
We are writing in response to your letter concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to various sales contracts entered into by […] (the Dealer). We apologize for the delay in responding to the enquiry.
The HST applies in the participating provinces at the following rates: 13% in Ontario; and 15% in New Brunswick, Newfoundland and Labrador, Nova Scotia and Prince Edward Island. 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.
DOCUMENTS RECEIVED
The documents provided include sales contracts with customers, such as conditional sales contracts, installment sales contracts, credit agreements or finance contracts with installments; these will be collectively referred to as “contracts”, and a specific agreement will be referred to as a “Contract”.
Specifically, we received the following documents:
a.) your incoming letter;
b.) […] (Lender 1) documents:
i. ) […] (the Lender 1 Dealer Agreement), […], and
ii. ) […] (the Lender 1 Contract);
c.) […] (Lender 2) documents:
i. ) […] (the Lender 2 Dealer Agreement), and
ii. ) […] (the Lender 2 Contract);
d.) […] (Lender 3) documents:
i. ) […] (the Lender 3 Dealer Agreement), and
ii. ) […] (the Lender 3 Contract);
e.) […] (Lender 4) documents:
i. ) […] (the Lender 4 Dealer Agreement),
ii. ) […] (the Lender 4 Contract), and
iii. ) […][another contract] with similar terms as the Lender 4 Contract, and therefore not referenced in the balance of this response;
f.) […] (the Lender 5 Contract);
g.) […] (the Lender 6 Contract);
h.) […] (the Lender 7 Contract); and,
i.) […] (the Lender 8 Contract).
STATEMENT OF FACTS
Based on your incoming letter and the various contracts and agreements listed above, our understanding of the pertinent facts is set out below. References to a “Customer” or a “Lender” pertain to a specific customer or lender referenced in one of the aforementioned contracts, whereas references to a “customer” or a “lender” pertain to customers or lenders generally that the Dealer may transact with, including under the various agreements collectively.
Key Provisions
The Dealer has entered into a number of Dealer agreements with various lenders. The Dealer has also entered into various contracts with customers for the purchase of motor vehicles that require financing. The key provisions in these transactions, based on the documentation we received, are:
* the contract is intended to be assigned to a lender;
* upon assignment, the lender is receiving an assignment of a flow of payments provided under the contract (e.g., all amounts due now and over time);
* upon assignment, the Dealer is to receive a payment based on the amount to be financed by a customer under the contract; and
* the Dealer receives a fee in respect of the assignment of the contract.
Hereafter the term “fee” includes a fee, referral fee, dealer reserve, or commission paid to the Dealer related to the assignment of a contract to a lender. References to a “Fee” pertain to a fee payable to the Dealer under one of the aforementioned contracts, whereas references to a “fee” pertains to a customer or lender generally that the Dealer may transact with, including under various contracts collectively.
A summary of the key provisions in the various agreements is set out in Appendix A. The key provisions in the various agreements are set out in Appendix B.
RULING REQUESTED
You have requested a ruling with respect to the GST/HST treatment applied to a Fee received by the Dealer from the Lenders.
As noted in GST/HST Memorandum 1.4, Excise and GST/HST Rulings and Interpretation Services, the Canada Revenue Agency (CRA) will not issue a ruling where all of the pertinent facts cannot be established.
Based on the incoming documentation received, we do not have information regarding Fees agreed to between the Dealer and Lender 2. Also, we did not receive samples of the Dealer Agreements between the Dealer and Lender 5, Lender 6, Lender 7, and Lender 8 and the documentation we did receive with respect to those lenders is silent on any Fee paid by the Lender to the Dealer.
As a result, we are unable to rule on Fees received by the Dealer from Lender 2, Lender 5, Lender 6, Lender 7 or Lender 8 from the assignment of the specific Contracts. In lieu of a ruling, we have provided an interpretation following the ruling with general information regarding the GST/HST implications of the assignment of a contract.
