Please note that the following document, although correct at the time of issue, may not represent the current position of the Canada Revenue Agency. / Veuillez prendre note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'Agence du revenu du Canada.
Excise and GST/HST Rulings Directorate
Place de Ville, Tower A, 11th floor
320 Queen Street
Ottawa ON K1A 0L5
Case Number: 150998
[Addressee]
Dear [Client]:
Subject: GST/HST RULING
Fees charged in relation to project loans
Thank you for your letter concerning the application of the goods and services tax/harmonized sales tax (GST/HST) to various supplies made by your client, […]([…][the Company]), which are in respect of […] projects. We apologize for the delay in our response to your enquiry.
The HST applies in the participating provinces at the following rates: 13% in Ontario; and 15% in New Brunswick, Newfoundland and Labrador, Nova Scotia and Prince Edward Island. The GST applies in the rest of Canada at the rate of 5%.
All legislative references are to the Excise Tax Act (ETA) unless otherwise specified.
In addition to your letters in which you provided your understanding of the impact of the GST/HST upon the specific supplies you are enquiring about, you also provided:
- documents related to […] ([…][Project A]) consisting of:
- a fee letter ([…][Fee Letter A]) between [the Company] and […]([…][Borrower A]), dated [mm/dd/yyyy], with no effective date and unsigned by [Borrower A],
- a credit agreement ([…][Credit Agreement A]), unsigned and dated [mm/dd/yyyy], for reference with an execution date of [mm/dd/yyyy], that provides the terms and conditions for the provision of a loan ([…][Loan A]) from […][Corporation #1]([…][Lender A]) to [Borrower A],
- a lender fee agreement ([…][Lender Fee Agreement A]) between [the Company] and [Lender A], dated [mm/dd/yyyy], and,
- a Direction to Pay ([…][Direction to Pay A]), dated [mm/dd/yyyy].
Collectively, these four documents are referred to as […][Finance Documents A];
- a fee letter ([…][Fee Letter B]) for […] project ([…][Project B]) between [the Company] and […]([…][Borrower B]), dated [mm/dd/yyyy], with no effective date and unsigned by [Borrower B]. The lenders are [Corporation #1] and other financial institutions (collectively referred to as[…][Lender B]); and
- an unsigned lender fee agreement ([…][Lender Fee Agreement C]) for the […] project ([…][Project C]) between [the Company] and three lenders - [ Corporation #1], […], and […] (collectively referred to as […][Lender C]), dated [mm/dd/yyyy]. […] is the borrower ([…][Borrower C]).
STATEMENT OF FACTS
Based on the documents provided and information from [the Company’s] website at […] we understand the following:
1. [The Company’s] principal business activity is focused on delivering corporate and structured financial solutions, providing financial advisory services, and supplying administrative services as a loan agent and security agent.
2. [The Company] enters into contracts with borrowers that are trying to find financing for […] projects.
A. [Project A]
3. [Lender A ] agrees to provide [Loan A] to [Borrower A] under the terms and conditions set forth in [Credit Agreement A].
4. [The Company] is designated and appointed by [Lender A] to act as both its Loan Agent and Security Agent, collectively defined as “Agent” in [Credit Agreement A].
5. Under [Fee Letter A], upon execution of [Credit Agreement A], [Borrower A] pays to [the Company], as the Loan Agent, a non-refundable amount called […][Closing Fee A] irrespective of whether the Closing under [Credit Agreement A] is completed. [Fee Letter A] notes that [Closing Fee A] is payable to and fully earned by [the Company] and [Lender A], and constitutes compensation for services rendered by [the Company] and [Lender A].
6. [Direction to Pay A] indicates that [Closing Fee A] is subsequently divided into two fees – a fee paid to [the Company] ([…][Agent Closing Fee A]) and a fee paid to [Lender A] ([…][Lender Closing Fee A]).
7. As Loan Agent and Security Agent for [Lender A], [the Company] is authorized to take such action on its behalf under the provisions of [Finance Documents A] and to exercise such powers and perform such duties as are expressly delegated to it by the terms of [Finance Documents A], together with such powers as are reasonably incidental thereto. However, [Credit Agreement A] states that the use of the term “agent” in [Credit Agreement A] is not intended to connote any fiduciary or other implied (or express) obligations arising under agency doctrine and the term is used merely as a matter of market custom and intended to reflect only an administrative relationship between independent contracting parties. All payments made by or on behalf of [Borrower A] under [Credit Agreement A] are made to and received by [the Company] on behalf of [Lender A] and are to be distributed to [Lender A] in accordance with the terms of [Credit Agreement A].
