10 July 2008 GST/HST Interpretation 84428 - XXXXX GST/HST Visitor Rebate on Short-term Accommodation

Please note that the following document, although correct at the time of issue, may not represent the current position of the Agency. / Veuillez prendre note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'Agence.

Excise and GST/HST Rulings Directorate Place de Ville, Tower A, 15th floor 320 Queen Street Ottawa ON K1A 0L5	XXXXX XXXXX X
XXXXXXXXX	Case Number: 84428
XXXXX XXXXX XXXXX	July 10, 2008

XXXXX:

Subject:

GST/HST RULING Application of GST/HST to the sale of serviced mortgages

Thank you for your letter of XXXXX concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to the supply of mortgages and the servicing of these mortgages. XXXXX We apologize for the delay in responding to your request.

All legislative references are to the Excise Tax Act (ETA) and the regulations thereunder, unless otherwise specified.

The following have been provided for our review:

•   XXXXX ("Master Sale Agreement") between XXXXX, (referred to in the agreement as "Purchaser") and XXXXX, (referred to in the agreement as "Seller"), dated XXXXX;

•   XXXXX ("Administration Agreement") between XXXXX, (referred to in the agreement as "Owner") and XXXXX, (referred to in the agreement as "Administrator"), dated XXXXX;

•   Fee Agreement between XXXXX dated XXXXX;

•   XXXXX ("Original Sale Agreement") between XXXXX, (referred to in the agreement as the "Investor") and XXXXX dated XXXXX. This is the original agreement that was replaced by the Master Sale Agreement and the Administration Agreement;

•   Amending Agreement between XXXXX, (referred to in the agreement as the "Investor") and XXXXX, dated XXXXX. This agreement amends the Original Sale Agreement;

•   XXXXX ("S&A Agreement") between XXXXX, (referred to in the agreement as the "Investor") and XXXXX, dated XXXXX; and

•   Amending Agreement between XXXXX (referred to in the agreement as the "Investor") and XXXXX dated XXXXX ("S&A Amending Agreement"). This agreement amends the S&A Agreement.

Statement of Facts

Based on the above documents and your letter, we understand that:

XXXXX was incorporated on XXXXX, under the provisions of the Business Corporations Act of the Province of XXXXX. XXXXX was incorporated federally on XXXXX, as a wholly owned subsidiary of XXXXX. You have written that XXXXX originates and funds mortgages and these mortgages are subsequently sold to third parties. As part of the sale agreements, XXXXX provides ongoing mortgage servicing to the third party purchasers for a fee.

You have written that XXXXX primary business is to source, originate, fund, sell and service prime residential mortgages. The sequence is described as follows:

XXXXX

You state that the agreements do not allow the buyer of the mortgages any option related to servicing. The buyer must purchase the servicing from XXXXX. Further, the servicing is a direct result of the sale of the mortgages and the buyer does not have the opportunity to purchase servicing from a third party.

XXXXX and XXXXX entered into the Master Sale Agreement, as of XXXXX, which replaced the Original Sale Agreement. The recitals to the Master Sale Agreement indicate that XXXXX desires to sell and XXXXX desires to purchase interests in Eligible Mortgages from time to time. Further, the two parties wish to amend and restate the Original Sale Agreement in regards to the purchase and sale of Mortgages and to enter into the Administration Agreement in regards to the servicing and administration of Mortgages sold to XXXXX. The amendments to the Original Sale Agreement are made in the Amending Agreement and will be discussed later.

The Master Sale Agreement defines a "Mortgage" to mean a mortgage, charge or hypothec on real or immovable property which is zoned residential, agricultural or rural and which is insured as to payment of principal by an Insurer. An Insurer means XXXXX or other provider of mortgage insurance that is acceptable to XXXXX and is approved for purposes of the National Housing Act Mortgage-Backed Securities (NHA MBS) Program. A Mortgage includes all obligations secured by a Mortgage, all monies payable under or in respect of the Mortgage and all other rights and benefits. An Eligible Mortgage means a Mortgage that satisfies all of the applicable criteria set out in Schedule XXXXX by a specified date. Schedule XXXXX includes such criteria as: the Mortgage must be insured, the remaining term to maturity is more the six months and less than or equal to 5 years; it is not delinquent (as defined in the Master Sale Agreement); it is payable in Canada only and denominated in Canadian dollars; and it is eligible for inclusion in the NHA MBS Program and the Canada Mortgage Bond Program conducted through the Canada Housing Trust. The Administration Agreement uses a similar definition for Mortgage as the Master Sale Agreement but does not include a reference to payment being insured by an Insurer.

