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: 125071
Business Number: [...]
November 10, 2011
Dear [Client]:
Subject:
GST/HST RULING
Application of GST/HST to franchise fees
Thank you for your letter of [mm/dd/yyyy] and [mm/dd/yyyy], concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to franchise fees. 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.
Statement of Facts
1. We understand from your letter dated [mm/dd/yyyy], that in a typical situation a mortgage broker would obtain credit information from a potential borrower, complete and assess the loan application, determine which lender is best suited to provide the necessary financing, and communicate with the lender. The lender would prepare the loan documents and the loan is made between the lender and borrower. The lender would pay a fee to the broker for its services.
2. Based on your letter dated [mm/dd/yyyy], in all cases, the loan agreement is made between the lender and the borrower; the broker is not a party to the lending agreement and receives a commission/fee for successfully funded loans referred by the broker. The commission rate is partly based on the volume of work the lender receives from the broker. In order to maximize the commission rate many brokers operate under franchise agreements which effectively pool the work done by others under the same banner to qualify for higher commission rates. [The] [...] (Franchisor) is one such franchise banner. The Franchisor has [...] for use in [...] a mortgage brokerage business [...]. By associating with the Franchisor the Franchisees enjoy use of [...] and frequently qualify for higher commission rates.
3. You have submitted a sample Franchise Agreement. Based on [...] the Franchise Agreement:
a. The Franchisor owns [...].
b. The Franchisee has been incorporated and is duly licensed under applicable law for the purpose of engaging in the mortgage brokerage business [...].
c. The Franchisee desires to acquire from the Franchisor the right and licence to operate a [...] [Franchise] mortgage brokering business [...].
4. Under [...] the Franchise Agreement, the Franchisor grants to the franchisee a nonexclusive right to operate the [...] Franchise only at a specific location and [...].
5. Under [...] the Franchise Agreement, the Franchisee shall pay to the Franchisor an [...] franchise fee [...] in the amount of $[...]. The [...] franchise fee is in consideration of the grant by the Franchisor to the Franchisee of the opportunity to establish the franchise.
6. Under [...] the Franchise Agreement, the Franchisee shall pay the Franchisor a [...] franchise fee equal to [...]% of [...]. Such franchise fee shall be deemed to have been earned fully at the time that the applicable mortgage lender advances the funds in respect of the mortgage transaction given rise to the [...] revenues.
7. Under [...] the Franchise Agreement, the Franchisee agrees [...]
8. Under [...] the Franchise Agreement the Franchisee shall collect and remit to the Franchisor an advertising fee of $[...] from [...]
9. The obligations of the Franchisee are stated in [...] the Franchise Agreement and include:
a. Operate the Franchise in a manner and to a quality consistent with the [...] and the mortgage brokerage business.
b. Comply with all documentation prepared by or on behalf of the Franchisor for use by the Franchisee, setting forth information, advice, standards, requirements, operating procedures, instructions, or policies relating to the operation of the Franchise.
c. Ensure that at all times [...] for use [...] with [...].
d. Maintain the condition and appearance of the Franchise in a manner consistent with the image established by the Franchisor.
e. Permit the Franchisor and its authorized agents and representatives to enter and inspect the premises for purpose of ascertaining whether the Franchisee is operation the Franchise in accordance with the terms of the Franchise Agreement.
f. Offer all services and only those services as may be authorized by the Franchisor.
Ruling Requested
You would like to know:
1. How GST/HST applies to the amounts paid (i.e. $[...] franchise fee, [...]% of [...] revenues, other amounts) by the franchisee to the Franchisor under the Franchise Agreement.
2. Are the fees/commissions earned by [...] competitors taxable supplies subject to GST?
3. Are the commissions earned by the Franchisees from the lending institutions exempt financial services or taxable supplies?
4. Assuming the commissions are exempt, if there is separate additional agreement between the Franchisor and its franchisee whereby in recognition of the work done by the Franchisor to assist the franchisee to earn commissions from the lenders, the franchisee and the Franchisor agreed to split the fee earned from the lending institution, would the portion received by the Franchisor via the franchisee retain its status as part of an exempt supply of financial services or does it continue to represent a supply of services, notwithstanding the fee-splitting agreement?
Ruling Given
With respect to your question 1 and based on the facts set out above, we rule that any and all fees payable by the Franchisee to the Franchisor under the Franchise Agreement are consideration for taxable supplies and therefore GST/HST is applicable on these amounts paid (i.e. $[...] franchise fee, [...]% of [...] revenues, other amounts) by the franchisee to the Franchisor under the Franchise Agreement.
With respect to your question 2, please note that for reasons of confidentiality, we are unable to provide you with a ruling or an interpretation regarding the tax status of the supplies provided by [...] competitors.
Furthermore, we cannot provide a ruling on questions 3 and 4 regarding the commissions earned by [the] Franchisees from a lending institution. As you have not provided an agreement between a franchisee and a lender and a third party authorization representing the Franchisees, we are not able to provide specific information as it relates to those fees. However we are pleased to provide you with an interpretation (see below).
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
Based on the Franchise Agreement, the Franchisor grants a right and licence to the franchisee to operate a [Franchise] mortgage brokering business, utilizing [...], including but not limited to [...], from a location that has been approved in writing by the Franchisor, and upon the conditions set in the Franchise Agreement.
Normally, franchise fees are taxable under the GST/HST. The $[...] franchise fee, [...]% of [...] revenues and other commission amounts paid to the Franchisor by the Franchisee are consideration for the supply of this right and licence. There are no exempting provisions that would apply to this supply. Consequently, GST/HST is applicable to these payments made by the franchisee to the Franchisor.
INTERPRETATION
The determination of whether a particular supply made by a Franchisee 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. However we are pleased to provide you with the following interpretation.
Under the ETA, supplies are taxable unless they are specifically exempt.
Supplies of financial services are exempt under Part VII of Schedule V unless they are 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). 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 mortgage loan). 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 a number of services or property and services, it must first be determined whether a single supply or multiple supplies have been made 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 must also be considered. However, 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.
By nature, a mortgage broker provides services of an intermediary. As an intermediary it is important to determine whether the mortgage broker 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.
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 an intermediary 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.
Furthermore, 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.
Also, paragraph (r.4) clarifies that certain services that are preparatory to or provided in conjunction with a financial service are excluded from that definition. 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.
Currently, no services are prescribed or proposed to be prescribed for the purposes of paragraphs (r.3) and (r.4).
Please note [...], it does not appear that the [...]% franchise fee on the volume bonuses meet the factors that are used to determine whether a supply is arranging for a financial service under paragraph (l), as there is no direct involvement in a supply of a financial service. Therefore the [...]% franchise fee retained by the Franchisor would be a taxable supply.
If you require clarification with respect to any of the issues discussed in this letter, please call me directly at 613-954-1433. 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,
Gabrielle Nadeau
Financial Institutions Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate
UNCLASSIFIED
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