27 March 2003 GST/HST Interpretation 43440[2] - Commissions Paid by Banks to Real Estate Brokers

Dear XXXXX:

Thank you for the fax XXXXX (with attachments) XXXXX concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to the commissions paid by Banks to Real Estate Brokers.

Statement of Facts

The following is our understanding of the situation:

The XXXXX is dealing with cases where financial institutions are paying commissions to real estate brokers (brokers) for referring clients for mortgage loans, but are not paying the GST XXXXX on said commissions because they are of the view the brokers are arranging for a financial service, i.e. the issuance of a loan. XXXXX Financial institutions are paying commissions to brokers who refer to them potential clients for mortgage loans. They are not paying the GST XXXXX on commissions paid where the financial institutions ultimately provide a mortgage loan as they are of the view the service is arranging for a financial service since the brokers are providing them with the same type of service that the car dealerships are providing pursuant to example no. 1 of GST/HST Policy Statement P-239 - Meaning of the term "arranging for" as provided in the definition of "financial service".

We understand that XXXXX and yourself gathered information from several financial institutions and real estate agents on the type of services being provided for the payment of the commissions. Most financial institutions told the XXXXX that they are not paying the GST XXXXX on the commissions because the brokers are providing them with a financial service. Also, some real estate agents said that the only thing they do for the payment of the commissions is to refer the clients to the bank and they confirmed that the banks are not paying GST XXXXX on the commissions.

The problem is that brokers are presently being audited because the financial institutions refuse to pay GST XXXXX on the commissions. XXXXX provided the XXXXX with a sample agreement between themselves and the brokerage firms and a description of the typical services provided by the broker for the commission received. According to these documents, the XXXXX is of the view that the services described are not sufficient to justify an arranging for service. Because of the on-going audits and several interpretation requests from financial institutions, the XXXXX is seeking our input on this issue.

Interpretation Requested

What is the tax status of the commissions paid by the banks to the real estate brokers for the referral of clients for mortgage loans?

Interpretation Given

Based on the information and documentation provided, the CCRA agrees with the XXXXX that the brokers are not arranging for a financial service.

Explanation

The agreement provided by the XXXXX does not include a complete description of the services provided by the brokers for the payment of the commission, however the tax specialist of the XXXXX provided a complete description in his letter to the XXXXX. The agreement and the letter uses the following expressions, which leads us to conclude that the brokers are providing a simple loan reference:

-    To promote the sale of loans

-    Client referred to the bank

-    Commission for a loan reference

The XXXXX maintains that the brokers are arranging for a financial service because:

-    They identify prospective clients

-    They do a basic screening

-    They present to their clients the different programs of the financial institutions

-    They refer the client to the financial institution chosen

-    They act as contact person for the financial institution and the client if information or additional help is needed, plus they provide a follow-up of the file[.]

In its letter to XXXXX, the XXXXX gives examples of the involvement of the brokers as contact persons for the financial institution and the client. These examples are mostly relating to providing information or solving a problem with the offer to purchase in order that the sale and the financing goes through.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact Nathalie Joly, Senior Rulings Officer, at (613) 941-2046.

Yours truly,

Ivan Bastasic
Director
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate