31 July 2002 GST/HST Interpretation 37094 - Tax Status of Mortgaging Services

XXXXX

All mortgages sold under these programs are on a fully serviced basis. The sale of mortgages is an exempt financial service while administrative services are excluded from the definition of financial services by paragraph (t) of the definition of financial services and the corresponding Financial Services (GST/HST) Regulations.

Based on a review and analysis of the documents provided, I initially advised XXXXX, that in my view both programs fell within the ambit of section 139 of the Excise Tax Act and the mortgage servicing is not subject to GST. XXXXX However, since then there have been some changes.

XXXXX Review and Analysis

The agreements/documents reviewed in this case are:

XXXXX The XXXXX Agreement is between the XXXXX is permitted to enter into a securitization agreement with XXXXX (the Trust) to sell eligible mortgages to the trust. Based on the agreement the local XXXXX must be a signatory to the agreement before it can sell its mortgages on a securitized basis to the Trust per the XXXXX. This agreement requires that all the requirements and covenants found in the XXXXX must be carried out by the XXXXX.

Essentially by way of this agreement, the XXXXX promises to the Trust that it will guarantee the performance of the XXXXX with respect to the sold mortgages in the event of an act of default by the XXXXX e.g. bankruptcy, failure to maintain an appropriate credit rating, failure to perform the servicing covenants and so on. The XXXXX in turn covenants to indemnify XXXXX for any damages its actions may have caused XXXXX. In the event the XXXXX fails to meet the requirements of this agreement the XXXXX may suspend the XXXXX right to participate in the asset securitization program, XXXXX.

XXXXX, the agreement requires XXXXX to service the securitized mortgages but does not stipulate that a separate charge must be made for servicing. Per XXXXX of the XXXXX, a servicer other than XXXXX, appointed by the Trust shall be entitled to a reasonable servicer fee. Under XXXXX of the XXXXX where XXXXX is in default, XXXXX is required to take over the servicing function but shall not be entitled to a servicing fee.

The XXXXX establishes the securitization program between the Trust and XXXXX and allows XXXXX to allow individual XXXXX to enter into the program with the trust. The XXXXX essentially contains all the conditions essential to the establishment of the securitization program and all the representations, warrantees and covenants between the parties in respect of the transactions that may occur between them. For example, a condition of admitting a seller to the program, i.e. an individual XXXXX, is that after XXXXX proposes their admission, the XXXXX must sign the XXXXX. Other conditions involve maintaining financial solvency, collection and distribution of payments, preparation of reports, payment terms and the appointment of a replacement servicer where a program termination event has occurred.

The XXXXX is the agreement signed between the Trust XXXXX and the individual XXXXX. These are typical securitization agreements. They deal with the purchase of mortgages, the conditions to purchase mortgages, the representations, warranties and covenants of the seller and of the Trust, the servicing of the purchased mortgages, the application of mortgage proceeds, the disposition of mortgages where there is an event of termination, the description of what constitutes an event of termination, appointment of a replacement servicer, servicer fees, sale of mortgages and so on.

Per the XXXXX, the seller (XXXXX) desires to sell and the purchaser (the Trust) desires to purchase interests in eligible mortgages on a fully serviced basis from time to time on the terms and conditions set out by the XXXXX. XXXXX states that the seller retains the registered title to the purchased mortgages in trust for the benefit of the purchaser. The Trust, although the beneficial owner of the mortgages is precluded from communicating to the mortgagors that it has in any way a beneficial interest in the mortgages. However, subject to an event of termination, registered title may pass to the Trust although this does not impact on the issue at hand in this case. Events of termination, per XXXXX of the XXXXX, may involve a default in the observance or performance in a material manner of any covenant or obligation of the seller, a default in the seller's performance of any obligation under XXXXX, the seller may be subject to an insolvency action and so on.

In effect, the Trust is the person at risk in respect of the purchased mortgages. XXXXX does not bear any risk in respect of the mortgages. This was confirmed with XXXXX.

All mortgages are sold on a serviced basis and there are references to servicer fees in the agreements reviewed. However, there are no specific references to a fee for servicing done by the XXXXX. Where the XXXXX may have to perform the servicing function because the XXXXX is unable to carry out some aspect of the servicing function, the XXXXX is precluded from charging any fee for servicing. Under the agreements, the Trust may appoint a replacement servicer where a XXXXX is unable to fulfill any aspect of its servicing function. In this case the Trust is entitled to negotiate a servicing fee with the replacement servicer and a provision is made for a servicer fee in the XXXXX.

Per their agreements, closing payment in respect of purchased mortgages means an amount equal to the aggregate net book value of the purchased mortgages. In XXXXX of the agreements, XXXXX, the amounts collected are first allocated to cover certain expenses both parties agreed to, payment of the purchase price and any amounts left over are paid to the seller. Since the amounts left over are not in respect of the consideration for the purchase, it is our view they are in respect of a separate consideration for the supply of the administrative services. Accordingly, sections 138 and 139 of the Act are not applicable as the single consideration criteria contained in those sections has not been met. These amounts paid by the Trust to the seller are consideration for a taxable supply of administrative services.

We would also point out that, while we have not reviewed the constituting documents XXXXX within the meaning of paragraph (q) of the definition of "financial service" in subsection 123(1) of the Excise Tax Act. Accordingly, the administrative services provided to the trusts would be excluded from the financial services definition by virtue of paragraph (q) without having to rely on paragraph (t) of the definition of "financial services" and the Financial Services (GST/HST) Regulations.

Should you have any questions do not hesitate to call me at (613) 952-8811 or Duncan Jones at (613) 952-9210.

XXXXX XXXXX