Please note that the following document, although correct at the time of issue, may not represent the current position of the Agency. / Veuillez prendre note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'Agence.
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Excise and GST/HST Rulings Directorate
Place de Ville, Tower A, 15th floor
320 Queen Street
Ottawa ON K1A 0L5
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XXXXX
XXXXX
XXXXX
XXXXX
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Case Number: 52698 / 52554
Code: 11643-3
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XXXXX
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October 15, 2004
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Subject:
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GST/HST APPLICATION RULING
Timeshare Resort Points / Default by Purchasers of Points
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Dear XXXXX:
Thank you for your letter XXXXX (with attachments) concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to the enforcement of a security interest by your client, XXXXX. This ruling letter provides a reply to question XXXXX, the last question in your submission. Your other XXXXX questions were previously answered XXXXX under H. Dorward's signature. We will refer extensively to XXXXX, which describes several numerical examples of the administrative allocation method of accounting to be used by your client for the sale of resort points. As you are aware, you have agreed to the method on behalf of your client during previous discussions with representatives of the CRA.
Statement of Facts
The facts are the same as described in our letter XXXXX, with the addition of the following:
Enforcement of Security Interest by XXXXX / US Entities or the Club
1. The XXXXX is defined in the XXXXX (which is attached to the XXXXX) to mean the XXXXX between XXXXX and the Purchaser pursuant to which the Purchaser agreed to purchase from XXXXX and XXXXX agreed to sell to the Purchaser on the terms contained therein resort points and a membership in the Club as evidenced by the XXXXX.
2. Collateral is defined in the XXXXX to mean the resort points and the membership of the Purchaser in the Club purchased by the Purchaser from XXXXX pursuant to the XXXXX as evidenced by the XXXXX, all rights and benefits of the Purchaser as a holder of the resort points and as a member in the Club including, without limitation, all rights and benefits of the Purchaser under the XXXXX and each of the other Club XXXXX, any and all substitutions for, replacements of and additions to such resort points and membership in the Club, and any and all distributions, income, payable or accruing to the Purchaser on, in respect of or by virtue of such resort points or the membership of the Purchaser in the Club.
3. As indicated in the XXXXX, when XXXXX sells resort points to a Purchaser, the Purchaser delivers to XXXXX the XXXXX and assigns, mortgages and charges to and in favour of XXXXX, and grants to XXXXX a purchase money security interest in the Collateral as general and continuing security for the due payment in full of the principal sum and all accrued and unpaid interest thereon as provided in the XXXXX (collectively, the XXXXX). This purchase money security interest is granted in accordance with the provisions of the XXXXX and shall continue in full force and effect until the XXXXX is paid in full. Upon payment in full of the XXXXX, the XXXXX will be returned by XXXXX to the Purchaser and the security constituted thereby will be released.
4. The XXXXX also indicates that, if and when the Purchaser fails to pay XXXXX a monthly payment when the same is due or fails to pay XXXXX the unpaid principal sum or any accrued and unpaid interest when such amount is payable under the terms of the XXXXX, then the Purchaser shall be in default and at the option of XXXXX, the unpaid balance of the XXXXX shall become immediately due and payable in full and the purchase money security interest becomes enforceable. In that case, XXXXX may proceed to enforce the payment of the unpaid balance of the purchase price and in so doing may exercise any and all of its rights and remedies as are provided at law or in equity or by statute including, without limitation, any and all rights and remedies pursuant to the XXXXX. If, in exercising its rights and remedies, XXXXX sells the Collateral or any part thereof to a third party, it shall be permitted to do so on terms of credit.
5. The XXXXX provides that the XXXXX and the rights and obligations there under are governed by and construed in accordance with the laws of the XXXXX and by execution of the XXXXX, the Purchaser attorns to the jurisdiction of the courts of the XXXXX.
6. You have stated the following on the enforcement of the security interest by your client:
XXXXX.
XXXXX.
7. Where XXXXX seizes or repossesses resort points, it is enforcing its security interest under authority of the XXXXX as described in facts # 1 - 5 above, and as evidenced by the sample XXXXX that you made available to us XXXXX.