8. Under [Credit Agreement A], [the Company] is to be paid an agent fee and [Fee Letter A] clarifies that [Borrower A] is to pay [the Company] all agency fees during the term of [Loan A] and [Lender A] agrees that this monthly agent fee ([…][Loan Administration Fee A]) is deemed to be a fee payable to [the Company] as Loan Agent.
9. [Lender Fee Agreement A] provides for a fee ([…][Interest Rate Differential Fee A]) to be paid by [Lender A] to the Loan Agent which the Loan Agent is “to pay” to [the Company]. [Interest Rate Differential Fee A] is calculated on a monthly basis on the then outstanding principal amount of [Loan A], as detailed in [Lender Fee Agreement A].
10. [Borrower A] has the right to prepay the principal of [Loan A] before the end of [Loan A’s] term. If [Borrower A] elects to exercise this option, [Borrower A] also agrees to pay to [the Company], as Loan Agent, contemporaneously with such prepayment, a loan prepayment amount ([…][Loan Prepayment Amount A]).
11. When [Borrower A] exercises the prepayment option and pays [Loan Prepayment Amount A] to the Loan Agent, [Lender A] “pays” [the Company], via the Loan Agent, an agent prepayment fee ([…][Agent Prepayment Fee A]), which is based on calculations laid out in [Lender Fee Agreement A].
B. [Project B]
12. Under [Fee Letter B], [Borrower B] agrees to pay a deposit ([…][Deposit B]), plus applicable taxes, to [the Company], as Loan Agent. In the event that [the Company] is unable to find a lender willing to commit to […][Loan B], […] of [Deposit B] is returned to [Borrower B].
13. If [the Company] locates a lender willing to commit to [Loan B], upon the execution of […][Credit Agreement B], [Deposit B] is credited to the closing fee ([…][Closing Fee B]) that is paid to and fully earned by [the Company] as Loan Agent and [Lender B]. […] [Deposit B] constitutes compensation for services rendered by [the Company] as Loan Agent and [Lender B]. […] [Deposit B] does not constitute interest or a charge for the use of money.
14. [Borrower B] agrees to pay [the Company] an annual administration fee ([…][Loan Administration Fee B]), plus applicable taxes, payable in monthly instalments, as long as [Credit Agreement B] remains in full force and effect.
C. [Project C]
15. [Borrower C] is required to pay an administration fee to [the Company] and [Lender C] agrees that this administration fee ([…][Loan Administration Fee C]) is payable to [the Company] in its capacity as Loan Agent.
16. […..][Lender Fee Agreement C] also provides for the payment of an interest rate differential fee ([…][Interest Rate Differential Fee C]), which is the amount by which the loan interest under the Loan Amortization Schedule exceeds the loan interest according to the Lenders’ Amortization Schedule. [Lender C] agrees to “pay” [the Company], via the Loan Agent, [Interest Rate Differential Fee C] each month and the Loan Agent deducts this amount from the monthly loan instalment remitted by [Borrower C].
17. Under [Lender Fee Agreement C], [Lender C] agrees that the Loan Agent is to pay an agent prepayment fee ([…][Agent Prepayment Fee C]) to [the Company] if [Borrower C] exercises the loan prepayment option.
RULING REQUESTED
You consider that [the Company] supplies the following services under the projects and request confirmation of the GST/HST treatment in each case.
1. [The Company] makes a supply of arranging for the provision of a loan. For this supply, [the Company] earns the following fees:
- a loan arrangement fee;
- a loan commitment fee;
- a loan closing fee;
- an interest rate differential fee; and
- a loan prepayment fee.
In your view, these services are GST/HST exempt in accordance with paragraph (l) in the definition of “financial service” in subsection 123(1).
2. [The Company] also makes a supply of an administrative service related to a loan. For this supply, [the Company] earns the following fees:
- a loan administration fee; and/or
- an agency fee.
In your view, these services are taxable supplies for GST/HST purposes.
As indicated in GST/HST Memorandum 1.4, Excise and GST/HST Rulings and Interpretations Service (GST/HST Memorandum 1.4), requests for rulings should include copies of any relevant supporting agreements or documents, together with references to, and summaries of the specific provisions of these agreements or documents which pertain to the request. We are unable to issue a ruling with respect to [the Company’s] services with regards to [Project B] and [Project C] as all of the relevant supporting agreements for the supplies in these cases have not been provided. However, we are pleased to provide an interpretation, which is a general explanation of the applicable provisions and how the legislation may apply, following the section titled Ruling Explanation.
