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-226

DATE OF ISSUE

February 24, 1999

SUBJECT

Application of the GST/HST to supplies made pursuant to various creditor remedies.

LEGISLATIVE REFERENCE(S)

Subsections 183(3) and 183(10) of the Excise Tax Act (the Act).

NATIONAL CODING SYSTEM FILE NUMBER(S)

11585-0, 11585-35, 11783-2 / ss.183(3), 183(10)

EFFECTIVE DATE

183(3) - Supplies made after 1992
183(10) - Supplies made after April 23, 1996 and supplies made on or before April 23, 1996 unless no amount was charged or collected as tax or before April 23,1996, the Minister received an application under subsection 261(1) for a rebate of that amount.

TEXT
Issue and Decision:

The purpose of this policy statement is to outline the department's administrative interpretation of the scope of subsections 183(3) and 183(10) of the Excise Tax Act with respect to supplies made pursuant to various creditor remedies.

Subsection 183(3) provides:

Where a court, for the purposes of satisfying an amount owing under a judgment of the court, orders a sheriff, bailiff or other officer of the court to seize property of the judgment debtor and subsequently makes a supply of the property, the supply of the property by the court shall be deemed, for the purposes of this Part, to be a supply made otherwise than in the course of a commercial activity.

The supply of property which falls within subsection 183(3) would not be subject to the GST/HST as such supplies are deemed to be made otherwise than in the course of a commercial activity.

In order for a supply to fall within subsection 183(3) the following conditions must be met:

1). The court must have rendered a money type judgment with respect to an amount of money owing as opposed to a declaration of rights.

2). The court must order a sheriff, bailiff or other officer of the court to seize property of a judgment debtor to satisfy the pre-existing judgment. Actual or constructive seizure of the property must occur.

3). After the seizure, the court, sheriff, bailiff or other officer of the court, makes a supply of the property.

4). The meaning of the phrase "officer of the court" is restricted to the class of persons or officers of the court, or their agents, who effect seizures and sales under the auspices of the court. This would exclude the judgment creditor as they are not "officer[s] of the court".

Where all of the above conditions are met, subsection 183(3) applies and the supply of the property would be considered to be a supply made otherwise than in the course of a commercial activity.

Subsection 183(10) provides:

• For the purposes of this Part, where
  
  1. for the purposes of satisfying in whole or in part a debt or obligation owing by a person, a creditor exercises a right under an Act of Parliament or the legislature of a province or an agreement relating to a debt security to cause the supply of property,
  2. subsection (3) does not apply to the supply, and
  3. a receiver (within the meaning assigned by subsection 266(1)) does not have authority in respect of the property,
• the creditor shall be deemed to have seized the property immediately before that supply and that supply shall be deemed to have been made by the creditor and not by the person.

The power of sale remedy, whether contained in a mortgage or under statute, falls within subsection 183(10). In this case, the creditor exercises a right of sale under the agreement or pursuant to a statute to satisfy the debt or obligation.

A judicial sale will also be considered to fall within subsection 183(10) on the basis that these are "rights" available to creditors under statute law. Hypothecary recourses provided for under the Civil Code of Québec include a "sale by judicial authority" and a "sale by the creditor". These types of recourses also fall within subsection 183(10).

Remedies That Do Not Fall Within Subsections 183(3) or 183(10)

The department's administrative position is that a simple foreclosure order does not fall within the ambit of subsection 183(3) as this type of action does not typically involve a court ordered seizure and sale of property to satisfy a money type judgment. Under simple foreclosure proceedings, the mortgagee keeps the property to satisfy the debt owing whereas subsection 183(3) requires a seizure and sale of property to satisfy an amount owing under a judgment.

A simple foreclosure action would not fall within subsection 183(10) as this type of action does not normally involve a supply of property to a third party to satisfy in whole or in part a debt or obligation owing by a person which is necessary under subsection 183(10). A post foreclosure private sale would not fall within 183(10) either since it would be difficult to say that such a supply was made for the purpose of satisfying in whole or in part a debt or obligation owing by a person. As a result of statute law, upon obtaining an order of foreclosure, the debt may no longer be owing in some jurisdictions. In addition, under the original foreclosure action, the mortgagee took the property in satisfaction of the debt and it is difficult to see how a subsequent supply of the property by the creditor was a right exercised under an Act of Parliament or the legislature of a province or any agreement to satisfy the debt or obligation. A simple foreclosure action may, however, fall within subsection 183(1).

SAMPLE RULINGS

Sample Ruling 1

Statement of Facts:

• Mr. A bought a vehicle and financed the purchase by taking out a loan from B Co., a finance company that is a GST/HST registrant. Mr. A granted B Co. a security interest in the vehicle.
• Mr. A went into default on his payments to B Co.
• B Co. determined that the value of the secured property was considerably less than the outstanding amount of the loan. Rather than realize on the secured property, B Co. sued Mr. A for the outstanding amount of the loan.
• The court rendered a money judgment in favour of B Co. (the judgment creditor) who then obtained a writ of seizure and sale in order to enforce the judgment. The writ provides for the sheriff to seize property of Mr. A (the judgment debtor).
• The sheriff seizes property of Mr. A and sells the property through auction.

Ruling Given:

The supply of the seized property is not subject to the GST/HST. All the conditions of subsection 183(3) have been met and, therefore, the supply is considered to have been made otherwise than in the course of a commercial activity.

Sample Ruling 2

Statement of Facts:

• In 1993, A Co. purchased an office building for $1,000,000. To finance the purchase, A Co. borrowed $500,000 from B Co., a trust company that is a GST/HST registrant. A Co. gave B Co. a mortgage on the building as security for repayment of the loan.
• In 1994, A Co. defaulted on its payments under the mortgage.
• B Co. informed A Co. that, unless the sums payable under the mortgage were paid by a certain date, B Co. would initiate proceedings to sell the office building.
• B Co. gave notice of exercising the power to sell the office building by sending a Notice of Sale to all persons entitled to such notice.
• The default was not remedied by A Co.
• The office building was listed for sale and sold.

Ruling Given:

Pursuant to subsection 183(10), B. Co. is deemed to have seized the property and is deemed to have made the subsequent supply. The power of sale remedy represents a right under an agreement relating to a debt security as provided in paragraph 183(10)(a). The condition of paragraphs 183(10)(b) and (c) are met since subsection 183(3) does not apply and a receiver (within the meaning of subsection 266(1)) did not have authority in respect of the property.

Since B Co. is deemed to have seized the property, subsection 183(1) of the Act will also apply. A Co. is deemed to have made, and B Co. is deemed to have received, a supply by way of sale of the property. Pursuant to paragraph 183(1)(b), that supply is deemed to have been made for no consideration. The subsequent supply by B Co. is subject to the GST/HST at the rate of 7% pursuant to subsection 165(1) or 15% pursuant to subsection 165(2) (i.e. if the supply is made in a participating province).

Sample Ruling 3

Statement of Facts:

• On February 24, 1997, A Co. purchased a building. To finance the purchase, A Co. borrowed $165,000 from B Co., a trust company that is a GST/HST registrant. A Co. gave B Co. a mortgage on the building as security for repayment of the loan.
• Later in 1997, A Co. defaulted on its payments under the loan agreement.
• On November 8, 1997, B Co. pursued the matter in provincial court, claiming the outstanding amount of the loan which was $171,000.
• As a result of the court action, A Co. was ordered to pay into Court, on or before November 27, 1997, the total amount claimed by B Co. plus accrued interest.
• The court order also indicated that upon default of the payment into Court, as stated above, the mortgaged land shall be sold under the direction of the Sheriff in accordance with rules also set out in the order. Further, the building could not be sold for an amount less than $205,000.
• The default was not remedied by A Co. and the building was listed for sale by the Sheriff and sold.

Ruling Given:

Pursuant to subsection 183(10), B. Co. is deemed to have seized the property and is deemed to have made the subsequent supply. The judicial sale remedy represents a right under an Act of Parliament or the legislature of a province as provided in paragraph 183(10)(a). The condition of paragraphs 183(10)(b) and (c) are met since subsection 183(3) does not apply and a receiver (within the meaning of subsection 266(1)) did not have authority in respect of the property. As the court did not render a money type judgment or instruct the sheriff to seize the property, subsection 183(3) would not apply. The fact that the court indicates the total amount outstanding does not, in itself, represent a money judgment.

Since B Co. is deemed to have seized the property, subsection 183(1) of the Act will also apply. A Co. is deemed to have made, and B Co. is deemed to have received, a supply by way of sale of the property. Pursuant to paragraph 183(1)(b), that supply is deemed to have been made for no consideration. The subsequent supply by B Co. is subject to the GST/HST at the rate of 7% pursuant to subsection 165(1) or 15% pursuant to subsection 165(2) (i.e. the supply is made in a participating province).

Sample Ruling 4

Statement of Facts:

• In the Province of Québec, a creditor, who is a GST registrant, holds a hypothec on the immovable property of a debtor.
• As a result of default by the debtor, the creditor sends the debtor a prior notice informing him of his intention to exercise his hypothecary security by means of a sale by judicial authority of the immovable and calling upon him to surrender the immovable within the period specified in the prior notice.
• The debtor fails to surrender the immovable within the period specified in the prior notice.
• In accordance with the provisions of the Civil Code of Québec, the creditor then petitions the court to order the surrender of the immovable for the purpose of its sale by judicial authority, designate a person who will proceed with the sale and fix the terms and conditions of that sale.

Ruling Given:

Pursuant to subsection 183(10), the creditor is deemed to have seized the property and is deemed to have made the subsequent supply. The sale by judicial authority remedy represents a right under an Act of Parliament or the legislature of a province as provided in paragraph 183(10)(a). The condition of paragraphs 183(10)(b) and (c) are met since subsection 183(3) does not apply and a receiver (within the meaning of subsection 266(1)) did not have authority in respect of the property. Subsection 183(3) does not apply as a money type judgment was not rendered by the court.

Since the creditor is deemed to have seized the property, subsection 183(1) of the Act will also apply. The debtor is deemed to have made, and the creditor is deemed to have received, a supply by way of sale of the property. Pursuant to paragraph 183(1)(b), that supply is deemed to have been made for no consideration. The subsequent supply (as indicated above) is deemed to be made by the creditor and is subject to the GST at the rate of 7% pursuant to subsection 165(1).