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: 131970
May 19, 2011
Dear [Client]:
Subject:
GST/HST INTERPRETATION
Application of the GST/HST to Look-See Fees and Completion Fees
Thank you for your letters of [mm/dd/yyyy] and [mm/dd/yyyy], and the attached copies of [...] sample [...] ("Agreements") concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to look-see fees and completion fees charged by X Co. to various lenders. We apologize for the delay in responding.
HST applies at the rate of 15% in Nova Scotia, 13% in Ontario, New Brunswick, 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 X Co. provides a supply (Supply) of connecting lenders who provide point-of-sale consumer financing (Lenders) with the Lenders' suppliers or dealers of taxable property (Dealers) in order to assist in the financing arrangements with the Dealers' purchasers (Purchasers). In particular, the Supply consists of X Co. providing to the Lenders an electronic loan application system for the processing and approval of credit applications between the Lenders and the Dealers on behalf of the Purchasers. Each Dealer may only interact with a Lender with which it has entered into an Agreement.
In order to provide the Supply, X Co. operates two secure internet portals (Portals), namely Portal A and Portal B. In large part, the Portals are similar in operation with the exception that Portal A requires the Dealers to download an applet to their desktops, whereas Portal B is entirely web-based. To operate the Portals, X Co. acquired a computer software program (Software) to empower the Portals' functionality.
According to the Agreements, X Co. is required to develop a project plan which, among other things, requires it to configure the Software in order to enable the Portals to communicate or connect with the Lenders' credit adjudication system and to provide the information in the format and manner as required by each Lender.
Certain Agreements [...] describe X Co.'s Supply as providing the Portals to electronically connect Lenders with Dealers for the following purposes:
(a) Making the Lenders' retail financing program (Program) available for Purchasers at the point-of-sale.
(b) Processing on-line the Purchasers' applications for financing from application preparation through to the Lenders' final credit decision.
(c) Facilitating the electronic preparation of the Lenders' specified legal documentation relating to Lender-approved and consumer-accepted finance transactions.
(d) Providing the electronic exchange of data between the Dealers and the Lenders.
X Co.'s obligations under the Agreements include the following:
(a) Operating and maintaining the Portals and providing the Supply in accordance with agreed upon service standards.
(b) Maintaining the facilities in which the Portal is hosted and from which X Co. provides the Supply in accordance with the service standards.
(c) Using best efforts to solicit Dealers to use the Portal.
(d) Providing technical support to the Lenders in respect of the use of the Software in accordance with service levels.
(e) Providing the Lenders with certain standard usage reports and allowing them to access any consumer information belonging to the Lenders stored on X Co.'s computer servers.
(f) Providing disaster recovery services in accordance with the service standards.
Your letter indicates that, as part of the provision of the Supply, X Co. also performs other ancillary activities including:
(a) establishing and maintaining a backup site;
(b) notifying the Lenders of new releases and versions of the Portal;
(c) implementing, managing and maintaining commercially reasonable measures to prevent unauthorized access to the Portal;
(d) operating a call centre to answer questions on the use of the Portals and technical issues relating to the same;
(e) providing monthly management summary reports to the Lenders;
(f) meeting with Dealers who express an interest in using the Portals;
(g) providing training with respect to the use of the Portals; and
(h) notifying the Dealers and Lenders of any changes or enhancements to the Portal or the Software.
The Agreements provide that in order for the Lenders to use the Portals, certain software components may have to be installed on the Lender's computer system. In particular, the Agreements specify that for the duration of the term of the Agreements, X Co. grants to the Lenders a personal non-exclusive, non-transferable right to use the software at the sites used by the Lenders to access the Portals and on computer equipment that is configured as required by X Co. to provide the Supply.
However, you explain that since this software was at no time installed on the Lenders' system, there was no transfer, delivery in any manner or licence conferred or granted to the Lenders for the right to use that software. Rather, you indicate that the Software is used solely by X Co. to operate the Portals or websites in order to provide the Supply. Moreover you confirm that the software license discussed in the Agreements does not relate to the Software used by X Co. to provide the Supply but instead is in respect of an earlier version of the software which, at the relevant time, was not used by X Co. to empower the Portals but was licensed to the Lenders to allow it to access information relating to completed applications that were provided using that version of the software. Lastly, you explain that the licensing language is included in the Agreements at the request of certain Lenders in the event that certain components of the Software were required to be installed on their system.