RULING GIVEN
With respect to [Project A], based on the facts set out above, we rule as follows:
1. [The Company’s] supply of a service to [Borrower A] for which it is paid [Agent Closing Fee A] is not a supply of a “financial service” as that term is defined in subsection 123(1); it is a taxable supply of a service and [Agent Closing Fee A] is subject to GST/HST at the applicable rate under section 165.
2. [The Company’s] supply of a service to [Borrower A] for which it is paid [Loan Administration Fee A] is not a supply of a “financial service” as that term is defined in subsection 123(1); it is a taxable supply of an administrative service and [Loan Administration Fee A] is subject to the GST/HST at the applicable tax rate under section 165.
3. [The Company’s] supply of a service to [Lender A] for which it is paid [Interest Rate Differential Fee A] and [Agent Prepayment Fee A] is not a supply of a “financial service” as that term is defined in subsection 123(1); it is a taxable supply of a service and [Interest Rate Differential Fee A] and [Agent Prepayment Fee A] are both subject to the GST/HST at the applicable tax rate under section 165.
In accordance with the qualifications and guidelines set out in GST/HST Memorandum 1.4, the Canada Revenue Agency (CRA) is bound by the rulings given in this letter provided that: none of the issues discussed in the rulings are currently under audit, objection, or appeal; no future changes to the ETA, regulations or the CRA’s interpretative policy affect its validity; and all relevant facts and transactions have been fully and accurately disclosed.
RULING EXPLANATION
Financial services are defined in subsection 123(1) and are generally exempt. A “financial service” is defined to mean anything that is described in any of paragraphs (a) to (m) of the definition of “financial service” and not excluded by any of paragraphs (n) to (t) of that same definition.
Where it is determined that there is a single supply, the predominant nature of that supply must be established to determine the GST/HST treatment of the supply. Based on the criteria set out in our GST/HST Policy Statement P-077R2, Single and Multiple Supplies, we determined that [the Company] is providing three distinct and separate supplies under [Finance Documents A], none of which are part of or incidental to any other supply, with respect to the four fees identified in the ruling. The predominant nature of each of these three supplies must be ascertained in order for them to be characterized for GST/HST purposes.
A financial service includes, under paragraph (c) of the definition of “financial service” in subsection 123(1), the lending or borrowing of a financial instrument and, under paragraph (d), the repayment of a financial instrument. A “financial instrument” is also defined in this subsection and includes a “debt security” which, in turn, is defined under that provision to include a right to be paid money (for example, [Loan A]). Therefore, both the borrowing of [Loan A] and the repayment of [Loan A] are financial services under the definition of “financial service”.
Paragraph (l) of the definition of “financial service” in subsection 123(1) refers to the agreeing to provide, or the arranging for, a service that is referred to in any of paragraphs (a) to (i) and not referred to in any of paragraphs (n) to (t). In determining if a service is included in this paragraph, all of the facts surrounding the transaction must be considered, including the activities performed by the person, as well as the context and purpose of paragraph (l). In addition, the term “arranging for” in paragraph (l) is generally intended to include financial intermediation activities that are normally performed by a financial intermediary described in subparagraph 149(1)(a)(iii), that is, a person whose principal business is as a trader or dealer in, or as a broker or salesperson of, financial instruments or money.
As noted above, we have determined that [the Company] is making three distinct and separate supplies for which specific fees are charged with respect to [Project A]. These supplies are: 1) a preparatory service supplied to [Borrower A] to ensure [Loan A] is closed, for which [Borrower A] pays [the Company] [Agent Closing Fee A]; 2) an administrative service supplied to [Borrower A] for which [Borrower A] pays [the Company] [Loan Administration Fee A]; and, 3) a service of managing and/or monitoring the repayment of [Loan A] supplied to [Lender A] for which [Lender A] pays [the Company] [Interest Rate Differential Fee A] and, when [Borrower A] triggers the loan prepayment option under [Credit Agreement A], [Agent Prepayment Fee A].
In performing its duties for which [Borrower A] pays [the Company] [Agent Closing Fee A], [the Company] reviews the project documentation as part of the preliminary due diligence to determine if [Project A] is bankable. As part of the due diligence for underwriting the transaction, [the Company] engages an independent engineer and an insurance consultant to prepare their third-party reports, completes a financial model, prepares a confidential information memorandum for a potential lender, prepares credit documentation with its legal counsel, and arranges for the closing and the funding of the project. The predominant nature of the service provided by [the Company] to [Borrower A], for which [Borrower A] pays [the Company] [Agent Closing Fee A], is preparatory in nature to the provision of the potential provision of a financial service, that is, the lending of [Loan A]. This service is not a financial service under paragraphs (a) to (m) of the definition of “financial service” in subsection 123(1). For greater certainty, this service is excluded from the definition of “financial service” in subsection 123(1) by paragraph (r.4).
