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: 129882
Business Number: [...]
May 27, 2011
Dear [Client]:
Subject:
GST/HST INTERPRETATION
GST/HST Treatment of Mortgage Brokerage Services
Thank you for your comments on GST/HST Notice 250, Proposed Changes to the Definition of Financial Service provided in your letter dated [mm/dd/yyyy], on the application of the Goods and Services Tax (GST)/ Harmonized Sales Tax (HST) to supplies made by mortgage brokers 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 Please note that GST/HST Notice 250 has been replaced by GST/HST Technical Information Bulletin: B-105, Changes to the Definition of Financial Service published in February 2011 (TIB B-105).
HST applies at the rate of 15% in Nova Scotia, 13% in Ontario, New Brunswick, and Newfoundland and Labrador, 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 that the [...] ([Corporation]) has concerns with the application of the changes to the definition of financial service to mortgage brokerage services. [The Corporation] seeks confirmation that such services will continue to be exempt financial services.
As previously discussed, the determination of whether a particular supply made by a mortgage broker 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 sample agreements, we are pleased to provide the following general information which may assist you in making that determination.
Under the ETA, all 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 XI (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.
Based on the document you provided, the activities of a mortgage broker can be summarized as follows:
Applications
i. Analyze the contextual framework in which mortgages are transacted in [...] [Participating Province X].
ii. Determine borrower's needs.
iii. Qualify the borrower (including assessing the impact of a given credit report; performing required calculations; analyzing scenarios to identify potential solutions).
iv. Obtain commitment from an appropriate lending source.
v. Disclose terms and conditions to the borrower.
Compliance and Consumer Protection
i. Recognize the impact of regulation and legislation on the mortgage industry in [Participating Province X].
ii. Distinguish between ethical and unethical behaviours of brokers and agents.
iii. Recognize the impact of the legal requirements related to the ownership and disposition of land and property on the mortgage industry.
iv. Recognize the impact of tort law on the mortgage brokerage industry.
v. Manage contracts and agreements in accordance with legislation including the Personal Information Protection and Electronic Documents Act, S.C. 2000 c-5 (PIPEDA).
Document Management
i. Manage borrower and lender documentation.
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 be generally 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.
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. A mortgage broker is such a person.
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.
The following exclusionary paragraphs, among others, were added to the definition of financial service in subsection 123(1) through 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.
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).
Based on the facts presented, it appears that the mortgage broker has a high degree of direct involvement and effort in the supply of a mortgage loan, is relied on by the borrower and the lender and has the intention to effect a supply of the mortgage loan. Although the mortgage broker may create or maintain records for the lender relating to a grant, or an application for a grant, of credit or in relation to accounts, the services provided by the mortgage broker are not limited to credit management services. Similarly, while the mortgage broker may provide information, document preparation or processing, or customer assistance that would be preparatory to the provision of a financial service, the services provided by the mortgage broker are not limited to those preparatory services. Therefore these services would generally be financial services described in paragraph (l) of arranging for a service referred to in paragraph (d) and would not be excluded from that definition by reason of paragraphs (r.3) or (r.4).
Please note that Example 9 of TIB B-105 illustrates a situation that relates to a supply made by a mortgage broker which may be of assistance when determining the GST/HST status of the supply provided by the mortgage broker.
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 guidance with respect to a particular case, please submit a request for a ruling including all relevant contracts and related documents. If you require clarification with respect to any of the information discussed in this letter, please call me directly at 613-952-9248 or Dawn Weisberg, Manager, at 613-952-9210.
Yours truly,
Ivan Bastasic
Director
Financial Institution and Real Property Division
Excise and GST/HST Rulings Directorate
UNCLASSIFIED
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