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: 82567
July 29, 2011
Dear [Client]:
Subject:
GST/HST INTERPRETATION
Application of the GST/HST to implementation services and transaction services
Thank you for your letter of [mm/dd/yyyy], concerning the application of the Canadian Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to implementation services and transaction services performed by ABC Corporation. 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.
In your letter and the various sample agreements included in the letter which are discussed below, you provide the following information.
ABC Corporation (ABC), a corporation located in [...] [Province X] and registered for the GST/HST, has developed a web-based system (System) on its servers which uses computer hardware and software that receives loan applications, automatically reviews and adjudicates upon them, prepares the necessary loan documentation, and facilitates the funding of approved loans. The System can also store loan information and generate various reports.
ABC's transactions involve the following parties:
• Lenders such as banks and other financial institutions (Lenders).
• Manufacturers, vendors or distributors of goods (Manufacturers or Vendors).
• Dealers of the Manufacturers' or Vendors' goods (Dealers).
• Dealers' customers (Customers).
Program #1
Under Program #1, ABC finds a Vendor and one or more Lenders to enter into a [...] (Finance Program Agreement) where ABC agrees to provide the services described above as well as:
• create a [...] website on ABC's servers customized with the Vendor's brand name for Dealers to access for purposes of applying for and obtaining loans for their Customers;
• partition ABC's database server to hold lending information relating to the Lender, Vendor, Dealers and Customers;
• configure the System to allow Dealers and Lenders to submit and receive information;
• program the System with the Lender's lending parameters; and
• train Dealers in the use of the System.
ABC also enters into a [...] Funding Agreement with each Lender where ABC agrees to generate loan applications which are automatically adjudicated by the System in accordance with the Lender's lending criteria. ABC will certify to the Lender that all items have been satisfied in respect of the approved loan, prepare the necessary loan documents, review the executed loan documents and forward the loan amount to the Dealer.
When a Customer requires financing, the Dealer logs onto the Website, enters the amount of the loan and the Customer's credit information on a form and submits it through the System. The System then obtains an online Customer credit report, compares the credit information with the Lender's lending parameters, performs other tests, and either approves or rejects the loan application. Where the System is unable to either approve or reject the loan, the System refers the application to the Lender for manual review and the decision is then inputted into the System.
Where a loan has been approved, the System generates a loan agreement between the Lender and the Customer and transmits the agreement to the Dealer. The Customer executes the loan agreement which the Dealer forwards to ABC who in turn checks the agreement for completeness. If the loan agreement is properly completed, ABC forwards it to the Lender. If the loan agreement is incomplete, ABC returns it to the Dealer for completion via the System.
Once the loan is approved, ABC advances the loan amount to the Dealer on the Lender's behalf. The Lender then forwards a lump sum payment to ABC on a daily basis to reimburse ABC for the total amount of that day's loans.
The Finance Program Agreement further provides that:
• ABC has the Canadian rights to use a suite of software products which enables ABC to process loan applications for specified Lenders, adjudicate a Customer's credit worthiness, obtain a Lender's approval or rejection, and fund loans via the Internet. ABC establishes a [...] (Finance Program) for the Customers and the Manufacturers' products (Products) and provides web-access to Dealers through which ABC performs the loan processes.
• ABC will provide the overall account management to help facilitate the Finance Program as well as coordinate the implementation of ongoing Manufacturer promotional programs. ABC will liaise between the Lenders and the Manufacturer regarding loan terms; submit reports on program successes; and provide technical support to Dealers via a toll free telephone line.
• ABC will execute a [...] (Dealer Program Agreement) with each Dealer requiring that each Dealer obtain the written consent of each loan applicant to the collection, use and disclosure of the loan applicant's data. Under the agreement, ABC will provide training for the Dealer consisting of a System functional overview and a review of payment methods and promotional programs.
• ABC will provide services in connection to the closing of loans by the Lenders, including advising the Manufacturer on the criteria set by the Lender for adjudicating loans and any changes thereto. ABC will also audit the loan application documents, post notices on the System if the documentation is incomplete, forward the documents to the Lender, and remit to the Dealers, on behalf of the Lenders, all Dealer incentive fees paid by the Lender.
• ABC will host, operate and make the Website available to the Dealers and other users; provide automated adjudication and document preparation, among other features; process all transactions; implement a Lender credit policy allowing for automated adjudication and credit replies; include Website security procedures and Customer data safeguards; supply and maintain telecom connections between the System, the Dealer network, the Lender and other third parties; and provide documents to the Dealer network and the Lender on their use of the Finance Program.
• ABC will grant to the Manufacturer a non-exclusive, non-transferable, royalty-free license to use and reproduce for the term and any renewal term the trademarks that ABC may from time to time make available for the Manufacturer's use in connection with the Website and other documents.
• The parties are independent contractors and not agents, partners or co-venturers of the other party nor are they creating any form of joint enterprise.
The [...] Funding Agreement states that:
• The Lender agrees to make loans to Customers to finance the purchase of Products from Dealers, and that ABC agrees to transmit loan applications and credit responses between Dealers and Lenders, and to facilitate the production of loan documents for such loans.
• The Lender engages ABC to generate loan applications under each Vendor's Finance Program. In turn, ABC warrants that the Website and the System will perform accordingly and that the Lender may request changes be made to the software at its expense with ABC's consent.
• When a Dealer submits a loan application to the Lender via the Website, the System will automatically adjudicate the application according to the Lender's underwriting criteria and will either approve, decline or submit the application to the Lender for management review. Where information is missing and/or incomplete, ABC will obtain the necessary information or documentation from the Dealer. Upon completion of all conditions, ABC will advise the Lender and the Vendor of the loan and deliver the loan documents to the Lender.