XXXXX of the Master Sale Agreement deals with the purchase of Mortgages. Pursuant to XXXXX, XXXXX may, from time to time, provide XXXXX with two signed copies of a XXXXX Schedule. This schedule (Schedule XXXXX) sets out a list of relevant Eligible Mortgages, whether any of the properties are in the XXXXX, and other prescribed information. Under XXXXX, if XXXXX agrees to the terms and conditions set out in Schedule XXXXX, it may accept the Mortgages in the Schedule. Upon acceptance, there exists "a binding agreement between the Purchaser and the Seller for the purchase of the Eligible Mortgages listed in the XXXXX Schedule and the Related Rights at a purchase price equal to the Purchase Price." The Purchase Price is identified in Schedule XXXXX and is payable by XXXXX to XXXXX by XXXXX on the related settlement date.

XXXXX of the Master Sale Agreement requires XXXXX to deliver to XXXXX or as it may direct, a blanket assignment (in the form of Schedule XXXXX to this agreement), all such other necessary documents and instruments to convey to XXXXX beneficial ownership of the purchased interests free and clear of adverse claims, and certain powers of attorney. Schedule XXXXX, entitled XXXXX, provides that XXXXX sell, transfer and assign unto XXXXX and XXXXX purchase from XXXXX, the Mortgages described in Schedule XXXXX of the Master Sale Agreement and in the relevant schedule, together with certain related rights.

XXXXX of the Master Sale Agreement lists a variety of representations and warranties that XXXXX is making to XXXXX. Each Mortgage should be an Eligible Mortgage and the information in respect of the Mortgage set out in Schedule XXXXX is in all material respects true and correct. Legal title in respect of each Mortgage and the related rights should be registered in the name of XXXXX or such other entity as approved by XXXXX. The documents delivered by XXXXX will be effective to validly convey to XXXXX beneficial ownership of the Mortgage and related rights. XXXXX is an approved lender for purposes of the NHA and is in good standing under the policies of applicable insurers and "the origination and servicing of mortgage loans is a principal element of its business operations". Finally, XXXXX will account for the sale of the Mortgages and related rights in its books and financial statements as a sale, consistent with Canadian GAAP.

Where either of XXXXX or XXXXX determine that, on the settlement date, a Mortgage sold to XXXXX is not an Eligible Mortgage ("Ineligible Mortgage"), upon notification XXXXX shall pay to XXXXX within XXXXX days an amount equal to the repurchase price (specified in the Master Sale Agreement). Upon receipt of this amount, XXXXX is deemed to have sold, XXXXX to XXXXX without the necessity of any further instrument or formality, XXXXX.

XXXXX has a right to repurchase a sold Mortgage where the Mortgage is refinanced by the mortgagor with XXXXX on the maturity date or the mortgagor has failed to pay all amounts owing thereunder on the maturity date. Otherwise, XXXXX has no right of repurchase.

XXXXX of the Master Sale Agreement, XXXXX provides that XXXXX irrevocably constitutes and appoints XXXXX, and its agents, the true and lawful attorney of XXXXX with full power of substitution to execute and deliver such documents, instruments or agreements that are necessary or desirable to effect the assignment or transfer of any Mortgage or Related Rights purchased by XXXXX, to XXXXX. Some of the rights that are conveyed to XXXXX are listed in the section and include the right to make all amendments, deletions, etc. to any assignments or transfers of a Mortgage and Related Rights executed by XXXXX in favour of XXXXX which are needed to register such assignment or transfer and the right to prepare, execute, deliver or register such further assignments or transfers of any Mortgage or Related Rights or documents which may be necessary or desirable to register legal title in the name of XXXXX.

As provided for in the Master Sale Agreement, XXXXX and XXXXX also entered into the Administration Agreement. The recitals to the Administration Agreement state that XXXXX, as Owner, XXXXX. They also state that XXXXX, as Administrator, has agreed to service such Mortgages for and on behalf of XXXXX upon the terms and conditions provided in the agreement.

XXXXX of the Administration Agreement provides:

XXXXX

XXXXX of the Administration Agreement provides:

XXXXX

The NHA MBS Information Circular, dated May 12, 2006, in the NHA Mortgage-Backed Securities Guide (the "NHA MBS Guide"), states that the mortgage loans in the mortgage pool have been assigned to XXXXX, which will hold them as trustee on behalf of and for the benefit of the Investors (registered owners of NHA Mortgage-Backed Securities Certificates). The sample Mortgage Pool Transfer Agreements, in the NHA MBS Guide, for XXXXX and for all provinces other than XXXXX that are entered into between Issuers (here, XXXXX) and XXXXX provides that the Issuer assigns and transfers to XXXXX their right, title and interest in existing Mortgage Pools.

