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: 157867
Dear [Client]:
Subject: GST/HST INTERPRETATION
Commission revenue earned by automobile dealers
Thank you for your letter of [mm/dd/yyyy] on behalf of your clients, […][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. […].
The HST applies in the participating provinces at the following rates: 13% in Ontario, New Brunswick and Newfoundland and Labrador, 14% in Prince Edward Island and 15% in Nova Scotia. 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
Following consultations between the Canada Revenue Agency (CRA) and [Client 1] of [mm/dd/yyyy] and [mm/dd/yyyy] we have received the following agreements in addition to your written request:
* […][Lender1] Agreement
* [Lender1] Conditional Sales Contract
* […][Lender2] Agreement
* [Lender2] Conditional Sales Contract
* […][Lender3] Agreement
* [Lender3] Conditional Sales Contract
* […][Lender4] Agreement
STATEMENT OF FACTS
We understand from our review of the documents submitted the following:
Automobile dealers (Dealers) frequently assist their customers to obtain financing. The Dealers are typically paid fees by financial institutions for facilitating financing. These fees are paid under agreements between the Dealers and numerous financial institutions (the “Dealer Agreements”). Under the Dealer Agreements, the financial institutions pay fees to the Dealers for facilitating the assignment of installment sales contracts (Conditional Sales Contracts) and for facilitating a loan to a customer.
Conditional Sales Contracts
You have stated that under the Dealer Agreement the Dealer has the right to enter into a Conditional Sales Contract with a customer for the sale of a vehicle that can subsequently be assigned to a financial institution for an amount which is generally equal to the unpaid purchase price of the vehicle. The unpaid portion of the purchase price is the purchase price, less the initial deposit that is made at the time the customer enters into the Conditional Sales Contract with the Dealer.
The Dealer's right to assign the Conditional Sales Contract generally requires the Dealer to perform the following services:
(i) the Dealer meets with the customer and explains the process and the nature of a Conditional Sales Contract;
(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 credit 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 credit 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 credit application is acceptable to the financial institution, the Dealer enters into a Conditional Sales Contract with the customer using the financial institution's preapproved form;
(viii) after entering into a Conditional Sales Contract, the Dealer assigns the contract to the financial institution in consideration for an amount which generally equals the unpaid portion of the purchase price of the vehicle;
(ix) any amounts subsequently received by the Dealer in respect of the assigned Conditional Sales Contract are held in trust by the Dealer for the financial institution; and
(x) any amounts received by the Dealer in trust are subsequently paid to the financial institution.
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.
Provided the Dealer has undertaken all of the above, in addition to the amount paid on the assignment of the Conditional Sales Contract, the Dealer will receive a fee for facilitating that assignment which fee usually varies depending on the embedded interest rate in the Conditional Sales Contract.
Financing Contracts
You have stated that under the Dealer Agreement the Dealer receives a fee for facilitating a loan with a financial institution for the Dealer's customer. 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.
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.
The Dealer will then typically receive a fee from the financial institution for facilitating the financing which fee usually varies depending on the embedded interest rate in the Loan Agreement.
Agreements
Four Dealer Agreements have been provided for (Lender1), (Lender2), (Lender3), and (Lender4) detailing the Dealer’s roles and responsibilities when assisting a Customer in obtaining financing from the Lender for the purchase of a vehicle. Conditional Sales Contracts have also been provided for Lender1, Lender2, and Lender3.
Lender1 Loan Program Dealer Agreement (Agreement1)
* Agreement1 is a means of financing the purchase of goods whereby a dealer enters into a Conditional Sales Contract/contract of installment (Contract) with a customer, which is then assigned to Lender1.
* In the course of discussions with prospective Customers, the Dealer may obtain personal financial information from prospective Customers to assist in determining if financing is required to purchase Goods. Where a Customer wishes financing and the Dealer reasonably concludes Lender1 may potentially approve the Customer, the Dealer will complete and submit to Lender1 a Credit Application. All Credit Applications must be completed using Lender1’s standard form.
* Under Agreement1 the Dealer agrees to:
o Obtain identification from each Customer and complete the “Know your Client” portion of the Credit Application.
o Meet personally with each Customer, examine only original, unaltered identification documents, and fully complete each Credit Application.
o Operate as the agent of Lender1 in respect of the application for financing. The Dealer will collect personal financial information from the applicant and, if applicable, each co-applicant and record it in the Credit Application.
