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: 122136
Business Number: [...]
October 28, 2011
Dear [Client]:
Subject:
GST/HST INTERPRETATION
Application of GST/HST to financial services
Thank you for your letters [...], concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to services given the recent changes to the definition of financial service. Please note that GST/HST Notice 250 has been replaced by GST/HST Technical Information Bulletin: B-105, Changes to the Definition of Financial Service published in February 2011. We apologize for the delay in responding to your enquiry.
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.
We understand from your letter of [mm/dd/yyyy], that most of your concerns expressed in your previous letters have been answered through various releases by the Department of Finance and the CRA.
However, you are still concerned that contracts under which auto dealerships arrange for the financing of the purchase of an automobile appear to be divided into exempt and taxable categories based on the degree of involvement of the auto dealership in arranging financing, and the extent to which the lending institution relies on the auto dealer's recommendation to accept the loan application. You are of the view that example 13 and 14 of Notice 250 published in June, 2010, may be misinterpreted and that all contractual arrangements with financial institutions will be treated as taxable transactions.
Also, you had previously requested that the Government of Canada delay the effective date of the changes to the definition of financial service in order to provide time to make the necessary systems changes, including changes to reverse invoicing systems, following the completion of systems changes required for HST implementation. Although you were advised that such delay or other temporary measures would not be possible, you have requested that the CRA make a written commitment to take no punitive action (e.g. interest, penalties) against either party to an affected contract for failure to charge, collect or remit GST prior to December 31, 2010.
Interpretation Given
Auto dealerships arranging for the financing of the purchase of an automobile
The determination of whether a particular supply made by an auto dealer is subject to GST/HST requires a detailed review of the facts and circumstances of the transactions which generally includes a review of the agreement or agreements under which the supply is made. Although you did not provide us with relevant documents such as written agreements that clearly describe the auto dealer's actions, responsibilities and obligations, we are pleased to provide the following general information which may assist you in making that determination.
Under the ETA, all supplies such as the sale of an automobile under conditional sales contract or otherwise, are taxable unless they are specifically exempt. Generally, where an auto dealer assists a customer in obtaining a loan or insurance for a vehicle, the service is considered a taxable supply.
A supply of a financial service is exempt under Part VII of Schedule V unless specifically zero-rated under Part IX of Schedule VI (which generally requires that the supply be made by a financial institution to a non-resident and that certain other conditions are met). In general, financial services relating to insurance policies issued by a financial institution are zero-rated to the extent that the policy relates to risks ordinarily situated outside Canada. A service is 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), the issue, granting and 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 or conditional sales contract). A financial service also includes under paragraph (g), the making of any advance, the granting of any credit or the lending of money.
Where an agreement provides for the provision of a number of services or property and services, it must first be determined whether a single supply or multiple supplies are being provided under the agreement. This distinction is important in cases where a combination of services and or property is supplied by a person under an agreement, some of which would be taxable and some of which would be exempt if supplied separately. In this type of situation it is a question of fact whether the person is making a single supply or multiple supplies.
GST/HST Policy Statement P-077R2, Single and Multiple Supplies, provides additional information on determining whether a single supply or multiple supplies are being provided. If it is determined that multiple supplies are being provided by a person the possible application of sections 138 and 139 should be considered.
If it is determined that a single supply is being provided, then the predominant element of that supply must be established to determine the nature of the supply. If the predominant element of the single supply is determined to be a financial service, then the supply as a whole will be considered a financial service. This determination will generally be based on written agreements, between the person providing the service and the person's client, detailing the actions, responsibilities and obligations of the person in connection with the supply.
As financing arrangements may vary among auto dealers across Canada, all particular facts and circumstances have to be examined to determine whether a particular supply is a financial service.
Where the predominant activity undertaken by an auto dealer is lending money to a customer for the purchase of a vehicle, the supply of the loan made by the auto dealer to the customer is generally an exempt supply of a financial service. However, where an auto dealer enters into a conditional sales contract with a customer where the customer is purchasing a vehicle, the supply of the vehicle under the conditional sales contract is generally a taxable supply. Where an auto dealer assigns the payments under a loan or conditional sales contract to a third party, the supply by the auto dealer to the assignee is generally an exempt supply of a financial service.
There may be situations where an auto dealer does not lend money to a customer and does not enter into a conditional sales agreement with a customer but simply "arranges for" a loan where the loan is granted by a third party. Where the auto dealer is assisting customers in obtaining a loan, it is important to determine whether the auto 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). To do so, it must first be determined whether an "arranging for" service is provided and if so whether that financial service is the predominant element of the supply.
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.
In determining if an intermediary's service is included in paragraph (l), all 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 a business of providing financial services).
Where a person performs a number of services including services described in any of paragraphs (n) to (t) as part of an agreement to arrange for a supply of a financial service, the single supply of the bundled services may be a supply of a financial service of arranging for, depending on the facts surrounding the transaction, the above listed factors, and the predominant element of the supply.
The following exclusionary paragraphs, among others, were added to the definition of financial service in subsection 123(1) by Bill C-9, the Jobs and Economic Growth Act, which received Royal Assent on July 12, 2010.
Paragraph (r.3) provides that a service (other than a prescribed service) of managing credit in respect of credit cards, charge cards, credit accounts, charge accounts, loan accounts or accounts in respect of any advance, where the service is supplied by one person to another person that is granting, or potentially granting, credit in respect of those cards or accounts is excluded from the definition of "financial service".
A service of managing credit includes:
• checking, evaluating or authorizing credit;
• making decisions on behalf of the person relating to a grant, or an application for a grant, of credit;
• creating or maintaining records for the person relating to a grant, or an application for a grant, of credit or in relation to the cards or accounts; or
• monitoring another person's payment record or dealing with payments made, or to be made by the other person.
Paragraph (r.4) excludes from the definition of financial service, 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) of the definition of "financial service", or that is provided in conjunction with a service referred to in any of those paragraphs, that is:
• a service of collecting, collating or providing information, or
• a market research, product design, document preparation, document processing, customer assistance, promotional or advertising service or similar service.
Although an auto dealer's service may assist a financial institution in providing a financial service under paragraphs (d) or (g) of the definition of financial service, paragraphs (r.3) and (r.4) may, in certain circumstances, exclude the supply made by an auto dealer from the definition of a financial service where the predominant element of the supply is one or more of the services listed in those provisions.
To assist in understanding the differences between examples 13 and 14 of TIB-B-105, in example 13, the financing company relies fully on the dealership'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 dealership. This high degree of reliance on the dealership by both the customer and the financing company to effect the loan is one of many factors that are considered when determining if the dealership 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, the independent automobile dealership does not make any recommendations or participate in the negotiation process, but rather its services 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.
Effective Date
Please note that paragraphs (r.3) and (r.4) are deemed to have come into force on December 17, 1990 except when certain conditions are met. Specifically, these paragraphs do not apply where, under a written agreement:
• all of the consideration for the supply became due or was paid on or before December 14, 2009;
• the supplier did not, on or before December 14, 2009, charge, collect or remit any amount as or on account of tax under Part IX in respect of the supply; and
• the supplier did not, on or before December 14, 2009, charge, collect or remit any amount as or on account of tax under Part IX in respect of any other supply that is made under the agreement and that includes the provision of a service referred to in any of paragraphs (q), (q.1) and (r.3) to (r.5) of the definition of financial service in subsection 123(1).
The above exceptions do not apply for purposes of Division IV of the Act. For purposes of Division IV, paragraphs (r.3) and (r.4) are effective as of December 17, 1990 in all cases.
The CRA is responsible for administering and enforcing the legislation as passed by Parliament. At the present time, no prescribed legislation has been proposed for the purposes of these provisions. The CRA cannot provide a written commitment that penalties and interest will not be imposed against either party to an affected contract for failure to charge or remit GST/HST prior to December 31, 2010.
The foregoing comments represent our general views with respect to the subject matter of your request. These comments are not rulings and, in accordance with the guidelines set out in GST/HST Memorandum 1.4, Excise and GST/HST Rulings and Interpretations Service, do not bind the Canada Revenue Agency with respect to a particular situation. Future changes to the ETA, regulations, or our interpretative policy could affect this interpretation.
If you require clarification with respect to any of the issues discussed in this letter, please call me directly at (613) 952-9248 or Dawn Weisberg at 613-952-9210.
Yours truly,
Ivan Bastasic
Director
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate
UNCLASSIFIED
Email this Content