Specifically, paragraph (r.4) of the definition of “financial service” ensures that certain services are not financial services where they are preparatory to or provided in conjunction with certain financial services. This paragraph excludes a service (other than a prescribed service) that is preparatory to the provision or the potential provision of a service referred to in any of paragraphs (a) to (i) and (l) of the definition of “financial service”, or that is provided in conjunction with a service referred to in any of those paragraphs, and that is:
1) a service of collecting, collating or providing information, or
2) a market research, product design, document preparation, document processing, customer assistance, promotional or advertising service or similar service.
Currently, no services are prescribed or proposed to be prescribed for the purposes of paragraph (r.4) of the definition of “financial service” in subsection 123(1).
As no other exempting provisions apply, [the Company’s] supply of a preparatory service to [Borrower A] is a taxable supply and [Agent Closing Fee A] is subject to the GST/HST at the applicable tax rate under section 165.
The administrative service that [the Company] provides to [Borrower A], for which it charges [Loan Administration Fee A], is not a financial service under paragraphs (a) to (m) of the definition of “financial service” in subsection 123(1). For greater certainty, the exclusions under paragraph (r.3) and (t) of the definition apply.
Paragraph (r.3) of the definition of “financial service” provides, in part, that a service (other than a prescribed service) of managing loan accounts, including a service provided to a person of monitoring another person’s payment record or dealing with payments made, or to be made by the other person is excluded from the definition.
Paragraph (t) of the definition of “financial service” excludes a prescribed service. Section 4 of the Financial Services and Financial Institutions (GST/HST) Regulations (the Regulations) lists services that are prescribed under this paragraph. Specifically, subsection 4(2) of the Regulations states, in part, that the services of transferring, collecting or processing of information, and any administrative service, including an administrative service in relation to the payment or receipt of interest, principal, claims, benefits or other amounts, other than solely the making of the payment or the taking of the receipt, is prescribed for purposes of paragraph (t) of the definition of “financial service”, unless subsection 4(3) of the Regulations applies to the services.
Subsection 4(3) of the Regulations provides, in part, that a service referred to in subsection 4(2) of the Regulations is not a prescribed service for purposes of paragraph (t) where the service is supplied with respect to an instrument by a person at risk. Subsection 4(1) of the Regulations defines an “instrument” to mean money, an account, a credit card voucher, a charge card voucher or a financial instrument and a “person at risk” is defined to exclude a person who becomes at risk in the course of, and only by virtue of, authorizing a transaction, or supplying a clearing or settlement service, in respect of the instrument. When [the Company] makes a taxable supply of an administrative service to [Borrower A], [the Company] is not a person at risk, a person that is closely related to a person at risk, or an agent, salesperson or broker who transfers ownership of the instrument for a person at risk or a person closely related to the person at risk. Therefore, subsection 4(3) of the Regulations does not apply and the administrative service supplied by [the Company] to [Borrower A] is a prescribed service under subsection 4(2) of the Regulations. As no other exempting provisions apply to this supply, [the Company’s] supply of the administrative service to [Borrower A] is a taxable supply and [Loan Administration Fee A] is subject to the GST/HST at the applicable tax rate under section 165.
In performing its duties for which [Lender A] pays [the Company] [Interest Rate Differential Fee A] and/or [Agent Prepayment Fee A], [Lender A] authorizes [the Company] to take such action on its behalf under the provisions of each of [Finance Documents A] and to exercise such powers and perform such duties as are expressly delegated to it by the terms of any of [Finance Documents A], together with such powers as are reasonably incidental thereto. All payments made by or on behalf of [Borrower A] under [Credit Agreement A] are made to and received by [the Company], as Agent, on behalf of [Lender A]. The predominant nature of the service provided by [the Company] to [Lender A], for which [Lender A] pays [the Company] [Interest Rate Differential Fee A] and/or [Agent Prepayment Fee A], is managing the [Loan A] account on behalf of [Lender A] and ensuring it is properly repaid under the terms of [Finance Documents A]. This service is not a financial service under paragraphs (a) to (m) of the definition of “financial service” in subsection 123(1). For greater certainty, the exclusions under paragraph (r.3) and (t) of the definition apply.