8. We assume that the US Entities seize resort points under U.S. law, as they generally operate in the U.S. and sell the resort points in the U.S. (i.e., the transaction occurs outside of Canada).
9. The XXXXX by XXXXX for XXXXX is a binding document for XXXXX, the Club and its members. Under XXXXX, the Club has a XXXXX. The same XXXXX gives the Club a power of sale in respect of any Membership for the purpose of collecting delinquent XXXXX. XXXXX is defined in the XXXXX as any amount levied by the Board of Directors [of the Club] upon Members of the Club, including XXXXX and XXXXX. XXXXX is defined as including "resort points," and "security interest" has the meaning provided in the XXXXX. In short, for purposes of the XXXXX, the Club has a security interest in the resort points to secure payment of any unpaid XXXXX and has power of sale in respect of these resort points to collect delinquent XXXXX.
10. In case of default of payment of XXXXX, XXXXX specifies that the Manager (engaged by the Club) shall send a notice to the Member in default with the following information:
• The Club's intention to accelerate all XXXXX due from the Member and to enforce its lien to collect such XXXXX.
• The Member's right to avoid enforcement by remitting all delinquent amounts within 30 days from the date of the notice.
Afterwards, if payment in full is not received within the specified period, the Club may take any of the following actions:
• Enforce its lien upon such XXXXX as provided XXXXX.
• Subject to applicable law, bring an action to recover a money judgment for the unpaid XXXXX or to enforce the Club's lien against a XXXXX for unpaid XXXXX.
• Suspend the XXXXX rights and privileges pursuant to his/her XXXXX and XXXXX.
XXXXX, all liens, XXXXX and charges provided for in the XXXXX shall be automatically enforceable by any manner authorized by law, including power of sale, or enforcement of the Security Interest in the manner provided for under the XXXXX, as applicable (or under applicable U.S. state law). In the event a XXXXX is terminated pursuant to this section, the Club shall reacquire such XXXXX resort points and XXXXX, in exchange for payment of all delinquent accounts owing to the Club by such XXXXX, shall have the option of 1) requiring the Club to transfer ownership to it of all resort points or 2) acting as exclusive agent of the Club for the sale of such resort points.
11. Concerning the subsequent sale of the resort points by XXXXX as agent for the Club XXXXX, we assume that the scenario to which you refer is the one where, as described in the previous paragraph, XXXXX would have exercised its option of acting as exclusive agent of the Club for the sale of such resort points, pursuant to XXXXX.
Rulings Requested
1. Where XXXXX, the US Entities or the Club enforces their security interests, the enforcement is considered to be a seizure or repossession of the resort points for purposes of section 183 of the Excise Tax Act ("ETA"). No GST/HST will apply at the time of the enforcement pursuant to subsection 183(1) of the ETA.
2. After the enforcement of the security interest, when XXXXX, the US Entities or the Club sells the "seized" resort points to Purchasers, the selling entity will calculate the GST/HST applicable to the supply of resort points on the basis of the sale price of the resort points. For ease of administration, you are requesting a deviation from the previously agreed allocation method for sales of any resort points XXXXX.
3. The seizure/repossession rules under subsection 183(7) of the ETA will apply and the selling entity will be entitled to claim a notional input tax credit ("ITC") equal to the GST/HST collectible on the supply of the seized resort points.
You have submitted the following rationale for the above requested rulings:
XXXXX.
XXXXX.
Rulings Given
Based on the facts set out above, we rule that
1. (a) XXXXX: Where XXXXX enforces its security interest, the enforcement is considered to be a seizure or repossession for purposes of subsection 183(1) of the ETA provided your client is enforcing the security pursuant to, and in accordance with, the XXXXX, i.e. the legislation under which the XXXXX is granted.
(b) US Entities: Please note that the CRA does not rule when an issue involves the interpretation of a foreign law (as explained in subsection 20(i) of Memorandum 1.4 Goods and Services Tax Rulings), and consequently we are not in a position to comment on the GST/HST consequences of the legislation or the nature of the procedure (seizure of resort points or extinguishment of rights) used by the US Entities to enforce their security interest in the United States. It therefore follows that we are not in a position to determine whether section 183 of the ETA would be applicable to the enforcement actions by the US Entities.
Should you obtain a ruling from the US federal government (or such other competent foreign authority where the "seizure" occurs) to the effect that the resort points are "seized or repossessed" for purposes of applicable US legislation, you may provide a copy of the ruling to us and we will be prepared to determine the GST/HST consequences of the seizure and subsequent sale of the resort points at that time.
(c) The Club: Where the Club has "reacquired" a delinquent XXXXX pursuant to XXXXX by XXXXX for XXXXX, and XXXXX has paid all delinquent accounts owing to the Club by the Member, and has chosen to act as exclusive agent for the Club in the sale of the resort points, the "reacquisition" is considered to be a seizure or repossession by the Club for purposes of subsection 183(1) of the ETA.
2. (a)(b)(c) After the enforcement of the security interest, when XXXXX or the US Entities or the Club sells resort points to Purchasers, the seller will calculate the GST/HST applicable to the supply of the resort points on the basis of a fair and reasonable method of allocation of the consideration, as previously agreed and indicated XXXXX.
As seized resort points give rise to new resort points available for sale, the allocation formula must be adjusted, both in the numerator and denominator.
3. (a) XXXXX: Provided XXXXX is selling seized resort points pursuant to, and in accordance with, the XXXXX, subsection 183(7) of the ETA will apply. In that case, XXXXX will be entitled to claim a notional ITC equal to the GST/HST payable in respect of the sale of the seized resort points XXXXX.
(b) US Entities: Where the US Entities is selling the "seized" resort points, for reasons similar to those indicated above in (1)(b), the CRA is not in a position to determine whether subsection 183(7) would apply. Once the competent authorities have interpreted the applicable foreign legislation, we would be in a position to rule on the application of section 183 of the ETA in general and subsection 183(7) in particular.
(c) The Club: Where the Club is selling the seized resort points through its agent XXXXX, subsection 183(7) will apply. Accordingly, the Club may claim a notional ITC equal to the GST/HST payable in respect of the sale of the seized resort points XXXXX.
This ruling is subject to the general limitations and qualifications outlined in section 1.4 of Chapter 1 of the GST/HST Memoranda Series. We are bound by this ruling provided that none of the above issues is currently under audit, objection, or appeal; that there are no relevant changes in the future to the Excise Tax Act, or to our interpretative policy; and that you have fully described all necessary facts and transactions for which you requested a ruling.
Explanation
1. "Seizure" of resort points under ETA
1.1 XXXXX
The sample XXXXX between XXXXX and a Purchaser indicates that the "security interest is granted in accordance with the provisions of the XXXXX." Accordingly, we assume that XXXXX when you mention "points seized or repossessed," you are referring to such resort points seized or repossessed pursuant to, and in accordance with, the XXXXX. The courts have recognized that, absent statutory authority to the contrary, at common law intangible property cannot be seized (for instance, see Bank of British Columbia v 22850 B.C. Ltd, Capital Savings and Credit Union Ltd v 299474 Alberta Ltd., Mortil v International PhasorTelecom Ltd). Several provincial XXXXX or equivalent legislation (such as the XXXXX) extend the common law somewhat by permitting the seizure of certain intangibles. In the case at hand, XXXXX allows the seizure or repossession of intangible personal property that is subject to a security interest. Such intangibles are included in the definition of "collatera", and a resort point is an "intangible that secures payment or performance of an obligation". The following XXXXX definitions are pertinent:
XXXXX
XXXXX
XXXXX
XXXXX
In the case at hand, XXXXX was provided a security interest in the resort points under the XXXXX. From the above definitions in the XXXXX, the resort points constitute a valid collateral under that Act. As such, the collateral is subject to seizure under XXXXX in case of default by the purchaser. Such a seizure authorized by statute would be considered to be a seizure for purposes of subsection 183(1) of the ETA, with the consequence that no GST/HST will apply to the transfer of the seized resort points to XXXXX where all of the requirements of subsection 183(1) are met.
1.2 US Entities
No additional explanations are required.
1.3 The Club
As pointed out in # 10 of the above Statement of Facts, the Club is enforcing its security interest under the XXXXX (for sales of original resort points that occurred in Canada) as well as pursuant to XXXXX. Also indicated in Facts #10 and #11 is the option available to XXXXX under the same XXXXX to sell the resort points as the exclusive agent of the Club.
