26 March 1997 GST/HST Interpretation HQR0000303 - Commissions Earned in Respect of Arranging for a Financial Service.

Dear XXXXX

This is in reply to your memorandum dated September 24, 1996, to John Sitka, A/Director, Financial Institutions and Real Property Division and your telephone conversations on September 17, 1996 with my colleagues Ginette Bouchard-Forgues and Phil Tang, concerning commissions earned in respect of arranging for a financial service.

Statement of Facts

Our understanding of the facts based on the information provided is as follows:

1. Automobile dealerships XXXXX contract with XXXXX who is a resident of Canada and registered for purposes of the GST, for the supply of various services to be performed in the business offices of the particular dealerships.

2. In all cases the dealership and XXXXX enter into a written agreement whereby XXXXX agrees to provide the following services:

i) The arranging for, on behalf of the dealership, customer financing for the purchase of new and used vehicles from the dealerships. This would consist of obtaining the customer's credit information, shopping for the lending rates, completing the appropriate loan application forms, screening of the customer's loan application and forwarding the completed application to the relevant financial institution. The dealership also reserves the right to choose the financial institution that will grant credit to the customer;

ii) The arranging for, on behalf of the dealership, the sale of optional life, disability and warranty insurance policies. This would consist of explaining to the customer the benefits of purchasing a certain policy, completing the appropriate forms and forwarding the completed application to the insurer on behalf of the dealership;

iii) Documenting sales of new and used vehicles by the dealership.

3. XXXXX receives a percentage of the income generated in the dealerships' business offices as remuneration for the services provided in subparagraphs 2 i) to iii).

4. XXXXX is engaged by XXXXX to perform the services described in subparagraphs 2 i) to iii). XXXXX is not an employee of XXXXX[.] Instead, she is self-employed and, pursuant to a verbal agreement with XXXXX receives a commission for the services that she renders.

Our Comments

Question

A) What is the GST status of each of the services described in paragraph 2 for purposes of the agreement between XXXXX and the dealerships?

Answer

General Comment

In your memorandum, you state that XXXXX arranges for, on behalf of the dealership, the sale of optional life, disability and warranty insurance policies and that XXXXX forwards completed applications to the insurer on behalf of the dealership. We interpret this statement to mean that it is a third party insurer that issues these insurance policies while the role of the dealership is to arrange for the issuance of the policies by the insurer. Further, XXXXX acts in a subcontracting capacity, on behalf of the dealership, to arrange for the issuance of insurance policies by the insurer to customers of the dealership. We raise this matter to clarify the nature of the business relationships between the parties and because the definition of "insurance policy" in subsection 123(1) of the Act would only include a policy or contract of life insurance that is issued by an insurer.

It is the Department's position that the services provided by XXXXX of arranging for, on behalf of the dealership, customer financing for the purchase of new and used vehicles from the dealership and arranging for, on behalf of the dealership, (which, in turn, is acting on behalf of the insurer) the issuance of optional life and disability insurance policies would be considered to be part of a financial service for GST purposes under paragraph (l) of the definition of "financial service" in subsection 123(1) of the Excise Tax Act (the "Act"). The documenting of sales of new and used vehicles by the dealership is addressed in answer C) below. The arranging for, on behalf of the dealership, the issuance of warranty insurance policies is addressed in answer D) below.

Question

B) What is the GST status of the services described in paragraph 2 under the agreement between XXXXX and XXXXX?

Answer

It is the Department's position that XXXXX is acting as a sub-contractor of XXXXX under the verbal agreement. The services she provides of arranging for, on behalf of the dealership, customer financing for the purchase of new and used vehicles from the dealership and arranging for, on behalf of the dealership, the issuance of optional disability and life insurance policies would be considered to be part of a financial service for GST purposes under paragraph (l) of the definition of "financial service" in subsection 123(1) of the Act. The documenting of sales of new and used vehicles by the dealership is addressed in answer C) below. The arranging for, on behalf of the dealership, the issuance of warranty insurance policies is addressed in answer D) below.

Question

C) Does documenting sales of new and used vehicles by the dealership constitute a taxable supply?

Answer

XXXXX receives a percentage of the income generated in dealerships' business offices as remuneration for documenting sales of new and used vehicles by the dealership. Since this commission is for a service that is not referred to in paragraphs (a) through (m) of the definition of a "financial service" in subsection 123(1) of the Act, it is not a "financial service" for GST purposes and the service for which the commission is the consideration would be taxable at the rate of 7%.

