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: 132388
July 14, 2011
Dear [Client]:
Subject:
GST/HST RULING
Application of GST/HST to supplies made by mortgage brokers and mortgage agents
Thank you for your letter of January 24, 2011, concerning 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 Please note that GST/HST Notice 250 has been replaced by GST/HST Technical Information Bulletin: B-105, Changes to the Definition of Financial Service published in February 2011 (TIB B-105).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.
Statement of Facts
We understand from your letter and documents you have provided, including [...] (the Agreement), a sample contract from [...], a contract between [...] and [...], a contract between [...] and [...] and our telephone discussion of March 21, 2011, that:
1. [...] (the Mortgage Broker) business consists of assisting borrowers in obtaining residential mortgages and referring them to mortgage lenders for a fee.
2. The Mortgage Broker is registered as such in each province where it is doing business. In [...] [Participating Province X], the Mortgage Broker is licensed with [...].
3. The Mortgage Broker is an independent contractor dealing with mortgage lenders on a non-exclusive basis.
4. The Mortgage Broker's duties consist in presenting to prospective borrowers the programs of the different mortgage lenders and select the program that fits the borrowers' needs as well as identify the mortgage lenders that would likely accept the borrowers.
5. According to your letter, the Mortgage Broker's activities are performed through Mortgage Agents. Mortgage Agents are sales representatives for the Mortgage Broker. They have access to brand and resources of the Mortgage Broker for this purpose and are acting on behalf of the Mortgage Broker when assisting borrowers in obtaining residential mortgages. Mortgage Agents are independent contractors, authorized agents of the Mortgage Broker pursuant to the appropriate Acts and Regulations of the relevant provincial jurisdiction and members of the Canadian Association of Accredited Mortgage Professionals.
6. For each transaction completed, the Mortgage Agent receives a commission based on a percentage of the fee received by the Mortgage Broker from the mortgage lender in relation to that transaction.
7. The Mortgage Agent has no authority to bind the Mortgage Broker in any manner unless expressly authorized to do so in advance and in writing.
8. In the contract between [...] and the Mortgage Broker, paragraph [...] states that the Mortgage Broker's activities include identifying and soliciting prospective borrowers, assisting the borrowers in completing the mortgage application, obtaining all necessary consents from borrowers, counselling the prospective borrowers, including explaining the mortgage lending process, verifying that the borrowers meet the mortgage lenders credit criteria, verifying the completeness and accuracy of the information, [...] providing all required disclosures, [...] delivering the application to the selected mortgage lender, participating in the closing, and any other duties associated with the brokering of mortgages (the Services).
9. Based on paragraph [...] of the same contract, the Mortgage Broker is an independent contractor and shall not in any manner claim or represent that it is an agent or employee of the Lender and shall not have the authority to bind the Lender under any circumstances.
10. According to your letter, the Mortgage Broker's fee remuneration is based on mortgage loans referred by the Mortgage Broker and accepted by a mortgage lender.
11. Based on paragraph [...]
12. You also mentioned in your letter that no fee is generally paid by the borrower to the Mortgage Broker and/or its Mortgage Agents, except where private lenders are involved.
Ruling Requested
The Mortgage Broker is requesting a ruling to confirm the following GST/HST status of its following activities:
1. What is the tax status of the supply for the services as described above, provided by the Mortgage Broker to the mortgage lender for which the Mortgage Broker receives remuneration from mortgage lender?
2. What is the tax status of the supply for the services as described above, provided by the Mortgage Agent to the Mortgage Broker for which the Mortgage Agent receives a commission from the Mortgage Broker?
3. What is the tax status of the supply for the services as described above, provided by the Mortgage Broker or Mortgage Agent for which the Mortgage Broker or Mortgage Agent receives a fee paid by a borrower?
Ruling Given
Based on the facts set out above, we rule that:
1. The Mortgage Broker fee received from the mortgage lender is consideration for an exempt supply of a financial service under paragraph (l) of subsection 123(1) of the definition of financial service.
2. The mortgage fee paid by a borrower to a Mortgage Broker is consideration for an exempt supply of a financial service under paragraph (l) of subsection 123(1) of the definition of financial service.
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.
We are unable to provide you with a ruling regarding the tax status of the Mortgage Agent fees received from the Mortgage Broker or from a borrower. More specifically, the facts in your letter are not supported by the Agreement and contracts that you have provided us. Also, the Agreement does not provide a description of the duties that will be performed by the Mortgage Agent except to stipulate that the Mortgage Broker desires to contract with the mortgage Agent to be a sales representative for the Mortgage Broker. However we are pleased to provide you the following interpretation.
Interpretation Given
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 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.
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 agent provides services of an intermediary. As an intermediary it is important to determine whether the mortgage agent 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.
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).
ADDITIONAL INFORMATION
Although you did not request information on future compensation programs (e.g. trailer fees), please note that a renewal commission payable in future years may not be consideration for the arranging for the supply of a mortgage loan. Whether compensation paid on an ongoing basis is for a financial service is a question of fact and it is necessary to look at the activities performed by the person in return for the renewal commission. The facts and circumstances of each transaction would have to be considered on their own merits.
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 613-954-1433. 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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