The Agreements state that X. Co owns all rights, title and interests, including intellectual property rights in and to:
(a) the Portals, including all content thereat, excluding any content provided by the Lenders to X Co. for use in connection with the Supply;
(b) any domain names registered by X Co. in connection with the Portals and/or the Supply;
(c) all trademarks, logos or other identifying names or marks used in connection with the Portals, except for the trademarks and logos owned by the Lenders;
(d) the Software and all associated documentation, including training and user documentation provided by X Co. for use in connection with the Supply and the business model related to the provision of the Supply; and
(e) any interface, including data maps, constructed in order for the Portals to access the Lenders' computer systems.
Your letter also explains that when X Co. provides the Supply, it facilitates the granting of credit by the Lenders to the Purchasers as follows:
(a) Where a Purchaser requires financing, the Dealer will connect to one of the Portals via the internet (either through a browser or an applet, depending on the Portal). The Dealer will then select the Lender to whom it wishes to submit a loan application on behalf of the Purchaser. The Dealer and the Purchaser complete and transmit the loan application to the Lender via the Portal in the format and manner required by the Lender.
(b) Once the Lender receives the loan application into its own systems, it performs the credit adjudication and makes a decision to accept or reject the loan application. The Lender will then send its decision to the Dealer via the Portal.
(c) If the loan is approved, the Dealer prints out the necessary documentation from the Portal for the Purchaser to sign and forwards the signed documentation to the Lender.
X Co. is not involved in the review of any of the loan applications other than to perform the edit checks which are built in the Portals to ensure the required and proper information is provided to each Lender in order to enable the Lender to process the loan application.
X Co. charges a range of fees to the Lenders for the Supply depending on the fee arrangement under each Agreement including:
• A completed application fee for each application submitted through the Portal by a Dealer to a Lender on behalf of a Purchaser payable whether or not the Lender grants the financing or the Purchaser accepts the financing ("Look-See Fee").
• A funded transaction fee for each completed application received through the Portal where the Lender disburses funds to a Dealer ("Completion Fee").
Each Agreement specifies that the parties are separate and independent legal entities and nothing contained in the Agreement is to be deemed to constitute either X Co. or the Lender as agent, representative, partner, joint venturer or employee of the other for any purpose. We also understand that X Co. is not a person that is closely related to any of the Lenders named in the Agreements.
Interpretation Requested
You would like to know:
1. whether the Look-See Fee and Completion Fee charged by X Co. to the Lenders under the Agreements is in respect of an exempt supply of a financial service or a taxable supply; and
2. if the Supply is a taxable supply, whether the supply is a telecommunication service.
Interpretation Given
Single supply of a taxable service provided by X Co.
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.
Based on the Agreements, X Co. provides a number of services to the Lenders. Whether X. Co. is making a single supply or multiple supplies is a question of fact. 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, including the following principles.
1. Every supply should be regarded as distinct and independent.
2. A supply that is a single supply from an economic point of view should not be artificially split.
3. There is a single supply where one or more elements constitute the supply and any remaining elements serve only to enhance the supply.
When reviewing the facts above, it is clear that each element of the services is intricately linked to each other and that the Lenders do not have the option to acquire some services separately. Since X Co. is therefore providing a single supply to each Lender, the predominant element of the Supply must be established to determine the nature of the Supply. If the predominant element of the single Supply is a financial service, then the Supply as a whole will be considered a financial service.
All 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 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. An activity performed by a person that is the "arranging for" a financial service is included in paragraph (l) of the definition of financial service in subsection 123(1).
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 business of providing financial services).
Where an intermediary provides a number of services including services described by 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 arranging for a financial service depending on the facts surrounding the transaction, the above factors, and the predominant element of the supply.
In general, services in the nature of management, administration, marketing or promotional activities are intended to be taxable as they are not themselves financial services. Based on the information provided, while some of X Co's activities, such as processing on-line the Purchasers' applications for financing, and facilitating the electronic preparation of the Lenders' specified legal documentation, assist the Lenders in providing a financial service of granting credit to Purchasers, X Co.'s activities when considered as a whole are predominantly managing and administering on behalf of the Lenders an electronic loan application system for the Program. Accordingly, the Look-See Fee and Completion Fee charged by X Co. to the Lenders are in respect of a single taxable Supply.