* Neither the Dealer nor Lender1 is the agent of the other except for the purpose of ascertaining the identity of a Customer, which the Dealer shall do as Lender1’s agent. The Dealer is not authorized at any time to represent to any other party that it represents Lender1.
* Any decision to extend credit to a Customer will be at the sole discretion of Lender1. Lender1 reserves the right to reject any Customer for any reason whatsoever. Lender1 will stipulate a rate of interest and a term and amortization for each Contract.
* If Lender1 approves the Customer’s Credit Application, the Dealer is to enter into a Contract with the Customer in Lender1’s standard form. The Dealer will complete the Contract in accordance with the terms of credit stipulated by Lender1.
* Lender1, at its sole discretion, may stipulate a Rate that will entitle the Dealer to a referral fee.
* Lender1 may pay the Dealer a Referral Fee as compensation for the Dealer’s role as an intermediary in Agreement1 and its participation in Lender1’s credit extension process.
* All payments due under the Contract will be made to Lender1.
* Any payments received by the Dealer in respect of a Contract assigned to Lender1 will be received by the Dealer in trust for and on behalf of Lender1. Upon receiving any such payments, the Dealer will immediately remit the payment to Lender1.
* Lender1 will pay to the Dealer an amount equal to the balance of the purchase price to be financed by the Customer under the Contract, less any fees owing to Lender1 by the Dealer or amounts owing in respect of interest amounts to be paid by the Dealer as an incentive for a Customer to enter into a Contract.
* From the time Lender1 receives the assignment of the Contract from the Dealer, Lender1 will have all rights and privileges conferred upon the Dealer by the Contract including the right to repossess the goods, the right to collect all sums due or to become due and the benefit of insurance.
* Lender1 will take a security interest in the goods. The Dealer will ensure that title to the Goods is transferred to the Customer. Please note, however that the provisions in the actual Conditional Sales Contracts relating to title, as set out in the following section, state that title and ownership do not pass to a Customer until the amounts owing are paid in full.
* As of the date of the assignment to Lender1 of each Contract, the Goods described in the Contract are free and clear of all claims except those of the Customer.
Lender1 Conditional Sales Contract
* A sample Full Disclosure Conditional Sales Contract (Contract) on Lender1 letterhead was provided.
* Under the Contract, the Dealer agrees to sell and the Buyer agrees to pay for the vehicle on the terms and conditions of the Contract.
* The Contract includes Lender1’s terms including the amount being financed, interest rate, amortization period, and installment payment amount.
* The title, ownership and right of property in the vehicle shall not pass to the Buyer until all monies payable by the Buyer under the Contract are fully paid. In addition, as security for the Buyer’s payment of monies payable under the Contract, the Buyer grants, assigns and conveys to the Seller and the Seller acknowledges that the Seller shall have, take and retain a purchase money security interest in the vehicle and the proceeds thereof.
* The Contract contains an assignment which provides that for value, the Dealer sells, assigns and transfers to Lender1 all its rights and interest in this contract and the Vehicle described, with the option to indicate whether the assignment is with or without recourse. As noted above, title to the vehicle does not transfer to the Buyer until all monies payable by the Buyer under the Contract are fully paid.
* The Contract specifies that the Buyer must pay the Amount Financed at an office of Lender1.
Lender2 Master Dealer Agreement (Agreement2)
* Agreement2 states that the Dealer is in the business of selling Property/Services to Customers and Lender2 is in the business of providing Financial Services, and that the Dealer has agreed to offer and arrange for Financial Services to Customers in connection with the sale of Property/Services, and to assign all of its right, title and interest in connection with such Financial Services to Lender2.
* Under Agreement2, and in accordance with the procedures advised to the Dealer by Lender2 from time to time, the Dealer will arrange for a Financial Service by Lender2.
* “Contract” means a conditional sales contract for consumer purchase, a contract of sale by instalment or a recreational vehicle and marine conditional sales contract in favour of the Dealer, in the format required by Lender2, which is signed by a Customer, and which is intended to be assigned to Lender2.
* “Customer” means a person or person(s) acquiring, or wishing to acquire, Property/Services from the Dealer, and wishing to obtain a Financial Service in connection with such acquisition of Property/Services and who has/have completed and signed an Application, and if approved by Lender2, have signed a Contract as well as any other guarantor who guarantees the obligation of the Customer.