Specifically, paragraph (r.3) of the definition of “financial service” ensures that certain services are not financial services where they are managing loan accounts, including monitoring [Borrower A’s] payment record and dealing with [Borrower A’s] payments made to repay [Loan A]. In addition, paragraph (t) of the definition prescribes an administration service in relation to the payment or receipt of interest, principal, claims, benefits or other amounts, other than solely the making of the payment or the taking of the receipt. [the Company’s] supply of a loan management and administrative service to [Lender A] is not a financial service. When [the Company] makes a taxable supply of loan management and administrative service to [Lender A], [the Company] is not a person at risk, a person that is closely related to a person at risk, or an agent, salesperson or broker who transfers ownership of the instrument for a person at risk or a person closely related to the person at risk. Therefore, subsection 4(3) of the Regulations does not apply and the loan management and administrative service [the Company] supplies to [Lender A] is a prescribed service under subsection 4(2) of the Regulations. As no other exempting provisions apply to the service, [the Company’s] supply of a service to [Lender A] for which it is paid [Interest Rate Differential Fee A] and/or [Agent Prepayment Fee A] is a taxable supply that is subject to the GST/HST at the applicable tax rate under section 165.
INTERPRETATION GIVEN
As noted above, we are unable to issue a written ruling concerning [Project B] and [Project C] as we were not provided with sufficient facts needed to rule on the application of tax to [the Company’s] services related to these projects. Therefore, we are issuing the following interpretation.
As previously discussed, paragraph (l) of the definition of “financial service” in subsection 123(1) refers to the agreeing to provide, or the arranging for, a service that is referred to in any of paragraphs (a) to (i) and not referred to in any of paragraphs (n) to (t). In addition, the term “arranging for” in paragraph (l) is generally intended to include financial intermediation activities that are normally performed by a financial intermediary described in subparagraph 149(1)(a)(iii), that is, a person whose principal business is as a trader or dealer in, or as a broker or salesperson of, financial instruments or money.
When a person is assisting another person to find a lender, or attempting to find a lender, consideration must be given to the predominant nature of the supply of the service being provided – that is, whether the predominant nature of the service is one of a service of “arranging for” a financial service under paragraph (l) of the definition of “financial service” in subsection 123(1), or a preparatory service to assist the other person to obtain the loan, which is excluded from the definition by paragraph (r.4). Therefore, the application of tax to [the Company’s] supply of its service to [Borrower B], for which it charges […][Agent Closing Fee B] or […][Transaction Fee B], will depend on the relevant facts and supporting documents, as well as, the activities performed by [the Company].
For purposes of [Loan Administration Fee B] or [Loan Administration Fee C], the predominant nature of the service provided to [Borrower B] or [Borrower C] needs to be determined. If the predominant nature is an administrative service, the service would not be a financial service under paragraphs (a) to (m) of the definition of “financial service” in subsection 123(1). Furthermore, the administrative service would be excluded by paragraph (r.3) and/or paragraph (t) of the definition. Such a determination would depend on the relevant facts and supporting documents.
The application of tax to [the Company’s] services supplied to [Lender C] for which it is paid [Interest Rate Differential Fee C] and/or [Agent Prepayment Fee C] is determined based on the relevant facts and supporting documents and the predominant nature of [the Company’s] services. If the predominant nature is a service of managing the [Loan C] account or monitoring [Borrower C’s] repayment, or an administrative service in relation to the payment or receipt of interest, principal, claims, benefits or other amounts, other than solely the making of the payment or the taking of the receipt, the service is not a financial service. Furthermore, the service would be excluded by paragraph (r.3) and/or paragraph (t) of the definition of “financial service”. Therefore the application of tax to [the Company’s] supply to [Lender C], for which it charges [Interest Rate Differential Fee C] and/or [Agent Prepayment Fee C] would depend on the relevant facts and supporting documents.
In accordance with the qualifications and guidelines set out in GST/HST Memorandum 1.4, the interpretation given in this letter, including any additional information, is not a ruling and does not bind the CRA with respect to a particular situation. Future changes to the ETA, regulations, or the CRA’s interpretative policy could affect the interpretation or the additional information provided herein.
If you require clarification with respect to any of the issues discussed in this letter, please call me directly at 778-374-8364. Should you have additional questions on the interpretation and application of GST/HST, please contact a GST/HST Rulings officer at 1-800-959-8287.
Yours truly,
Marjorie Stevens
Financial Services Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate
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