6 July 2004 GST/HST Interpretation 48523 - Purchase of mixed-use building

This memorandum is in response to your memorandum XXXXX which was transferred to our office XXXXX.

Our understanding of the facts is as follows:

•   The Registrant is a limited partnership called XXXXX (the Registrant).

•   The business activity began on XXXXX and was registered for GST purposes on the same date.

•   The Limited Partnership Agreement is among XXXXX partners: XXXXX general XXXXX and XXXXX limited partners as follows:

XXXXX

•   The Registrant enters into limited partnership agreements with resident and non-resident persons. In each case, the Registrant is the Limited Partner with a XXXXX% share while the other party is a General Partner with a XXXXX% share. This limited partnership then lends money to a third party evidenced by a loan agreement.

You have requested rulings with respect to the following issues:

1. Are commitment fees subject to GST?

2. Are asset management fees (also referred to as asset monitoring fees, loan maintenance fees) subject to GST?

3. Are supplies made with respect to loans to non-residents zero-rated?

4. Is interest received from Canadian borrowers exempt?

5. What are the implications for ITCs if interest is exempt?

Our Comments

1. As outlined in GST/HST Memoranda Series Chapter 17.2, loan commitment fees are fees for a supply of a financial service pursuant to paragraphs (g) and (l) of the financial service definition, i.e., the Lender is agreeing to lend money to the Borrower and the Borrower pays the loan commitment fee. This fee is exempt (see item B-14). However, pursuant to Section 1 of Part IX of Schedule VI, where the Lender is a financial institution, a supply of a financial service to a non-resident is zero-rated unless it relates to, among other things, a debt that arises from the lending of money that is primarily for use in Canada. Therefore, where the Registrant is making a supply of a financial service to a resident, the loan commitment fee is exempt. Where the Registrant is making a supply of a financial service to a non-resident for use outside Canada, the loan commitment fee is zero-rated if the Registrant is a financial institution. Therefore, it must be determined whether the Registrant is a financial institution.

The Limited Partnership Agreement states XXXXX that the purpose of the Limited Partnership is the operation of the Business. XXXXX The Registrant's financial statements for the period ended XXXXX show over $XXXXX in loans receivable out of total assets of approximately $XXXXX. In addition, its main source of revenues is interest XXXXX. Its partnership agreement states that the business of the partnership is XXXXX. In doing so, the Registrant lends money to various partnerships in which it also has an interest. Based on the preceding, it is reasonable to conclude that the Registrant is a person whose principal business is the lending of money and as such, is a listed financial institution pursuant to subparagraph 149(1)(a)(viii) of the Excise Tax Act (ETA). However, it should be noted that no loan agreements between the Registrant and any of the borrowers were provided to enable us to confirm that the Registrant is in fact a listed financial institution.

2. The asset management fees (also referred to as asset monitoring fees, loan maintenance fees) are outlined in the various loan agreements, however, we have not been provided with a detailed description of the services provided. Generally, management services are taxable supplies. In addition, section 23 of Part V of Schedule VI to the ETA zero-rates the supply of an advisory, consulting or professional service made to a non-resident person provided the supply is not specifically excluded. For purposes of section 23 (and paragraph 7(b) which excludes advisory, consulting or professional services from the general zero-rating provision for exported services), paragraph 41 and 42 of GST/HST Memoranda Series 4.5.3 Exports - Services and Intellectual Property discusses the Agency's interpretation of these terms and supplies specifically excluded.

3. Generally, a supply of a financial service made by a financial institution to a non-resident person is zero-rated under Section 1 of Part IX of Schedule VI to the ETA, however paragraphs (a) to (e) outline specific exceptions to this general rule. Paragraph (a) precludes a financial service from being zero-rated if it relates to a debt that arises from deposits in Canada and the instrument issued as evidence is a negotiable instrument. Also excluded from zero-rating in paragraph (a) is a financial service that relates to a debt arising from a loan, the funds of which are primarily for use in Canada. Paragraphs (b) and (c) provide that a financial service is not zero-rated if it relates to a debt arising from the purchase of real property situated in Canada or personal property for use primarily in Canada. Therefore, if the Registrant is a financial institution, the loans made by the Registrant to non-residents are zero-rated unless the loan relates to a debt referred to in the above-noted paragraphs.

4. The payment or receipt of money as interest from Canadian borrowers is a financial service pursuant to paragraph (f) of the definition of financial service and is exempt.

5. A listed financial institution involved in making both taxable and exempt supplies must determine the extent to which their inputs are for use in their commercial activities in order to calculate their eligibility for ITCs pursuant to section 141.01. For further information refer to GST Memorandum 700-5-1: ITC Allocation for Financial Institutions.

Should you have any further questions, please do not hesitate to contact me at (613) 952-9577.

Marilena Guerra
Senior Rulings Officer
Financial Institutions Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate

2004/07/22 — RITS 49110 — Tax Status of XXXXX Committee