* “Financial Service” means the extension of credit by Lender2 to a Customer to enable the Customer to acquire the Property/Services which extension of credit is made by Lender2 through the acquisition of a Contract by Lender2 from the Dealer.
* “Financial Services Documents” means the documents required by Lender2 to be provided by the Customer in connection with the Financial Service; such documentation to include but not be limited to, the Application and the Contract.
* The Dealer’s stated obligations include:
o Verifying the identity of the Customer;
o Arranging for the Customer to complete an Application;
o Forwarding the Financial Services Documents to Lender2;
o Obtaining all forms, documents and other information from the Customer, as requested by Lender2, and using the standard forms supplied by Lender2;
o Ensuring that the Financial Services Documents are properly completed; and
o Providing the Customer with a copy of the Financial Services Documents.
* Lender2 will:
o Review applications sent by the Dealer and conduct a credit assessment of the Customer;
o Advise the Dealer of its decision to accept or reject the Application as soon as possible following receipt of the Application;
o Have no obligation to extend credit to any Customer or acquire any Contract;
o If it acquires a Contract, Lender2 will credit the Dealer’s current account with Lender2 or outside Lender2 via a direct electronic funds transfer, the amount of the balance payable less any adjustments as required upon receipt of all Financial Services Documents and other documentation required by Lender2;
o Not be deemed to have purchased or be a party to a Contract until it has actually remitted funds to the Dealer and any loss of the Property/Services which arises prior to the remittance of the funds is the responsibility of the Dealer; and
o Pay to the Dealer a fee or fees for each Financial Service arranged by the Dealer for Lender2, at the rate and the times agreed between Lender2 and the Dealer from time to time.
* Lender2 has established a Conditional Sales Rate and a […] Conditional Sales Rate in connection with the program and Lender2 will notify the Dealer of any changes to these rates in writing or in any other manner as agreed.
* The Dealer agrees that all assignments of Contracts to Lender2 shall be an assignment of all moneys due and to become due as well as the Dealer's right, title and interest in the Contracts.
* The Dealer shall be responsible for and shall pay all taxes that may be owing in connection with the sale of the Property/Services. The Dealer shall be responsible for and shall pay all taxes, including without limitation, sales and excise taxes, which may be owing in connection with the assignment of the Contracts and in connection with all amounts, including fees paid by Lender2 to the Dealer in connection with Agreement2. If any taxes are payable on any payment made by Lender2 to the Dealer, Lender2’s payment will be deemed to include such taxes and Lender2 shall not be responsible to pay any additional amount in respect of such taxes.
* All Property/Services are free and clear of all liens and encumbrances other than the security interest created under the Contract and the Dealer has the unfettered right to assign the Contracts to Lender2.
* Any payment or prepayment received by the Dealer under the Contract shall be received in trust for and on behalf of Lender2 and shall be paid over to Lender2 forthwith.
Lender2 Conditional Sales Contract
* A sample Conditional Sales Contract (Contract) for Consumer Purchase (for use in Canada except [Province A]) has been provided on Lender2’s letterhead.
* The Buyer agrees to purchase goods as described in the Contract (the Goods) from the Dealer (Merchant).
* The Buyer acknowledges delivery and receipt of the Goods.
* The Contract lists the cost of financing the Goods including the price of the Goods, other fees, down payment, the amount being financed, interest rate, amortization period, and installment payment amount.
* The Buyer acknowledges that the Contract is assigned by the Dealer to Lender2 in accordance with the Merchant’s Assignment without Recourse to Lender2.
* Title to and ownership of the Goods shall remain with the Dealer until the Time Balance and any other amounts owing have been paid in full at which time title and ownership shall pass to the Buyer.
* The Contract provides that, for value received, the Dealer assigns and transfers to Lender2 the Contract and all amounts due and to become due thereunder and all right, title and interest in and to the Goods.
* Lender2’s interest in the Goods will cease when the Buyer pays Lender2 what is owed under the Contract in full.
Lender3 Dealer Agreement (Agreement3)
* The Dealer is in the business of selling Property/Services to Customers and Lender3 is in the business of providing Financial Services. Under the terms of Agreement3 the Dealer has agreed to arrange for Financial Services in connection with the sale of Property/Services and to assign all of its right, title and interest in connection with such Financial Services to Lender3.
