24 April 2003 GST/HST Ruling 44055 - Application Fee to Review, Evaluate and Accept Insurance Risk

Dear XXXXX

Thank you for your letter XXXXX with attachments concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to the transaction described below.

We apologize for the delay in responding.

Statement of Facts

Our understanding of the facts, the transaction, and the purpose of the transaction is as follows:

1. The XXXXX is a corporation incorporated under the laws of Canada with its head office located at XXXXX

2. The XXXXX insures financial institutions against the risks associated with the non-payment of debts on mortgages issued by financial institutions. The XXXXX charges an application fee to review and evaluate the risks associated with mortgage applications received by various financial institutions.

3. The essential feature of this process includes the review of the application by the XXXXX automated collateral underwriting system. Following the review by this automated process the application is either approved or referred for manual underwriting. If the application is approved a XXXXX is issued to the lender.

4. The electronic XXXXX or XXXXX (XXXXX of the XXXXX XXXXX issued to the lender indicates the premium owing, the PST/QST owing for the particular application. The XXXXX is generally the only communication between the XXXXX and the lender and qualifies as an invoice to the lender.

5. If more than XXXXX of the value of the intended purchase price is borrowed the financial institution (lender) is required to obtain mortgage default insurance on that mortgage.

6. The XXXXX insures the lender and the lender is required to pay the premium charged by the XXXXX. In general, the costs associated with the premium are passed on to the borrower.

7. The XXXXX uses database and independent appraisers to ascertain the value of property acquired by the borrower, which is used to determine the loan-to-value ratio, which determines the premium to be paid.

8. The application fee paid by the lender covers the costs associated with using property associated databases, third party appraisers, general underwriting overheads, processing costs and credit reports.

XXXXX

9. This application fee is separate from the premium. However, according to XXXXX XXXXX which indicates that the premium payment is allocated to the application fee and collected at the same time as the premium. The XXXXX refers to the application fee as an "underwriting fee".

10. The XXXXX charges three types of application fees (i) XXXXX, (ii) XXXXX and (iii) XXXXX. The fee varies according to the valuation work that is required to assess the application, as an example, a standard application fee would apply if the lender provides an independent third party appraisal with the application.

11. The application fee does not depend on or vary with the premium the lender is required to pay. Although the application fee is a reflection of the market rate other factors like valuation costs and third party appraisals have an impact on the application fee charged by the XXXXX.

12. The XXXXX prices its insurance products to obtain a return on equity of approximately XXXXX.

Transaction

The XXXXX provides mortgage insurance on the risks associated with the potential non-payment by debtors of sums due to insured financial institutions, and receives an application fee as consideration for reviewing and evaluating the risks associated with mortgage applications and related properties.

Ruling Requested

Whether the GST is payable on application fees received by the XXXXX as consideration for reviewing and evaluating mortgage applications and related properties.

Ruling Given

Based on the facts set out above, we rule that:

The application fee received by the XXXXX represents consideration for an exempt supply of a "financial service" as referred to in section 1 of Part VII of Schedule V to the Excise Tax Act (ETA). The underwriting services provided by the XXXXX qualify as "financial services" as defined in paragraph (h) of the definition of "financial service" in subsection 123(1) of the ETA. Therefore, the XXXXX is not required to charge and collect GST on application fees it receives from insured financial institutions.

This ruling is subject to the general limitations and qualifications outlined in section 1.4 of Chapter 1 of the GST/HST Memoranda Series. We are bound by this ruling provided that none of the above issues is currently under audit, objection, or appeal; that there are no relevant changes in the future to the Excise Tax Act, or to our interpretative policy; and that you have fully described all necessary facts and transaction(s) for which you requested a ruling.[required only when the decision is unfavourable]

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 957-8222.

Yours truly,

Manjula Vethanayagam
Financial Institutions Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate

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