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, 11th floor
320 Queen Street
Ottawa ON K1A 0L5
[Addressee]
Case Number: 156434
Business Number: […]
January 24, 2018
Dear [Client]:
Subject: GST/HST RULING
Amounts paid by various lenders
We are writing in response to your letter concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to amounts paid to […] (the Dealer) by various lenders. We apologize for the delay in our reply.
As discussed with you, we are responding under separate cover to the application of the GST/HST to amounts paid by an insurer to the Dealer.
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, credit agreements or sales finance contracts; 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) […] (Lender 1) documents:
i) […] (the Lender 1 Dealer Agreement), and
ii) […] (the Lender 1 Contract);
b) […] (Lender 2) documents:
i) […] (the Lender 2 Dealer Agreement), and
ii) […] (the Lender 2 Contract);
c) […] (Lender 3) documents:
i) […] (the Lender 3 Dealer Agreement), and
ii) […] (the Lender 3 Contract);
d) […] (Lender 4) documents:
i) […] (the Lender 4 Dealer Agreement), and
ii) […] (the Lender 4 Contract); and
e) […] (Lender 5) documents:
i) […] (the Lender 5 Dealer Agreement), and
ii) […] (the Lender 5 Contract).
STATEMENT OF FACTS
Based on your letter and the various contracts and agreements listed above, our understanding of the pertinent facts is set out below.
The Dealer is an automobile dealership in […][Province A], and is registered for GST/HST. The Dealer operates under the trade name, […].
Key provisions
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.
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 (for example, all amounts due now and over time);
- upon assignment, the Dealer is to receive a payment from the lender based on the amount to be financed by a customer under the contract; and
- the Dealer may also receive from the lender 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 in relation to the assignment of a contract by the Dealer 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 regarding customer financing is set out in […]. The key provisions in the various agreements regarding customer financing are described in […].
RULING REQUESTED
You requested a ruling on whether the Fee received by the Dealer from the Lenders is consideration for an exempt supply of a financial service.
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 documentation we received, the Lender 2 Dealer Agreement and the Lender 5 Dealer Agreement do not specifically set out a Fee payable by the Lender to the Dealer. As a result, we are unable to rule on Fees received by the Dealer from Lender 2 and Lender 5 for 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.
RULINGS GIVEN
Based on the facts set out above, we rule that:
- The assignment of the Dealer’s rights to the Lender under the Lender 1 Contract, the Lender 2 Contract, the Lender 3 Contract, the Lender 4 Contract, or the Lender 5 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; and
- The Fee payable to the Dealer by Lender 1, Lender 3, or Lender 4 under their respective Dealer Agreements for the assignment of rights under the Lender 1 Contract, the Lender 3 Contract, or the Lender 4 Contract forms part of the consideration for this exempt supply and therefore is not subject to GST/HST.
EXPLANATION
A supply of property or a service made in Canada is taxable unless it is exempt under Schedule V to the ETA. A supply of a financial service is exempt under Part VII of Schedule V to the ETA unless it is specifically zero-rated under Part IX of Schedule VI to the ETA (which generally zero-rates the supply by a financial institution of certain financial services to a non-resident person).
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 is not excluded by any of paragraphs (n) to (t) of that same definition. A financial service in subsection 123(1) includes, under paragraph (d), 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) to include a “debt security” which, in turn, is defined under that provision to include a right to be paid money.
The Dealer has entered into various Contracts with Customers ([…]) 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 5, 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 an exempt supply of a financial service.
The Fee payable by Lender 1, Lender 3, or Lender 4 to the Dealer under their respective Dealer Agreements for the assignment of the specific Contract […] forms part of the consideration payable for the exempt supply, that is the assignment of the Contract, and, therefore, the Dealer is not required to collect GST/HST on the Fee.
INTERPRETATION GIVEN
As previously noted under “Ruling Requested”, the Lender 2 Dealer Agreement and the Lender 5 Dealer Agreement do not specifically set out a Fee payable by the Lender to the Dealer. As a result, we are unable to rule on Fees received by the Dealer from Lender 2 and Lender 5 for the assignment of the specific Contracts. In lieu of a ruling on this issue, we provide the following general comments.
The terms “conditional sales contract” and “credit agreement” 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. A credit agreement is 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 or credit agreement 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 Canada Revenue Agency (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. 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 (780) 495-6518. 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,
Heather Gibbard
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate
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