6 April 2006 GST/HST Ruling 78790 - XXXXX

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 fax XXXXX concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to amounts charged related to outstanding rents.

All legislative references are to the Excise Tax Act (ETA) and the regulations therein, unless otherwise specified.

Statement of Facts

Our understanding of the facts is as follows:

1. XXXXX is the landlord of a shopping centre XXXXX located at XXXXX. XXXXX The Landlord has a lease agreement (the "Lease") with XXXXX ("the Tenant"). The Tenant has accumulated rental arrears over the past four years. XXXXX The Landlord charged the Tenant interest on the outstanding rent and also charged GST on the interest. The Tenant is contesting the fact that the Landlord XXXXX is charging GST on the interest on outstanding rent. You wish to have a ruling to determine if GST/HST is applicable to the interest XXXXX.

2. Certain provisions of the Lease are crossed out and have not been taken into consideration for purposes of this ruling. Concerning the purpose of the lease, XXXXX of the Lease provides:

XXXXX.

3. XXXXX of the Lease provides that XXXXX. XXXXX provides for the amount of rent due over the term of the Lease.

4. XXXXX of the Lease, titled XXXXX provides:

XXXXX.

5. XXXXX of the Lease, titled XXXXX provides:

XXXXX.

6. XXXXX of the Lease, titled XXXXX provides:

XXXXX.

Ruling Requested

You would like to know if GST is applicable to the interest charged on unpaid rent or additional rent, as described in XXXXX (XXXXX of the Lease).

Ruling Given

Based on the facts set out above, we rule that GST is not applicable to the interest charged on unpaid rent or additional rent, as described in XXXXX.

This ruling is subject to the qualifications in GST/HST Memorandum 1.4, Goods and Services Tax Rulings. We are bound by this ruling provided that none of the above issues is 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.

Explanation

Every recipient of a taxable supply, other than a zero-rated supply (taxable at 0%), made in Canada is required to pay GST at the rate of 7% on the value of the consideration for the supply. The person making the supply is required to collect the tax payable by the recipient, as agent of Her Majesty in right of Canada. A taxable supply is made in the course of a commercial activity. A commercial activity does not include the making of exempt supplies.

An exempt supply includes a supply of most financial services. A "financial service" is defined under subsection 123(1) of the ETA to include the payment or receipt of money as interest in respect of a financial instrument. A "debt security" is defined by the same subsection to mean a "right to be paid money" and is a financial instrument. Where rent under the Lease was payable by the Tenant and was not paid, the Landlord has a right to receive the outstanding amount which is a right to be paid money. This is a debt security for purposes of the ETA and any interest charged on this amount is interest in respect of a financial instrument. Consequently, the interest charged by the Landlord is consideration for an exempt financial service and GST is not applicable to this amount.

For your convenience, find enclosed a copy of GST/HST Memorandum 1.4, Goods and Services Tax Rulings.

If you require clarification with respect to any of the issues discussed in this letter, please call me directly at 613-952-9577.

Yours truly,

Kirk Moore
Financial Institutions Unit
Financial Institutions & Real Property Division
Excise and GST/HST Rulings Directorate

2006/06/30 — RITS 58143R — Direct Sellers - Sales Aids