30 November 1998 GST/HST Interpretation HQR0001361 - Operations of a Used Goods Dealer

Dear XXXXX

This is in reply to your letter of September 30, 1998, and further to our telephone conversation XXXXX of November 19, 1998, concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to the operations of a used goods dealer.

Our understanding of the situation is as follows:

XXXXX describes itself as a used goods dealer. Its business involves primarily buying second hand items from various parties, principally from individuals who are non-registrants for GST purposes. Items acquired are subsequently resold by XXXXX[.] While some items are acquired outright, XXXXX will hold items in its possession on a conditional basis prior to taking title to the goods.

XXXXX will advance an amount of money to a customer subject to certain conditions. A contract is drawn up which indicates the article received by XXXXX, the amount advanced and the fees which will be charged by XXXXX for services rendered including a monthly credit charge, warehousing and insurance fee and a contract administration fee. The customer has a certain time frame in which to repay the advance and fees and recover his property. If the customer does not make payment by the specified date in the contract, then the property is considered sold to XXXXX on the first day after the termination of the contract for the amount advanced. The property then becomes an inventory item of XXXXX for future resale purposes. If XXXXX had advanced XXXXX then the property would be recorded as having an inventory carrying cost of XXXXX should the customer fail to repay the advance.

In this hypothetical situation, XXXXX will earn its income in primarily four ways;

1. The monthly credit charge, which will amount to approximately XXXXX of its gross revenues for the year,

2. The monthly warehousing and insurance charges, which will amount to approximately XXXXX of its gross revenues for the year,

3. The contract administration fee, which will amount to approximately XXXXX of its gross revenues for the year,

4. The gross profit earned from the resale of contract property along with resale of other inventory items acquired outright. This amount of income accounts for the remaining gross revenues of XXXXX[.] Note that XXXXX total revenues in any one year would not exceed XXXXX[.]

Interpretation Requested

You have posed the following questions regarding the application of the Excise Tax Act (the Act) to the transactions on the assumption that XXXXX does not hold itself out as a pawnbroker and is not registered as such under any federal, provincial or municipal legislation.

A. Will the outright purchase of used goods from non-GST registrants give rise to a notional input tax credit to be claimed by XXXXX?

B. Is the earning of the monthly credit charge, warehousing and insurance fee and the contract administration fee all considered to be taxable supplies?

C. Is the advance of money by XXXXX considered to be a financial service as defined within section 123(1) of the Act?

D. If the advance of money by XXXXX is considered a financial service, it would appear that the fee earned with the provision of that service is the monthly credit charge. Since the monthly credit charge would not exceed in aggregate XXXXX of XXXXX total revenues, XXXXX should not be considered a de minimis financial institution and thus eligible to claim full input tax credits for all inputs associated with the provision of that supply. In your view would either of the warehousing and insurance fee or contract administration fee be considered financial revenues?

E. Where a customer fails to repay the advance within the required time frame and XXXXX subsequently acquires the property, is this considered to be a non taxable event and one giving rise to a notional input tax credit claim?

F. Is the subsequent resale of inventoried property by XXXXX to third parties considered a taxable supply?

You also asked if the responses to any of the above six questions would change where XXXXX is registered to conduct business as a pawnbroker.

Interpretation Given

We would point out at the outset that, although you have indicated that XXXXX in this hypothetical situation does not hold itself out as a pawnbroker nor is registered as such under any federal, provincial or municipal legislation, the activities and the services provided by XXXXX are analogous to that of a pawnbroker and, as such, the GST/HST treatment of supplies made by XXXXX would be the same as that accorded to a registered pawnbroker.

With respect to your specific questions, we provide the following responses.

A. For supplies made on or before April 23, 1996, under subsection 176(1), registrants were entitled to claim notional ITCs for the acquisition of used tangible personal property supplied in Canada by way of sale, where the GST was not payable by the registrant in respect of the supply and the property was acquired for the purpose of consumption, use or supply in the course of the commercial activities of the registrant. The notional ITC was equal to the tax fraction (7/107ths) of the consideration for the supply at the time it was paid. For supplies made after April 23, 1996, registrants are no longer entitled to claim notional ITCs on purchases of used tangible personal property which they purchase or accept as trade-ins from non-registrants.

B. No, these fees are not considered to be taxable supplies. The monthly credit charge is considered to be an interest charge in respect of a loan (a financial instrument) and is a financial service pursuant to subsection 123(1)(f) of the definition of "financial service". The contract administration fee, and the warehousing and insurance fee would be considered a separate fee or charge for an exempt financial service as they appear to be fees in respect of the contract in which money is advanced (the loan).

C. Yes, the advance of money by XXXXX is treated as a loan and the transfer of the item to XXXXX is treated as a transfer of a security interest which is deemed not to be a supply under section 134. The loan is an exempt financial service pursuant to paragraph (g) of the definition of financial service in subsection 123(1).

D. As noted above, the monthly credit charge and the warehousing and insurance fee are considered to be fees in respect of a financial service. Paragraphs 149(1)(b) and (c) set out the de minimis rule which applies to certain financial institutions. In general, under paragraph (b), the rule provides that a person is a financial institution if the person's revenues in the preceding taxation year from interest, certain dividends or income from separate fees or charges for financial services exceeded 10% of the person's total revenues for the preceding taxation year, and exceeded the threshold amount of $10,000,000 on an annualized basis. In general under paragraph (c), a person is considered a financial institution throughout a taxation year where the total of all amounts each of which is included in computing the person's income is comprised of interest, fees or other charges in respect of charge cards or credit cards issued by the person or loans, advances or credit granted by the person exceeded $1,000,000 in the preceding year. A person who is considered to be a de minimis financial institution is subject to the special input tax credit rules. That is, property or services acquired or imported by a financial institution must be consumed, used or supplied 100% in the course of commercial activities of the financial institution to be eligible for a full ITC. Where financial institutions do not use inputs exclusively in the course of commercial activity, the tax paid or payable on the input must be apportioned between the intended use of the input in a commercial activity and any other use.

However, given the circumstances of XXXXX it is our view that they may be a financial institution pursuant to paragraph 149(1)(a) of the Act. That is, pursuant to subparagraph 149(1)(a)(viii), "a person whose principal business is the lending of money or the purchasing of debt securities or a combination of both". In the hypothetical situation, it would be a question of fact as to whether the principal business of XXXXX would be the lending of money.

E. When the item is not claimed within the redemption period, it is considered seized for the purpose of satisfying a debt obligation pursuant to subsection 183(1) and the creditor is deemed to have received, at that time, a supply by way of sale and that supply is deemed to have been made for no consideration.

F. In accordance with subsection 183(2), when XXXXX subsequently sells the item, it charges tax on the sale. XXXXX may not claim a notional input tax credit at the time the item is seized, however, at the time when the item is resupplied to a third party, a notional input tax credit may be claimed provided the requirements of subsection 183(7) of the Act are satisfied.

The responses to the above six questions would remain the same regardless of whether XXXXX is registered to conduct business as a pawnbroker or not.

The foregoing comments represent our general views with respect to the subject matter of your letter. Proposed amendments to the Excise Tax Act, if enacted, could have an effect on the interpretation provided herein. These comments are not rulings and, in accordance with the guidelines set out in section 1.4 of Chapter 1 of the GST/HST Memoranda Series, do not bind the Department with respect to a particular situation.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 952-9577 or Duncan Jones at (613) 952-9210.

Yours truly,

Marilena Guerra
Rulings Officer
Financial Institutions and Real Property Division
GST/HST Rulings and Interpretations Directorate
Policy and Legislation Branch