Question

D) What is the GST status of arranging for, on behalf of the dealership, the issuance of warranty insurance policies? i.e. warranty insurance does not fall within the definition of "insurance policy" where services performed in that regard cannot be described as "financial services", thus making them subject to GST.

Answer

The definition of "insurance policy" in subsection 123(1) of the Act excludes a warranty issued by an insurer that is in respect of the quality, fitness or performance of tangible personal property where the warranty is supplied to a person who acquires the property otherwise than for resale. Therefore, in situations such as this case at hand, extended warranty policies issued by an insurer to a person who is not acquiring the product for resale, where these warranties are sold to the consumer, would be subject to GST. Further, the service of arranging for the issuance of these warranties on behalf of the dealerships would also be subject to GST.

Question

E) Will the same reasoning and guidelines be applied to the services XXXXX provides directly to the dealerships under her verbal agreement with XXXXX as outlined in the Department's position on this issue in a letter dated July 23, 1993, addressed to XXXXX[?]

Answer

XXXXX is arranging for services, as a sub-contractor, on behalf of the dealership and receives commissions for her services from XXXXX who is also arranging for these same services as a contractor through XXXXX. Therefore, the rationale and guidelines outlined in the letter dated July 23, 1993, from Jim Daman to XXXXX could be applied to the services provided directly to the dealerships under her verbal agreement with XXXXX has entered into a sub-contracting agreement with XXXXX It should be noted, however, that it has been the Department's position that, the service of "arranging for" the provision of a "financial service" referred to in any of paragraphs (a) to (i) of the definition "financial service" in subsection 123(1) of the Act should be supplied in an active manner to the buyer or seller of a financial service with a view to bring them together to transact.

Question

F) Are there any special guidelines for the service of arranging for the sale of life and disability insurance that would allow a similar treatment to that of arranging for customer financing described in subparagraph 2 i)? If so, would that treatment be applied to the services supplied under the agreement between the dealerships and XXXXX and XXXXX, or both?

Answer

There are no special guidelines for the service of arranging for the issuance of life and disability insurance. It has been the Department's position that the services provided, such as the arranging for the issuance of life and disability insurance, should be supplied in an active manner to the buyer or seller of a financial service with a view to bring them together to transact.

Question

G) Could section 139 of the Act or the provisions of Policy Statement P-077 be applied if we determine XXXXX commissions to be based on a mixture of taxable and exempt supplies for commissions paid to her from which are in a single lump sum?

Answer

Section 139 of the Act deems a mixed supply to be only a supply of a financial service where

a) the consideration for the financial services component is greater than 50% of the total consideration for the mixed supply, and

b) the mixed supply includes a property that is not capital property of the supplier, and

c) the financial services are related to the other properties and/or services, and it is the usual practice of the supplier to provide the financial and other properties and/or services together in the ordinary course of its business.

It should be noted that the total consideration for the mixed supply is calculated as the sum of the consideration for each of the financial services and non-financial services components if each component had been provided on a separate basis, and the mixed supply will be exempt. Since we do not know on what basis XXXXX commission is calculated, whether the supplies of financial services she is making are related to the other supplies she is making, or whether it is her usual practice to provide financial services together with other supplies in the ordinary course of her business, we cannot determine whether section 139 of the Act would apply.

In order to determine whether the requirements of section 139 of the Act have been met, you would need to determine the formula by which her commission is calculated. For example, she may be paid on a lump-sum basis, on a percentage basis, on the basis of a set fee for each separate service provided, or some combination of these methods. You also need to determine whether the financial services are related to the other services she is providing. For instance, is it her usual practice to document the sales of all the new and used vehicles sold by the dealership or just the sales for which she has arranged the customer financing?

In the event that section 139 of the Act does not apply to a mixed supply, section 138 of the Act may apply instead. Section 138 provides what might be described as an "incidental supply" rule whereby a supplier is not required to apportion consideration between two or more properties and/or services if the provision of one of the properties or services (the "incidental supply") can reasonably be regarded as being incidental to the provision of the other property and/or service (the "principal supply") and if no separately identifiable charge is made for the incidental supply. Accordingly, the incidental supply forms part of the principal supply and, therefore, will have the same GST status (i.e. taxable at 7%, zero-rated or exempt) as the principal supply. We have not been provided with sufficient information to determine whether the conditions of section 138 of the Act have been satisfied.

We hope that these comments are of assistance to you. Should you have any further questions, please do not hesitate to contact Tim Côté at 952-3413 or Duncan Jones at 952-9210.

T.R. Côté
Rulings Officer
Financial Institutions and
Real Property Division
GST Rulings and Interpretations Directorate

Telephone #: (613) 954-5124

Fax #: (613) 990-1233