With respect to servicing, the NHA MBS Information Circular states that the Issuer is responsible for servicing and otherwise administering the mortgages which constitute the pool in accordance with generally accepted practices of the mortgage lending industry. The sample Mortgage Pool Servicing Agreement, in the NHA MBS Guide, dated March 10, 2006, signed by the Issuer and Servicer (where relevant), provides that:

XXXXX

A "Serviced Mortgage" means a Mortgage that is to be serviced by XXXXX and which has been purchased by the XXXXX pursuant to the Mortgage Sale Agreement (i.e., the Master Sale Agreement). XXXXX requires XXXXX to service each Serviced Mortgage in accordance with Requirements of Law, the terms of the Serviced Mortgages and other relevant policies and standards. XXXXX is required to enter into an agreement with a third-party backup servicer to perform the obligations of XXXXX if certain conditions occur.

Pursuant to XXXXX of the Administration Agreement, entitled XXXXX, XXXXX is not permitted to sell, assign or otherwise dispose of, or create an adverse claim; extend, amend or otherwise modify or take other specified actions in respect of any Serviced Mortgage unless otherwise set out in the agreement or with the prior consent of XXXXX. If XXXXX fails to observe its convents in XXXXX and the Mortgage has not been assigned to XXXXX (or XXXXX has re-assigned it back to XXXXX), XXXXX will be required to pay the Repurchase Price and XXXXX shall be deemed to have sold the Serviced Mortgage to XXXXX.

XXXXX of the Administration Agreement requires XXXXX to perform its specific duties under the agreement with reasonable skill and diligence. XXXXX is to use the degree of skill and attention that would otherwise be applied by a reasonably prudent Canadian mortgage administrator that is administering a pool of Mortgages. These duties require XXXXX to take a variety of actions including to:

•   Take, or cause to be taken, all action that may be necessary or desirable to collect amounts owing in respect of each Serviced Mortgage;

•   Give or cause to be given timely notice to the mortgagor of payments or other defaults;

•   Investigate or cause to be investigated all delinquencies and defaults under each Serviced Mortgage, determine the advisability of taking action and carrying out such action where advisable;

•   Maintain complete and accurate records;

•   Execute and deliver all such assignments, releases and discharges of the Serviced Mortgages as required;

•   Settle, compromise and otherwise deal with any claims in respect of Serviced Mortgages;

•   Hold as trust property for and on behalf of XXXXX, free of any adverse claims, in respect of each Serviced Mortgage, a variety of relevant documents;

•   Maintain and implement reasonable and prudent administrative and operating procedures to keep and maintain or cause to be kept and maintained all relevant records and other information;

•   Maintain certain types of insurance in respect of third party liability, fire and all perils, property, real or property tax, etc. in respect of the Mortgage, Mortgaged Property and Related Rights;

•   Hold the proceeds of all insurance on any Mortgaged Property or Related Rights received by XXXXX in trust for XXXXX;

•   Perform all services in connection with the settlement of all losses in the event of damage to or destruction by fire or other insured casualty of any Mortgage Property or Related Rights; and

•   Perform all tasks necessary to maintain all mortgage insurance from applicable insurers, make all possible claims for payment and use its best efforts to maximize on behalf of XXXXX any available insurance proceeds.

XXXXX requires XXXXX to establish and maintain a collection account. All Collections are to be deposited by XXXXX into this account. Collections include all cash collections and other cash proceeds received in respect of Serviced Mortgages and Related Rights. The balance on deposit in the collection account is held in trust by XXXXX for the benefit of XXXXX. At specified times, Collections are to be transferred from the collection account to a remittance account, as per instructions of XXXXX.

Pursuant to XXXXX of the Administration Agreement, XXXXX may assign certain of the Serviced Mortgages to XXXXX under the NHA MBS Program, as described in XXXXX, and is required to notify XXXXX of this. XXXXX must provide all necessary information for XXXXX to effect the assignment. If XXXXX enforces the assignment to it of certain Serviced Mortgages under the terms of the NHA MBS Guide, the Administration Agreement will still continue in full force for the benefit of XXXXX unless and until terminated by XXXXX.

All Serviced Mortgages are to be registered in the name of XXXXX or such other entity approved by XXXXX at its sole discretion, as well as other related documents. XXXXX agrees to indemnify XXXXX and any of its agents and to save them harmless from and against any and all damages, losses, claims, liabilities, costs and expenses (including reasonable legal fees and disbursements) awarded against or incurred by XXXXX or its agents arising or resulting from certain failures of performance or action by XXXXX or breach of any representation or warranty under the agreement. Further, this also applies to any injury or property damage suit or other similar or related claim or action arising from or in connection with a Mortgaged Property after XXXXX "has gone into possession thereof."

With respect to fees, XXXXX provides that XXXXX shall pay to XXXXX the fees set forth in the Fee Agreement. XXXXX is also entitled to retain certain Administrative Charges collected by it from Mortgagors. Administrative Charges means, in respect of Serviced Mortgages, amounts related to renewals processing or other services fees, late payment charges, and various other charges and fees payable by the Mortgagor.

The Fee Agreement refers to the Administration Agreement and provides:

XXXXX

The recitals to the Original Sale Agreement between XXXXX (Investor) and XXXXX indicate that XXXXX has purchased or agreed to purchase from XXXXX, and XXXXX has agreed to sell to XXXXX, Mortgage Loans. Further, XXXXX is an Approved Lender and has agreed to administer and service Mortgage Loans "for and on behalf of the Investor" in accordance with the National Housing Act (the "Act" in this agreement). A Mortgage Loans means an indebtedness or obligation secured, directly or collaterally, by a mortgage insured by XXXXX or XXXXX.

XXXXX of the Original Sale Agreement states, in part, that:

XXXXX

XXXXX, concerning the Purchase Price of a Mortgage Loan bought by XXXXX, provides that XXXXX agrees to pay "a servicing fee to XXXXX at the annual rate of" a certain number of basis points that varies according to the amount of assets under administration. XXXXX provides that all Mortgage Loans shall be registered in the name of XXXXX and related security documentation shall be drawn in the name of XXXXX.

XXXXX of the Original Sale Agreement provides that:

XXXXX

XXXXX lists a variety of activities XXXXX must engage in to administer and service the Mortgage Loans. The list is not exhaustive and includes similar actions as are listed in the current Administration Agreement. Pursuant to XXXXX, where a Mortgage Loan is in default, XXXXX is required to ensure that the remittance account, established and maintained by XXXXX, continues to receive credited principal and interest payments, regardless of whether these amounts are received by the mortgagor. XXXXX requires XXXXX to indemnify XXXXX for any loss or expense incurred by XXXXX in respect of any Mortgage Loan.

The Amending Agreement between XXXXX and XXXXX is dated XXXXX and states that the two parties wish to amend the Original Sale Agreement to set out their original intention upon entering the Original Sale Agreement was XXXXX. The recitals also state that neither party has taken any action inconsistent with or in contravention of any amendment set out in the Amending Agreement.

The amendments set out in the Amending Agreement concern: XXXXX.

XXXXX also entered into the S&A Agreement with XXXXX which was subsequently amended by the S&A Amending Agreement. The recitals to the S&A Agreement, between XXXXX and XXXXX (as Investor), indicate that XXXXX is an approved lender of XXXXX and of XXXXX and has agreed to administer and service on behalf of XXXXX the Mortgage Loan(s) purchased by XXXXX under the S&A Agreement. Further, XXXXX has purchased or agreed to purchase from XXXXX, and XXXXX has agreed to sell to XXXXX the Mortgage Loan(s) referred to in the XXXXX Schedules.

Pursuant to the S&A Agreement, a Mortgage Loan means XXXXX. "XXXXX Schedule" ("Offering Schedule") means a listing of Mortgage Loans provided by XXXXX that sets out the details of the Mortgage Loans, purchase price and interest.

XXXXX of the S&A Agreement states that XXXXX business includes XXXXX.

XXXXX of the S&A Agreement states that:

XXXXX

With respect to the settlement of mortgages, XXXXX provides an Offering Schedule that includes the purchase price and accrued interest, to XXXXX by a specified date that is agreed upon by the parties. XXXXX then arranges for the electronic transfer of funds to XXXXX. Payment of the purchase price by XXXXX acknowledges XXXXX agreement with the purchase price. XXXXX also agrees to pay a servicing fee referred to in XXXXX of this agreement.

All mortgages are to be registered in the name of XXXXX as well as all related security documentation, and held by XXXXX on behalf of XXXXX. XXXXX represents and warrants certain things including that: the particulars in the Offering Schedule are true and accurate; each Mortgage Loan is or will be duly and validly registered in the proper Land Registry Office and is a good or valid first mortgage; and each Mortgage Loan is in good standing and not in default.