Even if the Supply includes services included in paragraph (l) of the definition of financial service in subsection 123(1), it is excluded from the definition of financial service by paragraphs (r.3), (r.4) and (t) of the definition.
Paragraph (r.3) excludes from the definition of financial service, 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 of 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 such 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 a similar service;
Currently, no services are prescribed or proposed to be prescribed for the purposes of paragraphs (r.3) and (r.4).
Although certain activities supplied by X Co. to the Lenders do assist in the provision of a financial service, these activities are limited to checking, collecting and providing on-line the Purchaser's credit information to Lenders who are potentially granting credit or lending money to those Purchasers under the Agreements. These activities are excluded from paragraph (l) of the definition of financial service by paragraphs (r.3) and (r.4) of that definition.
Lastly, paragraph (t) of the definition of financial service excludes from its definition, a prescribed service. Subsection 4(2) of the Financial Services (GST/HST) Regulations (Regulations) provides that the following services are generally prescribed for purposes of paragraph (t):
• the transfer, collection or processing of information, and
• any administrative service, including an administrative service in relation to the payment or receipt of dividends, interest, principal, claims, benefits or other amounts, other than solely the making of the payment or the taking of the receipt.
Subsection 4(3) of the Regulations provides that a service referred to in subsection 4(2) is not a prescribed service for the purposes of paragraph (t) of the definition of financial service where the service is supplied with respect to an instrument by:
• a person at risk,
• a person that is closely related to a person at risk, where the recipient of the service is not the person at risk or another person closely related to the person at risk, or
• an agent, salesperson or broker who arranges for the issuance, renewal or variation, or the transfer of ownership, of the instrument for a person at risk or a person closely related to the person at risk.
A "person at risk" is defined in subsection 4(1) of the Regulations to mean a person who is financially at risk by virtue of the acquisition, ownership or issuance by that person of the instrument or by virtue of a guarantee, an acceptance or an indemnity in respect of the instrument, but does not include a person who becomes so at risk in the course of, and only by virtue of, authorizing a transaction, or supplying a clearing or settlement service, in respect of the instrument. An "instrument" is also defined in that subsection to mean money, an account, a credit card voucher, a charge card voucher or a "financial instrument" defined under subsection 123(1).
The exceptions under subsection 4(3) of the Regulation do not apply since X Co. is not a person at risk when it provides the Supply as it is not financially at risk by virtue of the issuance of the credit or loan by the Lenders, nor is X Co. a person who is a member of the same closely related group as the person at risk (i.e., the Lenders). Moreover, the Agreements specify that X Co. is not an agent, representative salesperson or broker who arranges for the issuance, renewal or variation of the credit or loan for a person at risk. Therefore, subsection 4(2) applies and X Co's services performed for the Lenders are also excluded from paragraph (l) of the definition of financial service by paragraph (t) of that definition.
Taxable Supply is not a telecommunication service
CRA's Technical Information Bulletin B-90, GST/HST and Electronic Commerce, sets out various indicators that are useful in determining whether a supply is a supply of a telecommunication service.
A supply is generally considered to be a supply of a telecommunication service where its principal purpose is to:
• provide for the emission, transmission or reception of signs, signals, etc. (e.g., voice or data) through a telecommunications network or similar technical system;
• make available a telecommunications facility for the emission, transmission or reception of signs, signals, etc. through a telecommunications network or similar technical system; or
• provide a means through which other services or intangible personal property (e.g., content in a digitized format) are delivered, rather than to provide the services or intangible personal property.
A supply is not generally considered a supply of a telecommunication service where:
• a telecommunication service is used or consumed by the supplier in making a supply of a service or property (other than a telecommunication service);
• it includes the provision of a telecommunication service, but only as a means of delivering another service or property; or
• it is incidental to the supply of another service or property.
The principal purpose of the Supply provided by X Co. is not consistent with any of the indicators of a telecommunication service. Moreover, if it were determined that there was a separate supply of a telecommunication service, that supply would be incidental to the supply of another service or property.
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 CRA 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 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,
Paul Lafond
Financial Institutions Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate
UNCLASSIFIED
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