24 February 2003 GST/HST Interpretation 30306 - Tax Status of Payments

Dear XXXXX:

Thank you for your letter XXXXX concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to certain payments of money. We regret the delay in providing you with a response.

The following facts were presented in your letter.

• A Canadian resident company (CanCo), who is registered for purposes of the GST/HST, is engaged in the sale of equipment in Canada (Equipment).

• A non-resident company, located in the United States (U.S. ManufactureCo), which is related to Canco, manufactures the Equipment. U.S. ManufactureCo is not registered for the GST/HST.

• U.S. ManufactureCo sells the Equipment to CanCo, the Canadian distributor. CanCo either maintains ownership of the Equipment or sells the Equipment outright to the dealers. U.S. ManufactureCo does not maintain ownership of the Equipment.

• CanCo sells the Equipment through a network of dealers, resident in Canada, who make sales to retail customers. A substantial portion of the Equipment is supplied by way of lease or conditional sales contracts. In some cases, Canco finances the leases and in some cases a credit acceptance corporation, which is wholly owned by CanCo (FinanceCo), finances the leases and conditional sales contracts.

• From time to time, Canco wishes to stimulate sales of Equipment by offering reduced financing rates in its leases and conditional sales contracts, e.g., XXXXX % off the prevailing market rate. These market incentives are implemented under two scenarios.

Scenario 1

In circumstances where CanCo owns the lease, CanCo and U.S. ManufactureCo agree that CanCo will charge U.S. ManufactureCo an amount equal to 50% of the cost of entering into the reduced financing rates with consumers.

Scenario 2

In circumstances where FinanceCo owns the leases and conditional sales contracts, it is agreed that FinanceCo will charge 50% of the cost of the reduced financing rate inducement to CanCo and 50% of the reduced financing rate inducement directly to U.S. ManufactureCo. The purpose of this transaction is to induce FinanceCo to enter into a reduced rate of financing agreements with its dealers.

In both cases, U.S. ManufactureCo bears 50% of the cost of the inducement payment.

Interpretation Requested

You have requested whether the payment to CanCo and FinanceCo by U.S. ManufactureCo for agreeing to effect reduced financing rates is a payment for a zero-rated supply of a service pursuant to section 7 of Part V of Schedule VI to the Excise Tax Act ("the Act").

Interpretation Given

We note that no actual contracts were provided by you; however, based on the information provided, we offer the following interpretation.

Scenario 1

1. The payment of money from U.S. ManufactureCo to CanCo, in the circumstances described, may be a supply of an exempt financial service pursuant to section 1 of Part VII of Schedule V to the Act.

Scenario 2

1. The payment of money from U.S. ManufactureCo to FinanceCo, in the circumstances described, may be a supply of an exempt financial service pursuant to section 1 of Part VII of Schedule V to the Act.

2. The payment of money from CanCo to FinanceCo may also be a supply of an exempt financial service pursuant to section 1 of Part VII of Schedule V to the Act.

Rationale

"Debt security" as defined in subsection 123(1) of the Excise Tax Act ("the Act") means a right to be paid money and includes a deposit of money, but does not include a lease, licence or similar arrangement for the use of, or the right to use, property other than a financial instrument. Financial obligations representing a right to be paid money are by definition a debt security.

Based on the information provided, the right of CanCo or FinanceCo, as the case may be, to receive a payment from U.S. ManufactureCo under an agreement to offer reduced financing rates, is a debt security.

The definition of "financial instrument" in subsection 123(1) of the Act includes a "debt security".

Pursuant to paragraph 123(1)(f) of the definition of "financial service" of the Act, the payment or receipt of money as interest, principal, benefits or any similar payment or receipt of money in respect of a financial instrument is considered to be a "financial service". The payment of money by U.S. ManufactureCo in the circumstances described to reduce financing rates may be considered to be a payment within the meaning of the said paragraph (f) and, therefore, a financial service.

Supplies of financial services are exempt under Part VII of Schedule V unless they are specifically listed as zero-rated under Part IX of Schedule VI to the Act. Based on the information provided, the supply of the financial service in this case would not be zero-rated under Part IX of Schedule VI to the Act.

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 Canada Customs and Revenue Agency with respect to a particular situation.

For your convenience, find enclosed a copy of section 1.4 of Chapter 1 of the GST/HST Memoranda Series.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 952-6743.

Yours truly,

Cheryl R. Leyton Border Issues Unit General Operations and Border Issues Division

This letter is not to be used as a reference. For further direction, please contact the Financial Services Unit of the GST/HST Rulings Directorate.