Please note that the following Policy Statement, although correct at the time of issue, may not have been updated to reflect any subsequent legislative changes.

GST/HST Policy Statement P-115

DATE OF ISSUE

February 21, 1994

SUBJECT

Section 134 - Security substitution

LEGISLATIVE REFERENCE(S)

Section 134

NATIONAL CODING SYSTEM FILE NUMBER(S)

11585

EFFECTIVE DATE

January 1, 1991

TEXT

This policy statement will discuss when there is a security substitution . In particular, does Section 134 apply to the transfer and retransfer of the property or property interest used to secure the debt or obligation.

Issue and Decision:

A debt or obligation is often secured by property or an interest in property. Where the purchaser has ownership of the property and wishes to borrow money, the purchaser\debtor may transfer ownership of the security to a lender. Subsequently, the purchaser\debtor may wish to replace the security pledged before the loan is paid in full. If the lender agrees, the original security is transferred\retransferred to the debtor. At the same time, the debtor transfers title to other security to the lender to secure the loan.

In cases of security substitution, the Department will not seek to tax the substitution of an interest in a debtor's property held for the purposes of securing a debt or obligation for an interest in another property of the debtor, where the purpose of the transaction is strictly the substitution of security. Where there are other potential tax results or considerations, each case will have to be examined on the basis of its particular facts.

SAMPLE RULING

STATEMENT OF FACTS

A small manufacturing company has a revolving equipment loan outstanding. The loan is secured by the company's operating equipment. For business reasons, the company wishes to trade in some of the old equipment for machines that are more cost efficient. The lender agrees to retransfer the original security provided the new equipment is substituted property. The lender retranfers the old equipment to the borrower. The borrower transfers title of the newly acquired equipment to the lender to secure the outstanding loan.

RULING REQUESTED

Do the provisions of Section 134 apply to the transfer of the new equipment and retransfer of the old equipment from the lender to the borrower?

RULING GIVEN

The transfer and retransfer of the equipment will not be taxed.

Rationale

Section 134 applies to the transfer of title of the new equipment substituted for the old equipment. It is the Department's position not to tax the retransfer of title of the old equipment provided it is part of a substitution of property. The transfer and retransfer of the equipment will not be taxed.