* “Contract” means a conditional sales contract, a sales finance contract, a contract of sale by installment (in the Province of Quebec), credit agreement, loan agreement or any other similar agreement, including, without limitation, all related schedules and documents incorporated by reference therein, in favour of the Dealer and signed by the Customer, in the format required by Lender3 and which is intended to be assigned to Lender3 pursuant to Agreement3, and which is intended to be assigned to Lender3 using Lender3 standard forms.
* “Customer” means a person or person(s) acquiring, or wishing to acquire, Property/Services from a Dealer, and wishing to obtain a Financial Service in connection with such acquisition of Property/Services and who has/have completed and signed an Application, and if approved by Lender3, has/have signed a Contract.
* “Financial Service” is defined in Agreement3 to mean the extension of credit by Lender3 to a Customer to enable the Customer to acquire the Property/Services, which extension of credit is made by Lender3 through the acquisition of the applicable Contract by the Dealer.
* “Financial Services Documents” means all of the forms, documents and other information required by Lender3 as a condition of it providing Financial Services, including but not limited to, the Application and the Contract.
* “Property/Services” means the property and/or services sold by the Dealer to a Customer which Lender3 in its sole discretion, has agreed are eligible for participation under Agreement3.
* The Dealer’s obligations include:
o Arranging for the Customer to complete the Application and Third Party Statement (if applicable);
o Ensuring the Application is accurately completed;
o Forwarding the Application to Lender3;
o Obtaining all Financial Services Documents from the Customer as required by Lender3 using standard forms provided by Lender3;
o Ensuring that the Financial Services Documents are properly and accurately completed;
o Verifying the identity of the Customer;
o Providing the Customer with a copy of the Contract; and
o Providing Lender3 with all information that may be reasonably expected to have a material effect on Lender3’s decision to approve, conditionally approve or reject the Application or to provide a Financial Service or purchase a Contract.
* Lender3 will:
o Review the completed Application sent by the Dealer and conduct a credit assessment of the Customer;
o Advise the Dealer of its decision to approve, conditionally approve, or reject the Application as soon as possible;
o Pay to the Dealer the amount of the Contract upon receipt of all properly and accurately completed and executed Financial Services Documents and other documents, and at its sole discretion pay to the Dealer a fee for each Financial Service arranged by the Dealer based on published rates and fees;
o Not be deemed to have purchased a Contract until it has remitted funds to the Dealer; and
o Have no obligation to extend credit to any Customer, provide any Financial Service or make any type of financing available, even if the Customer meets Lender3’s credit criteria.
* The assignment of each Contract pursuant to Agreement3 will be conditional upon the Dealer fulfilling all of its obligations under Agreement3. The Dealer agrees that all assignments of Contracts to Lender3 shall be an assignment of all moneys due and to become due under the Contracts and of all of the Dealer’s right, title and interest thereunder.
* The Dealer shall be responsible for and shall pay all taxes that may be owing in connection with the sale of the Property/Services. The Dealer shall be responsible for and shall pay all taxes, including without limitation, sales and excise taxes, which may be owing in connection with the assignment of the Contracts and in connection with all amounts, including fees paid by Lender3 to the Dealer in connection with Agreement3. If any taxes are payable on any payment made by Lender3 to the Dealer, Lender3’s payment will be deemed to include such taxes and Lender3 shall not be responsible to pay any additional amount in respect of such taxes.
* The Property/Services are free and clear of any and all claims, liens and encumbrances other than the security interest created in favour of Lender3 under the Contract.
* The Dealer is not authorized to enter into any contract on Lender3’s behalf, incur any liability on Lender3’s behalf, or otherwise bind Lender3 in any way. The Dealer and Lender3 agree that Agreement3 will not create a joint venture, partnership or other formal business relationship or entity of any kind, or an obligation to form any such relationship or entity and each party will act as an independent contractor and not as an agent of the other party for any purpose, except for the purpose of verifying the identity of the Customer.
Lender3 Conditional Sales Contract
* A sample Conditional Sales Contract (Contract) has been provided on Lender3’s letterhead.
* The Buyer agrees to purchase goods (the Goods) as described in the Contract from the Dealer.
* The Contract includes Lender3’s terms including the amount being financed, interest rate, amortization period, and installment payment amount.
* The Dealer sells to the Buyer and Co-Buyer who agree to purchase the Goods described in the Contract.
* The Buyer consents to the assignment of the Contract and acknowledges that the Dealer and Lender3 are not agents of one another.
* Title to and ownership of the Property will remain with the Dealer and subsequently Lender3 until all amounts owing under the Contract or any related judgement have been paid in full at which time title will pass to the Buyer.
* The Contract includes an Assignment where the Dealer assigns all of its right, title and interests in and to the Contract and the Property to Lender3 on the terms of the assignment and in accordance with the terms and conditions in Agreement3.
* The Dealer, and subsequently Lender3 may register a financing statement in order to perfect its purchase money security interest in the Property.
Lender4 Agreement (Agreement4)
* The Merchant (Dealer) and Lender4 have entered into an agreement whereby Lender4 wishes to make available a financing program to finance the sale of consumer products and services offered by the Dealer.
* The purpose of Agreement4 is to provide a framework for the Dealer to offer to its clients (Clients) Lender4’s Financing Program.
* “Financing Program” means a program that Lender4 plans to offer and that the Dealer may propose to its Clients.
* The Dealer undertakes to:
o Establish the identity of the Clients wishing to obtain credit from Lender4;
o Check that any required documentation is duly completed before sending a loan application to Lender4;
o Use all forms provided by Lender4 and agree not to alter, amend or modify them; and
o Ensure that the vehicle is free and clear of any encumbrances before submitting the loan application to Lender4.
* Lender4 undertakes to finance the financing projects submitted by the Dealer provided the credit standards of Lender4 and the terms and conditions of the Financing Program are met.
* Where applicable, Lender4 undertakes to pay a commission to the Dealer. Lender4 has complete discretion with regard to the payment of any commission.
* The terms of the Financing Program state the following:
o Loans granted shall be personal loans with a fixed rate, floating rate or a rate that may change, with an amortization that may vary from one to 20 years;
o Interest rates to be granted by Lender4 shall be those in the rate bulletins in effect when the agreement between Lender4 and the Client is signed;
o Lender4 reserves the right to amend the borrowing conditions and interest rates at its discretion;
o Lender4’s usual credit policies will apply to all loan applications and Lender4 shall have the right at any time to refuse to make loans to a Client for any reason whatsoever, without having to justify or disclose the reasons for its refusal to the Dealer;
o The Dealer shall be responsible for completing the loan applications using the forms provided by Lender4 and is required to notify Clients that their loan application is subject to the credit standards and final approval of Lender4; and
o Upon receipt of the necessary documents for disbursement of the loan to the Client, the Dealer shall ask the Client to sign them, and is to sign them itself, give a copy to the Client, and return the duly signed originals to Lender4.
* The loan amount shall be disbursed by way of a direct transfer to the Dealer’s bank account.
* The Dealer is not authorized to conclude contracts on behalf of Lender4, agree to obligations on behalf of Lender4, or otherwise bind Lender4 in any manner whatsoever. The Dealer is not authorized to accept any payment in cash or any other form of compensation from a Client in consideration for financial services provided by Lender4.
You were unable to provide a sample financing contract for Lender4.
INTERPRETATION REQUESTED
You would like to know if commission revenues earned by the Dealers with respect to the assignment of Conditional Sales Contracts and to services provided to Lenders in connection with loans supplied by the Lenders are consideration for the supply of exempt financial services.
INTERPRETATION GIVEN
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 service will be a financial service where it is included in any of paragraphs (a) to (m) of the definition of financial service in subsection 123(1) and is not otherwise 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). A financial service also includes under paragraph (g), the making of any advance, the granting of any credit or the lending of money. An activity performed by a person that is the “arranging for” a service referred to in any of paragraphs (a) to (i) and not referred to in any of paragraphs (n) to (t) is also a financial service and is included under paragraph (l) of the definition of financial service.
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).
Conditional Sales Contracts
The term “Conditional Sales Contract” is not defined in the ETA, however 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 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 Dealer enters into a Conditional Sales Contract with a customer where the customer is purchasing a vehicle, the supply of the 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 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 the Conditional Sales Contracts by the Dealers to the financial institutions as described in the provided agreements is a financial service.
