5 July 1999 GST/HST Interpretation HQR0001828 - Financial Service

Dear XXXXX

Thank you for your letter of May 31, 1999 concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to the two scenarios described below.

The statement of facts and the interpretations requested for each scenario as you presented them are as follows:

Scenario One

Statement of Facts

1. XXXXX [(]"ABC") is a Canadian resident company. ABC is an insurance company registered under federal and/or provincial insurance statutes. ABC is a GST registrant.

2. XXXXX ("NRC") is a non-resident company incorporated and located in the United States. NRC is not registered for GST. NRC has no offices or employees located in Canada.

3. XXXXX ("XYZ") is Canadian resident company. XYZ is an insurance company registered under federal and/or provincial insurance statutes. XYZ is a GST registrant. XYZ sells insurance and extended car warranties in Canada. The extended car warranty guarantees the repair of the car (including parts and labour) should the car breakdown. The extended car warranties are sold through car dealerships in Canada.

4. XYZ has entered into an agreement with NRC. Under the agreement XXXX NRC will be responsible for administering XYZ's extended care warranty program in Canada. This includes distributing and marketing XXXXX XYZ's extended car warranties, receiving extended car warranty premiums from dealerships and settling claims (i.e., paying out funds under the extended car warranty program) on behalf of XYZ. NRC will receive a fee for administering XYZ's XXXXX extended car warranty program in Canada. The administration of XXXXX XYZ's extended car warranty program is NRC's only business activity in Canada.

5. NRC has entered into an agreement with ABC XXXXX[.] Under the agreement, NRC will subcontract the administration of XXXXX XYZ'[s] XXXXX extended car warranty program in Canada to ABC XXXXX[.] This means that ABC will be required to distribute and market XYZ's XXXXX extended car warranties in Canada, receive extended car warranty premiums from dealerships and settle claims (i.e., pay out funds under the extended car warranty program). ABC will receive a fee for this service from NRC.

Interpretation Requested

1. Are the extended warranties issued by XYZ GST exempt or GST taxable?

2. Is NRC's service of administering XYZ's extended car warranty program in Canada GST exempt (as a financial service) or GST taxable?

3. Is ABC's service of administering XYZ's extended car warranty program in Canada, on behalf of NRC, GST exempt (as a financial service) or GST taxable?

4. Is XYZ required to self-assess and remit the 7% GST on the value of the fee paid to NRC under section 218 of the Excise Tax Act (the Act)?

5. Can ABC zero-rate its service (as an exported service) to NRC under section 7 of Part V of Schedule VI to the Act?

Scenario Two

Statement of Facts

1. XXXXX ("DPC") is a non-resident company incorporated and located in the United States. DPC is not registered for GST. DPC has no offices or employees located in Canada.

2. XXXXX [("]CAC") is a Canadian resident company. CAC is a GST registrant.

3. DPC has entered into an agreement to purchase overdue credit card account receivables from a credit card company in Canada. DPC will own the overdue credit card accounts receivables purchased from the credit card company and will be financially at risk in respect of the accounts receivables.

4. DPC has entered into an agreement with CAC. Under the agreement, CAC will be responsible for trying to collect the overdue credit card accounts receivables from the credit card holders. XXXXX CAC will receive a fee based on a percentage of the accounts receivable collected. CAC will not own the overdue credit card accounts receivables and will not be financially at risk in respect of the accounts receivables.

Interpretation Requested

1. Is the purchase of the overdue credit card accounts receivables by DPC from the credit card company GST exempt (as a financial service) or GST taxable?

2. Is CAC's service of collecting the overdue credit card accounts receivables from the credit card holders GST exempt (as a financial service) or GST taxable?

3. Can CAC zero-rate its service (as an exported service) to DPC under section 7 of Part V of Schedule VI to the Act?

Interpretation Given

Based on the information provided we provide the following responses to your questions:

Scenario One

1. Subsection 123(1) defines "insurance policy", in part, as "a policy or contract of insurance (other than a warranty in respect of the quality, fitness or performance of tangible property, where the warranty is supplied to a person who acquires the property otherwise than for resale) that is issued by an insurer". The extended car warranties in question issued by XYZ to the final consumer do not meet the definition of insurance policy and are therefore not financial instruments. The issuance of the warranties are taxable.

2. NRC is responsible for administering the extended car warranties including distributing and marketing the warranties, receiving the premiums from dealerships and settling claims. This service is not considered a financial service and is therefore taxable.

3. It is indicated that NRC has entered into an agreement with ABC whereby NRC subcontracts the administration of the warranties to ABC. As in response for #2, the administration of the warranties is a taxable supply.

4. XYZ is making taxable supplies of warranties. Section 217 defines "imported taxable supply", in part, as

"(a) a taxable supply (other than a zero-rated or prescribed supply) of a service made outside Canada to a person who is resident in Canada, other than a supply of a service that is

(i) acquired for consumption, use or supply exclusively in the course of commercial activities of the person or activities that are engaged in exclusively outside Canada by the person and that are not part of a business or an adventure or concern in the nature of trade engaged in by the person in Canada".

The supply made by NRC to XYZ is a taxable supply of administrative services. Since this supply is being made to a person resident in Canada, that person would be required to self-assess and remit the 7% GST, if it were not for the exclusion under subparagraph 217(a)(i) which excludes supplies imported by a person for consumption, use or supply in the course of commercial activity of the person. Therefore, XYZ would not be required to self-assess under section 218 on the value of the fee paid to NRC.

5. Unless the service supplied by ABC to NRC falls within one of the exceptions outlined in sections 7(a) to (h) of Part V of Schedule VI to the Act, the service could be zero-rated. It would be necessary to examine the terms of the agreement to determine whether XXXXX ABC is considered to be acting as an agent of NRC consequently falling within the exception noted under section 7(f).

Scenario Two

1. Subsection 123(1) includes a debt security in the definition of "financial instrument". Credit card accounts receivable are a debt security and a financial instrument. The purchase of the overdue credit card accounts receivable by DPC from the credit card company is considered to be an exempt financial service under paragraph (d) of the definition of "financial service" found in subsection 123(1).

2. CAC's is to provide a service of collecting the overdue credit card accounts receivable for which it is not financially at risk. This service is not considered a financial service and is therefore taxable.

[3]. Unless the service supplied by CAC to DPC falls within one of the exceptions outlined in sections 7(a) to (h) of Part V of Schedule VI to the Act, the service could be zero-rated under section 7. It would be necessary to examine the terms of the agreement to determine whether CAC is considered to be acting as an agent of DPC consequently falling within the exception noted under section 7(f).

Please note that it appears that the scenarios described above appear to be structured in a way that may ultimately provide a tax benefit to NRC and DPC. Were these transactions to take place further examination may result in the general anti-avoidance rule (GAAR) under section 274 of the Act being considered. This section is intended to prevent persons from benefiting from transactions undertaken primarily for the purpose of avoiding, reducing or deferring the payment of tax, or increasing a refund or rebate or other amount, where no other anti-avoidance provision is applicable. Such a transaction is considered to be "an avoidance transaction" and includes an arrangement or an event. The GAAR applies to all persons, e.g., registrants, persons claiming rebates, etc. Refer to GST Memorandum 500-6-9: General Anti-Avoidance Rule for further details.

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
A/Senior Technical Analyst
Financial Institutions and Real Property Division
GST/HST Rulings and Interpretations Directorate
Policy and Legislation Branch