Pursuant to XXXXX of the S&A Agreement, XXXXX will continue to administer and service the Mortgage Loans for XXXXX, notwithstanding the sale of the Mortgage Loans. XXXXX may exercise any reasonable discretion or remedy in respect of a Mortgage Loan which it is entitled to exercise. The administration and service XXXXX is required to perform include:

•   Keeping financial records of the loan accounts;

•   Establishing and maintaining a trust account where XXXXX will deposit all funds received on behalf of XXXXX;

•   Collecting principal and interest and any other relevant monies to which XXXXX is entitled;

•   Providing, at least monthly, a statement of account in respect of Mortgage Loans outstanding;

•   Giving notices and/or making personal contact with the mortgagor(s) in respect of overdue amounts and taking appropriate action;

•   Providing necessary services to settle losses and supervise the disposition of insurance proceeds where applicable;

•   Settling XXXXX;

•   Maintaining XXXXX or XXXXX loan insurance policies with respect to Mortgage Loans;

•   Taking all necessary steps to exercise any available remedies in the event of default by the mortgagor;

•   Executing and delivering any discharge or assignment of mortgages upon settlement; and

•   Providing a monthly arrears report to XXXXX of all mortgages in default and in arrears.

With respect to fees for servicing the Mortgages, XXXXX of the S&A Agreement provides:

XXXXX

XXXXX agrees to indemnify XXXXX for any loss or expense incurred by XXXXX where the Mortgage Insurer fails or refuses to make payment in full in respect of a Mortgage Loan.

Pursuant to XXXXX, at the end of its term of a particular mortgage, XXXXX will not arrange for its renewal for the account of XXXXX. XXXXX will have the first right to re-acquire the mortgage that has matured and been renewed by XXXXX.

Where a default of a Mortgage Loan occurs (described in XXXXX of the S&A), upon written request from XXXXX, XXXXX will repurchase from XXXXX the Mortgage Loans which it had previously purchased from XXXXX and that are in default.

The S&A Amending Agreement between XXXXX and XXXXX indicates that both parties have agreed that the amendments contained therein have effect from the original XXXXX date of the S&A Agreement (the SAA for purposes of the Amending Agreement). Further, from the recitals, the terms contained in the Amending Agreement XXXXX. The recitals also state that since XXXXX neither party has taken any action inconsistent with or in contravention of any amendment of the SAA as set out in the Amending Agreement.

The amendments set out in the Amending Agreement concern: XXXXX.

Rulings Requested

1. Is the consideration payable by XXXXX for the sale of Eligible Mortgages by XXXXX under the Master Sale Agreement and the consideration payable by XXXXX for the servicing of Serviced Mortgages by XXXXX under the Administration Agreement consideration for a single supply of a financial service?

2. Is the consideration payable by XXXXX to XXXXX under the Original Sale Agreement, as amended by the Amending Agreement, for the sale and servicing of Mortgage Loans consideration for a single supply of a financial service?

3. Is the consideration payable by XXXXX under the S&A Agreement, as amended by the S & A Amending Agreement, for the sale and servicing of Mortgage Loans by XXXXX consideration for a single supply of a financial service?

Rulings Given

Based on the facts set out above, we rule that:

1. The consideration payable by XXXXX to XXXXX under XXXXX under the Master Sale Agreement and the consideration payable by XXXXX to XXXXX under XXXXX of the Administration Agreement is consideration for a single supply of a financial service described in the respective agreements.

2. The consideration payable by XXXXX under XXXXX of the Original Sale Agreement, as amended by the Amending Agreement, is consideration for a single supply of a financial service described in the agreement.

3. The consideration payable by XXXXX under XXXXX of the S&A Agreement, as amended by the Amending Agreement, is consideration for a single supply of a financial service described in the agreement.

These rulings are subject to the qualifications in GST/HST Memorandum 1.4, Excise and GST/HST Rulings and Interpretations Service. We are bound by these rulings provided that none of the above issues are currently under objection, or appeal, that no future changes to the ETA, regulations or our interpretative policy affect its validity, and all relevant facts and transactions have been fully disclosed.

Explanation

The supplies of financial services by XXXXX, described above, are exempt under section 1 of Part VII of Schedule V to the ETA unless they are zero-rated under section 1 of Part IX of Schedule VI.

Please note, where the servicing of a mortgage loan is subcontracted to a third party (i.e., a person who did not supply the mortgage loan), the supply of the servicing will generally not be a supply of a financial service and will be taxable.

If you require clarification with respect to any of the issues discussed in this letter, please call me directly at 613-952-9577. 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,

Kirk Moore
Financial Institutions Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate

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