Any fee or commission received by the automobile dealer from the financial institutions for the assignment of the Conditional Sales Contract forms part of the consideration received from the assignment of the Contracts, and therefore would not be subject to GST/HST where the assignment of the Conditional Sales Contract is exempt.
Financing Contracts
In situations where a Dealer does not lend money to a customer and does not enter into a Conditional Sales Contract with a customer but simply assists a customer in obtaining a loan where the loan is granted by a third party, it is important to determine whether the Dealer is providing a supply of a financial service under paragraph (l), of “arranging for” a service referred to in any of paragraphs (a) to (i) and not referred to in any of paragraphs (n) to (t) and, if so, whether that financial service is the predominant element of the supply.
Specifically, in characterizing the supply made by the Dealer under the Dealer Agreements it is necessary to consider whether the predominant element of the Dealers’ services was “arranging for” a financial service. As explained in GST/HST Technical Information Bulletin B-105, Changes to the Definition of Financial Service (TIB-105), the term “arranging for” is generally intended to include intermediation activities that are normally performed by financial intermediaries described in subparagraph 149(1)(a)(iii), such as agents, brokers and dealers in financial instruments or money. Although the Dealers are not licensed intermediaries this is not conclusive in determining whether or not Dealers are “arranging for” a financial service.
In determining if an intermediary's service is included in paragraph (l), all of the facts surrounding the transaction, including the following factors, must be considered:
* the degree of direct involvement and effort of the person in the provision of a financial service referred to in any of paragraphs (a) to (i);
* the time expended by the intermediary in the provision of a financial service referred to in any of paragraphs (a) to (i);
* the degree of reliance of either or both the supplier and the recipient on the intermediary in the course of providing a financial service referred to in any of paragraphs (a) to (i);
* the intention of the intermediary to effect a supply of a financial service referred to in any of paragraphs (a) to (i); and
* the normal activities of an intermediary in a given industry (including whether the intermediary is engaged in business of providing financial services).
The normal business activities of an intermediary in a given industry are one of the factors examined to determine if the intermediary is “arranging for” a financial service. For example, if it is normal business practice of the dealer to merely assist in filling out forms then passing them on to the provider of the financial service, this would not be considered arranging for the supply of a financial service. Also, where it is the normal business practice to merely refer the person to the financial service provider, this would also not meet the arranging for criteria. A referral service is not considered to be an arranging for service.
GST/HST Technical Interpretation Bulletin B-105, Changes to the Definition of Financial Service, provides a number of examples to aid in determining whether a supply of services may be “arranging for” a financial service. In Example 13 of TIB-105, the financing company relies fully on the automobile dealer’s captive financing segment to secure the loan with the customer. The customer and the financing company have no direct contact with each other; their contact is through the Dealer. The Dealer provides services such as meeting and explaining the terms, obtaining information and completing the application with the Customer, making a recommendation and forwarding it to the Lender for its consideration, and negotiating the terms of the loan in connection with a loan provided by a third-party. This high degree of reliance on the Dealer by both the customer and the financing company to effect the loan is one of many factors that are considered when determining if the Dealer is providing a supply of “arranging for” a financial service under paragraph (l) of the definition of financial service in subsection 123(1).
In Example 14 of TIB-105, the independent automobile dealer does not make any recommendations or participate in the negotiation process. The services provided in Example 14, such as providing the customer with a loan application and helping the customer complete the loan application, verifying the information entered on the application, forwarding the loan application to the financial institution and referring the customer to that institution are preparatory to the provision of a financial service and therefore fall within the exclusion under paragraph (r.4) of the definition of financial service.
Whether a Dealer is “arranging for” a financial service provided by the Lender in respect of a financing contract entered into between the Lender 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 Lender’s supply of a financial service, the Dealer may be considered to be “arranging for” a financial service under paragraph (l). Where a Dealer provides only preparatory services and does not effect the supply of a financial service by the Lender the supply of services is excluded from the definition of financial service by paragraph (r.4).
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(s) given in this letter, including any additional information, is not a ruling and does not bind the Canada Revenue Agency (CRA) with respect to a particular situation. Future changes to the ETA, regulations, or the CRA’s interpretative policy could affect the interpretation(s) 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 613-952-9262. 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,
Gunar Ozols
Manager, Financial Services Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate
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