3 May 2004 GST/HST Interpretation 48128 - Importations of eyeglass frames

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.

Dear XXXXX:

Thank you for your facsimile transmission XXXXX (with attachments and follow-up documentation), concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to the activities of your client, a real estate broker. We apologize for the delay in responding.

Statement of Facts

You have provided severed copies of: 1) the XXXXX XXXXX XXXXX "Mortgage Specialist"; 2) the agreement between your client and XXXXX, whereby your client appoints XXXXX as exclusive agent to provide mortgage brokerage services to its customers; and 3) the Independent Contractor Agreement between your client and a Mortgage Specialist and XXXXX to this agreement.

Based upon the documents provided, our understanding of the facts, the transaction(s), and the purpose of the transaction(s) is as follows:

•   Your client, a real estate broker, provides space in their office to an agent ("Mortgage Specialist") of XXXXX for the purpose of providing a service of "matching" potential homeowners with mortgage lenders.

•   The Mortgage Specialist provides services set out in the XXXXX "Mortgage Specialist." This document indicates that, as consideration for providing these services, XXXXX will pay the "Mortgage Specialist" an Agent's fee based on a XXXXX% split of the Finders Fee received by XXXXX.

•   Under an Independent Contractor Agreement (hereafter referred to as the Agreement), the mortgage specialist will gain access to the real estate broker's facilities and equipment for the purpose of conducting a mortgage brokerage practice. The Agreement states that there is no intention to create a relationship between the real estate broker and the mortgage specialist, except that of two contracting parties.

•   XXXXX the Agreement outlines the real estate broker's obligations (i.e. activities) to be provided in return for earning a portion of the mortgage specialist's agent fee. The obligations of the real estate broker include: XXXXX.

•   The agent fee earned by the mortgage specialist is received from XXXXX, based on a portion of the finder's fee received from a financial institution when a mortgage is arranged with a homeowner. XXXXX forwards the agent's fee earned by the mortgage specialist directly to the real estate broker, who will then deduct their portion (plus an amount in respect of unpaid expenses incurred by the mortgage specialist) before forwarding the remainder along to the mortgage specialist.

•   You indicated in a telephone conversation with XXXXX of the CRA that the real estate broker earns money under the Agreement only as a result of a completed mortgage agreement. This does not apply to indebtedness related to expenses incurred by the mortgage specialist that are unpaid.

Ruling Requested

You had originally asked whether a mortgage specialist should be a GST/HST registrant; however, you have confirmed that, in fact, you would like to know the HST status of the fee paid by the realtor to the Mortgage Specialist.

Ruling Given

Based on the facts set out above, we rule that the payment by the real estate broker to the Mortgage Specialist is a fee for a financial service exempt under the HST.

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 transaction(s) for which you requested a ruling.

Explanation

The services provided by the Mortgage Specialist pursuant to the above-noted agreements meet the requirements of "arranging for" the provision of a financial service as set out in the CRA GST/HST Policy Statement P-239: "Meaning of the term "arranging for" as provided in the definition of "financial service."

The documents provided contain some discrepancies related to the flow of the payment under the above-noted scenario. Although the job description indicates that the fee is paid by XXXXX to the Mortgage Specialist, the Independent Contractor Agreement indicates that the fee is paid by XXXXX directly to the real estate broker who then pays the XXXXX agent. You have confirmed that XXXXX pays the real estate broker directly and includes an amount on account of HST in this payment. The HST paid is calculated on the amount of commission payable to the realtor by virtue of the various agreements.

Logically, as the Mortgage Specialist is not an employee or contractor of the realtor, but is an agent of XXXXX, it is XXXXX that is the recipient of the agent's supply. There is likely an agreement between XXXXX and the agent (as witnessed by the copy of the XXXXX Mortgage Specialist XXXXX provided) to which the realtor has no access. Further, according to our conversations, your client, the realtor, drafted its agreement with the Mortgage Specialist in order to: XXXXX.

It would then seem that the Independent Contractor Agreement was entered into for clarification of services, costs and fees as between the realtor and the Mortgage Specialist as opposed to being entered into for purposes of assigning the obligation to pay from XXXXX to the realtor. It is for these reasons as well that XXXXX pays the realtor directly, although the realtor's agreement with XXXXX does stipulate that XXXXX reserves the right to pay the Mortgage Specialist directly (at its discretion). The application of XXXXX (agreement as supply) to the transactions would also support the interpretation that XXXXX is the recipient of the supply by its "agent".

In these circumstances, XXXXX should be making the entire payment to the Mortgage Specialist/contractor (exempt) and the Mortgage Specialist should be making its payment -- % of commission, plus expenses - to the realtor, plus HST.

Although the client can, of course, do the actual payments on a netting basis, its books and records should reflect the above-noted supplies.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at 613-952-9262.

Yours truly,

Sheena France
Financial Institutions Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate

2004/05/18 — RITS 49026 — Sales of Real Property by the Estate XXXXX