8 February 2002 GST/HST Interpretation 37008 - Asset Securitization -

The letter from XXXXX proposes the interpretation that administrative services carried out as a part of a mortgage securitization program form part of a single supply of the sale of the mortgages, and by operation of section 138 or 139 as applicable, are deemed to be a financial service and therefore exempt of the GST/HST.

Based on an extensive survey of the mortgage securitization programs of several XXXXX, it is our conclusion that each contract/agreement between the participants must be examined in detail before a determination may be arrived at as to whether the admin services provided in respect of the securitized mortgages is subject to GST. The position presented by XXXXX, after their analysis of the facts, as they perceive them, within the framework of Policy P-077R "Single and Multiple Supplies", is interesting from a discussion point of view but we cannot accept its conclusion that all administrative services within any mortgage securitization program should be considered to fall within the definition of financial services and therefore be exempt of tax.

Survey Findings

Of the numerous facts reviewed in the agreements made available, the following were the most directly related and pertinent to the issue at hand i.e. determining the tax status of administrative services and servicer fees as relates to securitized mortgages.

The agreements between the parties involved in such transactions are very complex and each one must be examined in detail to determine the tax status of the servicing function. Where the agreement appears to be silent in respect of a servicing fee, it is necessary to examine the books and records/financial statements of the participant(s) to determine if revenue earned from servicing the mortgages has been recognized as such in their accounts.

In every case the transactions, sale and purchase of mortgages, is between the issuer of the mortgages and a trust established to act as the purchaser thereof. Individual investors in the securitized mortgage pool are not the purchasers of record of the mortgages. They usually purchase investment certificates issued by the trust in respect of the mortgage pool.

All agreements reviewed specify that the mortgages are sold on a fully serviced basis. They outline in great detail what tasks the seller/servicer is required to perform.

A "Servicer Fee" is mentioned/defined in most of the agreements.

There is also a provision for a replacement servicer where the original servicer may not fulfill certain obligations.

The agreements also specify that the replacement servicer is entitled to a servicer fee which is reasonable and cannot be below a certain threshold specified in the agreement.

The purchase price of the mortgages is determined separately from the calculations dealing with the division and allocation of the cash flow from the mortgage payments.

All agreements state that unless specifically covered by the agreement the participants in the agreement will follow generally accepted accounting principles in respect of the transactions between themselves.

Analysis

XXXXX conclusion after reviewing the factors outlined in Policy P-077R "Single and Multiple Supplies", is that the sale of the mortgages and the subsequent mortgage servicing is a single supply of a financial service and therefore is exempt of tax. They do not address the other requirement of sections 138 and 139 that the supply must be for a single consideration. Their argument also does not refer to "The Financial Services (GST/HST) Regulations".

The first factor in P-077R is to determine whether some elements of a supply are inputs or themselves supplies. For this factor even they concede that the supply of the mortgages is independent of the servicing component with which it is supplied and this points to a multiple supply. This is supported by the commercial reality that every agreement we reviewed has a provision for a replacement servicer where the original servicer may default on any obligation specified in the agreement and that the replacement servicer is entitled to the receipt of a fair and remunerative fee for servicing. In other words, the servicing function, based on commercial reality, is not necessarily restricted to the original seller of the mortgages and can be carried out by other institutions.

The second factor relates to the examination of any contracts or agreements between the parties involved. XXXXX contends that there is a single supply since all agreements stipulate that the mortgages are sold on a fully serviced basis and that it is unlikely that a mortgage would be sold without the accompanying servicing function.

While not in disagreement with these facts it is our observation that all securitization agreements contemplate the possibility that the purchaser of the mortgages may under certain circumstances appoint a replacement servicer. So the servicing of the mortgages could be carried out by someone other than the original seller of the mortgages and independently of the sale of the mortgages indicating a multiple supply. As well, each agreement spells out in great detail the administrative services that must be carried out in respect of the sold mortgages which is another indicator of a multiple supply. Also the replacement servicer is entitled to a reasonable servicing fee which most agreements stipulate cannot be below a certain level.

The third factor relates to the number of suppliers and recipients. If there is only one of each this may indicate that there is single supply involved. XXXXX position is that the agreements contemplate a single supplier and single recipient. However, since every agreement reviewed contemplates that a replacement servicer may be appointed by the purchaser under certain conditions this seems to indicate that there is a multiple supply in these situations.

Based on the information in the securitization agreements reviewed, as applied to the factors listed in P-077R, it is our conclusion that there is a multiple supply in these situations.

As a result of an extensive review of the industry, it is our finding that most of the securitization agreements contemplate a separate fee for servicing which is clearly distinguishable from the purchase price of sold mortgages. Therefore, where there is a consideration for the sale of the mortgage and a separate consideration for mortgage servicing, sections 138 and 139 of the ETA are not available to characterize the tax status of any servicing fee. In accordance with generally accepted accounting principles, since these servicing fees can be material, they may be recognized as a separate source of revenue in their financial statements and in their books and records, even though the agreement may be somewhat ambiguous in dealing with the issue of a separate servicing fee.

Paragraph (t) of the definition of "financial services" and section 4 of the "Financial Services (GST/HST) Regulations" must also be reviewed in determining the tax status of the servicing fees. Under paragraph (t), prescribed services are excluded from the definition of financial services. Section 4 of those regulations excludes all administrative services from the definition of financial services unless they are performed by specific persons in specific situations.

For purposes of paragraph (t) of the definition, the regulations prescribe all administrative services unless those services are performed in respect of a financial instrument by a person at risk, or by a person that is closely related to a person at risk, if the recipient of the service is not the person at risk or another person closely related to a person at risk. Also not a prescribed service for purposes of paragraph (t) is the arranging for issuance, renewal or variation or the transfer of the ownership of the instrument for a person at risk or a person closely related to a person at risk, by an agent, sales person or broker.

Based on our review there was only one situation where the regulations specifically excluded the administrative services in respect of a securitization from falling within the ambit of paragraph (t). In all other situations these administrative services were prescribed services for purposes of paragraph (t).