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.
[Addressee]
Excise and GST/HST Rulings Directorate
Place de Ville, Tower A, 15th floor
320 Queen Street
Ottawa ON K1A 0L5
Case Number: 119716
March 9, 2011
Dear [Client]:
Subject:
GST/HST RULING
Thank you for your letter of November 26, 2009, concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to vehicle repossession.
HST applies at the rate of 15% in Nova Scotia, 13% in New Brunswick, Newfoundland and Labrador, and Ontario, and 12% in British Columbia. GST applies at the rate of 5% in the remaining provinces and territories.
All legislative references are to the Excise Tax Act (ETA) unless otherwise specified.
Statement of Facts
We understand the facts are as follows:
1. On [mm/dd/yyyy], [...], a registrant company (the "Borrower") entered into an agreement with [...] (the "Creditor") to finance the purchase of a [...] (the "Trailer") bearing serial number [...].
2. The loan, granted for an amount of $[...], was repayable over a 60-month term in installments of $[...] plus a lump sum of $[...]. If the Borrower failed to pay any installment of principal and interest payable, such occurrence would constitute a default.
3. The Borrower provided the following securities to the Creditor:
• First ranking specific security agreement on the Trailer;
• The Creditor was designated as the beneficiary of the proceeds of insurance covering all property given as security up to its full replacement value;
• Guarantee in the amount of $[...] from [...];
• Guarantee in the amount of $[...] from [...] (the "Guarantor").
4. The security agreement granted to the Creditor a first ranking security interest in all right, title and interest in the Trailer. The agreement also provided that in the event of default by the Borrower, the Creditor's security interest became immediately enforceable and the Creditor could, among other things, choose to sell the Trailer or keep it in total or partial satisfaction of its outstanding loan.
5. The obligation and liability of the Guarantor was set out in a separate letter of guarantee (the "Letter") entered into with the Creditor on [mm/dd/yyyy].
6. The documents provided as security for the loan (security agreement, all risk insurance and letter of guarantee from [...]) are referred hereinafter as the Loan Documents.
7. Subject to the terms of the Letter, the Guarantor guarantees [...]% of the credit of $[...] granted by the Creditor to the Borrower to finance the purchase of the Trailer.
8. The Letter also provided that the Creditor shall transfer and assign or the Guarantor shall request that the Creditor transfer and assign its rights under any security agreement (including the Loan Documents) to the Trailer to the Guarantor who shall be subrogated to all of the Creditor's rights where:
• The Borrower defaults on making interest or principal payment due to the Creditor and the Guarantor makes these payments on behalf of the Borrower.
• The Borrower defaults on making above payments and the Guarantor pays the balance owing of the loan to the Creditor.
• The Borrower ceases to perform services exclusively for the Guarantor or its affiliates.
9. The Borrower defaulted under the term of its security agreement with the Creditor and the Creditor demanded that the Guarantor fulfill its obligations under its letter of guarantee.
10. On [mm/dd/yyyy], the Guarantor paid out the balance of the Borrower's loan of $[...] to the Creditor to fulfill its obligations under the guarantee. As a result the Creditor discharged the equipment as it no longer had any interest in the said security and issued a limited power of attorney to the Guarantor to register and transfer the Trailer.
11. As a result of the payment made, the Guarantor is of the opinion that it has become the Creditor and in this capacity has convinced the Borrower to turn over possession by quitclaim of the financed equipment to the Guarantor.
12. The following documents were submitted to support the facts outlined above:
• Financing and Security agreements between borrower and creditor;
• Letter of Guarantee between guarantor and creditor;
• Power of attorney by the creditor allowing the transfer of property to the guarantor;
• Statement that the borrower has defaulted and guarantor has performed its obligations under the guarantee.
Ruling Requested
[You] would like to know whether the Guarantor can transfer the Trailer on a tax exempt basis pursuant to paragraphs 183(1)(a) and (b) and subsection 183(9).
Ruling Given
Based on the facts set out above, we rule that the transfer of the Trailer by quitclaim deed by the Borrower to the Guarantor is not subject to GST/HST. The transfer is deemed to be a taxable supply for no consideration by virtue of the combined operation of subsections 183(1) and 183(9).
This ruling is subject to the qualifications in GST/HST Memorandum 1.4, Excise and GST/HST Rulings and Interpretations Service. We are bound by this ruling provided that none of the above issues are currently under audit, 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
Black's Law, 6th edition, 1990 defines the terms "legal subrogation" as "[...] where person secondarily liable pays debt and becomes subrogated to creditor's rights." It also defines "equitable subrogation" as "legal fiction through which a person who pays debt for which another is primarily responsible is substituted, subrogated to all rights and remedies of other."
In the present case, once the Borrower defaulted on its loan and the Guarantor paid out the balance owing on the Borrower's loan to the Creditor, the relationship between the Borrower and the Guarantor evolved into one of debtor-creditor. From that point on, the Guarantor became subrogated to all of the rights of the Creditor vis-à-vis the Borrower which rights included a security interest in the Trailer.
Under subsection 183(9) where a debtor voluntarily transfers property to a creditor to satisfy a debt or other obligation in respect of which the debtor is in default, the creditor will be deemed to have seized or repossessed the property in circumstances giving rise to the application of subsection 183(1).
Subsection 183(1) provides that where property is seized or repossessed from a person to satisfy a debt or obligation (in whole or in part) owed to a creditor under a right or power exercisable by the creditor, a supply of property by way of sale will be deemed to have been made by the person and to have been received by the creditor. Furthermore, the supply will be deemed to have been made for no consideration. Consequently, no GST will apply to the seizure or repossession.
At the time that the Borrower made the voluntary transfer of the Trailer by quitclaim deed, the Guarantor had already been subrogated to the Creditor's rights. Therefore, pursuant to subsection 183(9), the Guarantor is deemed to have seized the Trailer and subsection 183(1) would prevent tax from being payable since the supply by the Borrower to the Guarantor of the seized Trailer is deemed to made for no consideration.
If you require clarification with respect to any of the issues discussed in this letter, please call me directly at 613-952-1512. 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,
Constantin Constant
Specialty Tax Unit
Financial Institution & Real Property Division
Excise and GST/HST Rulings Directorate
UNCLASSIFIED
Email this Content