In this case, the requirements of subsection 183(1) are met and the "reacquisition" is considered to be a seizure for ETA purposes. Accordingly the case is similar to the scenario in 1.1 above (the difference being that in 1.1 XXXXX is selling the Resort points in its own name) and the Club is deemed to have received a supply of the resort points for no consideration. In short there are no GST/HST consequences to the seizure of the Resort points.
2. Accounting for tax based on allocation ratio
At the outset, we wish to summarize the method of accounting for GST/HST when XXXXX (or the US Entities or the Club) sells resort points XXXXX. The supply of resort points is taxed on the portion that is considered to be supplied in Canada. That portion is determined approximately by allocating the consideration payable by a recipient of resort points to the extent that the resort points represent a right to use real property situated in Canada, and such an allocation must be fair, reasonable and used consistently. One method that was considered fair and reasonable by all parties consists of determining, at the time of sale, the allocation ratio of Canadian points (Canadian points are resort points issued by the Club in respect of real property in Canada) available for sale to the total number of World points (World points are resort points issued by the Club in respect of real property in and outside Canada) available for sale. That allocation ratio would remain the same until new resort point become available for sale. Several numerical examples were provided in our letter cited above.
On the issue of accounting for GST/HST on the sale of seized resort points, we note that repossessed resort points are "added to the existing inventory and sold by the seizing entity." Such resort points become identical to other points in inventory, and since the supply of resort points by your client is a combination of supplies made in Canada and outside of Canada, there is no legislative basis on which to rule that GST/HST must be calculated on the full sale price of the resort points. To do so would expose the CRA to potential claims for refunds of tax paid in error on every sale of seized resort points, while your client would have remitted no tax on such a sale, due to the offsetting notional ITC permitted under subsection 183(1) of the ETA, as indicated in our above ruling 3(a).
3. Applicability of subsection 183(1)
3.1 XXXXX
The sale of resort points seized or repossessed under XXXXX must be undertaken in accordance with the requirements of that Act. More particularly, the sale must conform to XXXXX, that is, in general:
• XXXXX
• XXXXX
• XXXXX
• XXXXX
• XXXXX
• XXXXX
• XXXXX
The sale of resort points must meet the conditions cited above to qualify as a sale of property seized pursuant to the XXXXX, and not a sale of new points. Accordingly subsection 183(1) of the ETA would apply only in such circumstances.
In regard to resort points acquired by the debtor and subsequently seized and sold by your client, the tax embedded in the value of the points seized and sold is removed via a notional ITC to the creditor. The net effect is that your client remits no GST/HST in respect of the seizure and sale of the resort points, and the purchaser of the original points (the debtor) as well as the purchaser of the seized points both paid a GST/HST-paid purchase price. The net effect on the general revenue is that it ends up with the GST/HST collected and remitted by your client on the original sale of the resort points.
I trust that the above rulings and explanations will be satisfactory to you and your client. As we indicated above, we assume that in most if not all cases, XXXXX would seize the resort points under the XXXXX.
3.2 US Entities / US law
No additional explanations required.
3.3 The Club / XXXXX
As indicated in the above section 1.3 of our EXPLANATION, the Club's "reacquisition" of resort points from a Member delinquent in the payment of membership fees or XXXXX is considered to be a seizure or repossession for purposes of subsection 183(1) of the ETA. Where the seized resort points are sold by XXXXX as agent of the Club, subsection 183(1) is applicable and the Club is deemed to have received, before the sale, a supply of resort points for consideration equal to the consideration received from the sale of the seized resort points. The GST/HST consequence for the Club is the same as described for XXXXX in the above section 3.1 of the EXPLANATION.
Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 954-1433.
Yours truly,
Bao Tran
Specialty Tax Unit
Financial Institutions and Real property Division
Excise and GST/HST Rulings Directorate
| c.c.: |
Costa Dimitrakopoulos
Hugh Dorward |
| Legislative References: |
ETA: s. 165, 183. |
| NCS Subject Code(s): |
R 11643-3 -11950-1 |
2004/10/08 — RITS 49550 — GST Status of Medical and Assistive Devices
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