• The Lender is to make independently and without reliance upon ABC its own credit analysis and decision to advance the principal amount for each loan, and to take or not take action under any loan. ABC does not have any duty, obligation or liability to the Lender for any loan or for any actions taken or omitted to be taken in connection to the loan.
• ABC will provide a funding list to the Lender at the end of each business day describing the loan amounts to be disbursed by ABC following receipt of such amounts from the Lender.
• The parties are independent contractors and are not agents, partners or co-venturers of the other party, nor are they creating any form of joint enterprise.
Under the Dealer Program Agreement, ABC, the Dealer and the Lenders establish the following Finance Program that will facilitate the online adjudication of loan applications:
• The Dealer will have access to the Website in order to submit loan applications for online adjudication and will be responsible for the telecom and internet connections necessary to access the Website.
• When a Customer requests a Loan, the Dealer will obtain from the Customer the information required to complete the loan application and will then submit the completed application to ABC via the Website. ABC will provide training to the Dealer in connection to the use of the Website.
• Once the loan application has been submitted, the Dealer will be advised online whether the application has been approved, declined or submitted for management review. If the application is declined, the System will enable the Lender to advise the Dealer of any steps the Customer may take to reverse the decision.
• If the loan application is approved, the Dealer will complete the loan documents online, arrange for the Customer to execute the documents, and deliver the documents to ABC. ABC will advise the Dealer of any known deficiencies that need to be addressed before the loan is advanced.
• On behalf of the Lender, ABC will advance the loan amount for the account of the Customer to the Dealer provided the Customer directed ABC and the Lender to pay such sum to the Dealer. The Lender will then pay that amount to ABC. The Lender will have no obligation to the Dealer to advance that amount directly to the Customer or the Dealer.
• Where certain events occur, the Lender may advise ABC not to advance the loan amount to the Customer, or may require the Dealer to repay the amount to the Lender (e.g., where the Product is returned or not received by the Customer, the Customer credit information is not accurate, or a forged or unauthorized signature appears on the loan document).
• The parties agree that they are not partners or joint venturers and that no party is liable for the obligations of another party.
Program #2
Program #2 is similar to Program #1 except that:
• ABC enters into an agreement with a single Lender to provide the same services described in Program #1 however ABC does not enter into agreements with Vendors or Dealers;
• the [...] website is branded with the Lender's name (rather than with the Vendor's name);
• the Lender (and not ABC) solicits Vendors and Dealers to participate in the program, and
• ABC is not involved in the manual review or approval of loans, the manual review or the transmittal of completed loan applications, or the forwarding of loan funding to Dealers.
For the services provided by ABC in connection with the Finance Program, ABC charges a lump sum fee to the Vendor for the implementation services described above, as well as charges a transaction fee for each transaction. ABC also charges a transaction fee to the Lender for each transaction. Your letter confirms that ABC does not charge fees to the Dealers or the Customers.
Interpretation Requested
You would like to know whether ABC is making an exempt supply of arranging for a supply of a financial service when it makes supplies of implementation services and transaction services to the Vendors (Manufacturers) and Lenders under both Programs.
Interpretation Given
The determination of whether a particular supply is subject to GST/HST requires a detailed review of the facts and circumstances of the transactions which generally includes a review of the written agreement or agreements detailing the actions, responsibilities and obligations of the parties in connection with the supply.
Where an agreement includes the provision of 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.
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, while ABC provides a number of services, it is clear that each element of the services is intricately linked to each other and that the Vendor (Manufacturer) and the Lender do not have the option to acquire the services separately. Since ABC provides a single supply of an implementation service or transaction service to both the Vendor (Manufacturer) and the Lender under each Finance Program, the predominant element of each 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.
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 not otherwise excluded by any of paragraphs (n) to (t) of that same definition. A financial service includes, for example, under paragraph (g), the making of any advance, the granting of any credit or the lending of money.
Also, the definition of financial service includes in paragraph (l) an activity performed by a person that is the "arranging for" a financial service referred to in any or paragraphs (a) to (i) and not referred to in any of paragraphs (n) to (t). 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 performs 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 a financial service of arranging for, depending on the facts surrounding the transaction, the above listed factors, and the predominant element of the supply.
Paragraph (r.3) of the definition of financial service excludes from the definition 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. 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 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 purposes of paragraphs (r.3) and (r.4).
GST/HST Technical Information Bulletin B- 105, Changes to the Definition of Financial Service, provides additional information related to credit management services and preparatory services.
While some of ABC's Finance Program related activities, such as screening and adjudicating the loan applications, reviewing the loan agreement, and facilitating the funding of the Approved Loans assist the Lenders in providing a financial service of granting credit to a Customer and may on their own be included in paragraph (l) of the definition of financial service, ABC's activities when considered as a whole are predominantly credit management services (obtain Customer credit reports, checking, evaluating and authorizing the Approved Loans, and making decisions on behalf of the Lenders relating to the applications) and services that are preparatory to the provision of a financial service (promote the Finance Program to Customers and Dealers, prepare and process Customer loan information collected and transmitted by Dealers via access to ABC's Website, and provide assistance to Lenders). Therefore, the transaction services performed by ABC for the Lender under the [...] Funding Agreement are excluded from the definition of financial service by paragraphs (r.3) and (r.4) of the definition.
Furthermore, the transaction services and implementation services performed by ABC for the Vendor (Manufacturer) under the Finance Program Agreement are also preparatory to the provision of a financial service under paragraph (r.4) (i.e., establish a Finance Program for the Manufacturer's Products, coordinate and facilitate the implementation of ongoing Manufacturer promotional program, liaise with the Manufacturer and Lender regarding loan terms, and provide various reports) and are therefore excluded from the definition of financial service.
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 613-952-9262. 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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