6 July 1998 GST/HST Interpretation HQR0001194 - Services Supplied to a Non-Resident Trust

                                                                        GST/HST Rulings and Interpretations
Place Vanier, Tower C, 9th Floor
25 McArthur Avenue
Vanier, Ontario K1A 0L5

                                                                        July 6, 1998

Dear XXXXX

Thank you for your letter of May 14, 1998, concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to a supply of servicing and administering a pool of first mortgage loans.

You provided the following information:

1. There are two parties to the subject supply, a chartered bank resident in Canada (Bank) and a real estate investment trust resident in XXXXX (Trust).

2. The Bank is registered for GST/HST purposes. The Trust is not registered for purposes of the GST/HST.

3. The Bank and the Trust enter into a servicing agreement (Agreement) pursuant to which the Bank agrees to service and administer a pool of certain residential first mortgage loans (Mortgage Loans) which are owned by the Trust.

4. The servicing activities to be undertaken by the Bank pursuant to the Agreement will consist of the collection and remittance of interest and principal arising under the Mortgage Loans (Portfolio Servicing). The Mortgage Loans are secured by real property in Quebec and other parts of Canada. None of the Portfolio Servicing will involve foreclosure, power of sale or other proceedings by which the Bank would take possession of, or acquire any legal interest in, the real property which is secured by the Mortgage Loans. The Portfolio Servicing performed by the Bank will be undertaken by personnel in Canada.

Interpretation Requested

The Bank will be entitled to zero-rate its supply of Portfolio Servicing to the Trust, a non-resident person, pursuant to Schedule VI, Part V, section 7 to the Excise Tax Act (Act).

Interpretation Given

Based on the information provided, the Portfolio Servicing supplied by the Bank to the Trust will qualify for zero-rating under the provisions of subsection 165(3) of the Act and Schedule VI, Part V, section 7.

Explanation

As stated in your letter, a Mortgage Loan in Quebec is considered to be an immovable property and, as a result, defined to be real property under subsection 123(1) of the Act. In addition, a Mortgage Loan outside Quebec, which constitutes an interest in real property, is also defined to be real property under subsection 123(1).

Policy Statement P-169, issued January 25, 1995, outlines the Department's administrative position concerning a service that is in respect of real property situated in Canada. There must be more than a mere indirect or incidental connection between a service and the underlying real property before the supply of the service will be excluded from zero-rating under Schedule VI, Part V, section 7.

In the scenario described above, there is a connection between the Portfolio Servicing and real property, but the connection is indirect. The direct object of the service is the collection and remittance of the mortgage payments (i.e., principal and interest).

The foregoing comments represent our general views with respect to the subject matter of your letter. Unannounced or future amendments to the Act may result in changes to this interpretation. 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) 952-6743.

Yours truly,

Garry L. Ryhorchuk
Senior Rulings Officer
Border Issues Unit
General Operations and Border Issues Division
GST/HST Rulings and Interpretations Directorate

NCS Subject Code:                 11640-3