RULING GIVEN
Based on the facts set out above, we rule that the assignment of the Dealer’s rights to the Lender under
i. ) the Lender 1 Contract,
ii. ) the Lender 2 Contract,
iii. ) the Lender 3 Contract,
iv. ) the Lender 4 Contract,
v. ) the Lender 5 Contract,
vi. ) the Lender 6 Contract,
vii. ) the Lender 7 Contract, or
viii.) the Lender 8 Contract
is a financial service under paragraph (d) of the definition of “financial service” as defined in subsection 123(1), and is an exempt supply under section 1 of Part VII of Schedule V.
We further rule that a Fee received by the Dealer from
* Lender 1 for the assignment of rights under the Lender 1 Contract,
* Lender 3 for the assignment of rights under the Lender 3 Contract, or
* Lender 4 for the assignment of rights under the Lender 4 Contract
forms part of the consideration received for the assignment of the specific Contract, and therefore would not be subject to GST/HST as the assignment is an exempt supply.
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 its validity; and all relevant facts and transactions have been fully and accurately disclosed.
EXPLANATION
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, 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).
The Dealer has entered into various Contracts with Customers (as summarized in Appendix A and as described in Appendix B) for the sale of motor vehicles. Under these Contracts, the Dealer is entitled to receive a stream of payments from the Customer. The CRA considers each of these specific Contracts to be a “debt security” and a “financial instrument” as each one represents a right to be paid money. When the Dealer’s rights under each of these Contracts are assigned by the Dealer to Lenders 1 through 8, the Lender is acquiring from the Dealer the right to receive the stream of payments from the Customer under the Contract. The assignment of these rights is a financial service under paragraph (d) of the definition of “financial service”. As such, the assignment of these rights is a supply of a financial service that is exempt from GST/HST.
The Fee received by the Dealer from Lenders 1, 3 and 4, under the Contracts described in Appendix B forms part of the consideration received for the exempt supply, that is the assignment of the Contract and is, therefore, not subject to GST/HST.
INTERPRETATION GIVEN
As previously noted under “Ruling Requested”, we were not provided with information regarding Fees paid to the Dealer by Lender 2, Lender 5, Lender 6, Lender 7 or Lender 8 for the assignment of Contracts to these Lenders. As a result, we were unable to rule on the tax status of any such Fees paid to the Dealer by Lender 2, Lender 5, Lender 6, Lender 7 and Lender 8. In lieu of a ruling on this issue, we provide the following general comments.
The terms “conditional sales contract”, “installment sales contract”, “credit agreement” and “finance contract with installments” are not defined in the ETA.
The CRA considers a conditional sale to take place when the seller transfers possession of goods to a customer, but ownership passes only after certain conditions are met, such as when the purchase price has been paid in full. In this type of sale, the customer agrees to make payments for the goods over a defined period of time. The customer takes possession of the goods, but the seller keeps title or ownership of the goods until the customer has met the specified conditions. Where a seller, for example the Dealer, enters into a conditional sales contract with a customer where the customer is purchasing a motor vehicle, the supply of the motor vehicle to the customer under the conditional sales contract is generally a taxable supply.
Conditional sales contracts and assignments of those contracts provide a financing mechanism to the customer. An installment sales contract, a credit agreement and a finance contract with installments are similar to a conditional sales contract that entitles the Dealer to receive a stream of payments from the customer. The CRA considers such a contract to be a “debt security” and a “financial instrument” as it represents a right to be paid money. When such a 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 these rights is an exempt supply of a financial service and is therefore not subject to GST/HST.
A fee received by the Dealer from a lender for the assignment of a conditional sales contract, installment sales contract, credit agreement, or finance contract with installments forms part of the consideration received for the assignment of the contract, and therefore would not be subject to the GST/HST as the assignment of the contract is an exempt supply.
In accordance with the qualifications and guidelines set out in GST/HST Memorandum 1.4, Excise and GST/HST Rulings and Interpretations Service, the interpretation given in this letter, including any additional information, is not a ruling and does not bind the CRA with respect to a particular situation. Future changes to the ETA, regulations, or the CRA’s interpretative policy could affect the interpretation or the additional information provided herein.
If you require clarification with respect to any of the issues discussed in this letter, please call me directly at 604-658-8526. 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,
Marjorie Stevens
Financial Services Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate
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