2 December 2003 GST/HST Interpretation 41678 - - Mortgage Backed Securities Program (MBS)

Please note that the following documents, although correct at the time of issue, may not represent the current position of the Agency. / Veuillez prendre note que ces documents, bien qu'exacts au moment émis, peuvent ne pas représenter la position actuelle de l'Agence.

This is in reply to XXXXX memorandum XXXXX in respect of XXXXX mortgage backed securities. We have reviewed the Master Mortgage Sale Agreement Commercial Mortgages (the Agreement) XXXXX between XXXXX (the Trust), XXXXX (the Seller) and XXXXX (Standy-By Servicer) and provide our comments.

Our understanding is that the Seller sells mortgages to the Trust on a fully-serviced basis. The Seller has not been collecting GST on the service fee.

Our Comments

Since the mortgages are sold to the Trust on a fully serviced basis, the first step is to determine whether the servicing is part of the single supply of the sale of the mortgages or whether the servicing is a supply separate from the sale of the mortgages. In determining whether there is a single supply or multiple supplies, we turn to policy statement P-077R "Single and Multiple Supplies".

The first factor in the policy is to determine whether some elements of a supply are inputs or themselves supplies.

XXXXX

These points indicate that the servicing of the mortgages is an element that is separable from the sale of the mortgages.

The second factor in the policy relates to the examination of the contracts or agreements between the parties involved. As indicated above, XXXXX indicates that the mortgages are sold on a serviced basis however, further examination of the agreement reveals that the agreement contemplates the possibility of another party carrying out the servicing. This is supported by both XXXXX, which contemplates the Seller appointing an agent to carry out its responsibilities outlined in XXXXX and, XXXXX which contemplates the appointment of a replacement Servicer under certain circumstances. These points also indicate that the servicing is a separate supply from the sale of the mortgages.

The third factor in the policy relates to the number of suppliers and recipients. Once again, the agreement contemplates one supplier with respect to the sale of the mortgages but more than one supplier with respect to the servicing of those mortgages. In both cases there is only one recipient, i.e., the Trust.

All three factors lead to the conclusion that there are multiple supplies in this situation. One supply being the sale of the mortgages and the second supply being the servicing of those mortgages.

As a result of the conclusion that there is more than one supply, the next step is to determine whether either of sections 138 or 139 may be applicable. Both provisions provide guidance in determining the tax status of mixed supplies of a financial and non-financial nature when the supplies are provided for a single consideration.

In most securitizations there is an amount set out in the sale agreement that dictates how much is being paid for the purchase of the mortgages as well as an amount which can be considered to be an amount in respect of servicing. As detailed in the e-mail XXXXX, the Seller is reporting servicing fees providing support that there is separate consideration for the servicing of the accounts.

Since it has been determined that there is a separate consideration for the servicing of the accounts, the next step is to determine the tax status of this fee. The servicing includes various administrative services relating to the financial instruments. These services would fall within a number of paragraphs of the definition of financial service found in subsection 123(1) of the Excise Tax Act (ETA) however upon examining paragraphs (n) to (t) there is the possibility that paragraphs (q) or (t) could apply to exclude the service from the definition of financial service.

Paragraph (q) excludes from the definition "the provision, to an investment plan (as defined in subsection 149(5)) or any corporation, partnership or trust whose principal activity is the investing of funds, of

(i) a management or administrative service, or

(ii) any other service (other than a prescribed service),

if the supplier is a person who provides management or administrative services to the investment plan, corporation, partnership or trust".

The Declaration of Trust details the activities of the trust.

XXXXX

Based upon this description, it is our view that the principal activity of the trust is the investing of funds, such that paragraph (q) would apply to exclude the service from the definition of financial service consequently the servicing is taxable. It is not necessary to examine the applicability of paragraph (t).

Should you have any further questions, do not hesitate to contact me at (613) 952-9577 or Duncan Jones at (613) 952-9210.

Marilena Guerra

Senior Rulings Officer
Financial Institutions Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate