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, 15th floor
320 Queen Street
Ottawa ON K1A 0L5
[Addressee]
Case Number: 159222
Dear Sir:
Subject: GST/HST RULING
GST/HST on fees relating to a loan
Thank you for your letter of December 11, 2013, concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to fees relating to a loan. We apologize for the delay in our reply.
The HST applies in the participating provinces at the following rates: 13% in Ontario, New Brunswick and Newfoundland and Labrador, 14% in Prince Edward Island and 15% in Nova Scotia. 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.
You asked us to refer to the following documentation provided to us by […][ACo]:
* Term Sheet dated [mm/dd/yyyy], between [ACo] and […][BCo];
* Assignment Agreement dated [mm/dd/yyyy], between [ACo], […][CCo], and [BCo]; and
* Acknowledgement and Agreement dated [mm/dd/yyyy], addressed to [CCo] and signed by […] on behalf of [BCo].
STATEMENT OF FACTS
Based on telephone conversations with […] of your office and the documentation provided, we understand that:
1. [CCo] carries on an auctioneering and liquidation business and is registered for GST/HST.
2. In [mm/yyyy], [CCo] provided a loan to [BCo] pursuant to the Term Sheet, Assignment Agreement, and Acknowledgement Agreement, all of which are described below.
Term Sheet
3. On [mm/dd/yyyy], [ACo] and [BCo], a resident of Canada, executed a term sheet (the Term Sheet).
4. The Term Sheet was a conditional offer for the provision of a loan which was open for acceptance by a stated deadline.
5. The Term Sheet set out terms and conditions that would be subject to the full scrutiny of a due diligence review that would include, but not necessarily be restricted to, considerations contemplated therein, as follows:
* Borrower: [BCo]
* Lender: [ACo] or any company [ACo] chooses to use
* Loan Facility: a demand term loan in the amount of $[…]
* Rate of Interest: […][the Bank] Daily Prime Interest Rate plus […]% per annum payable monthly in arrears.
* Commitment Fee: $[…] plus HST is payable on the execution by [BCo] of the Lender’s Commitment Letter (which we understand to be the Term Sheet itself).
* Closing Fee: [BCo] agrees to pay a fee equal to […]% of the maximum of the Loan Facility, which is earned at the time the Lender first advances the Loan Facility with payments being postponed until the earlier of the maturity date of the Loan Facility or payout of the Loan Facility.
* Term: […] months, on demand.
* Interest Rate Adjustment Date: [BCo] shall pay interest on the entire loan facility amounts monthly, in arrears, on the 30th day of each month. Such interest will be calculated monthly and will accrue daily on the basis of a 365 day year.
* Principal and Interest Payments: The Loan Facility is to be repaid as follows: interest only payable monthly in arrears plus a principal repayment equal to $[…] of the principal balance owing on a monthly basis on the outstanding loan. The outstanding principal balance together with any accrued interest and fees is due and payable […] months from the date of the initial advances, unless the Term shall have been otherwise extended as provided herein. Interest will be applicable to any fees owing from the commencement of the loan.
* Collateral: The collateral for the loans will be all of the owned equipment, vehicles, office furniture, trademarks or trade names of [BCo] whether located on site or in other locations and a personal guarantee.
* Security: [BCo] will grant a general security agreement (GSA) in favour of the Lender providing the Lender with a fixed and floating charge over all of the present and after acquired property and undertaking of [BCo]. The GSA will provide the Lender with a first charge position on assets. It will provide the Lender with a second fixed and floating charge on all other assets of [BCo], including its debtor accounts. All shareholder advances to [BCo] shall be postponed in favour of the Lender.
* Title: The loan segments are subject to the Lender receiving an opinion satisfactory to the Lender that the Lender has good title to its security.
* Registrations: The loans are subject to the Lender receiving all necessary registrations with respect to its security and its legal counsel being satisfied with all aspect of this transaction.
* A waiver must be executed by [BCo’s] landlord in favour of the Lender using language suitable to the Lender that takes priority over the landlord’s rights to the Collateral.
* Assignment: The Lender may assign the loan agreement in whole or in part to its bank or another financial institution without prior written approval of [BCo].
* Appraisal Requirements: It is a condition of this letter that asset appraisals be completed by […][X]. The cost of these appraisals will be absorbed in the work fee.
* Other: All legal fees in connection with this agreement are for the account of [BCo]. [BCo] shall provide evidence that it has obtained a receivable and inventory financing on terms and conditions satisfactory to the Lender.
6. As provided for in the Term Sheet, [BCo] signed and returned two (2) copies of the Term Sheet with a cheque in the amount of $[…] (the Commitment Fee) plus HST which signified [BCo’s] acceptance to the general terms and conditions contained in the Term Sheet.
Assignment Agreement
7. On [mm/dd/yyyy], [ACo], [CCo], and [BCo] entered into an Assignment Agreement (Assignment Agreement) which contained the following provisions:
* Pursuant to the Term Sheet, [ACo] agrees to make certain loans and advances to [BCo], subject to the terms and conditions of the Term Sheet (the “Credit Facilities”);
* Pursuant to terms of the Term Sheet, [ACo] has the discretion as to the entity that will enter into the loan arrangements with [BCo] and fund the advances made to [BCo] pursuant to the Term Sheet;
* [ACo] has designated [CCo] as the Lender under the Term Sheet;
* For consideration of $[…] paid by [CCo] to [ACo], [ACo] assigns to [CCo] all of its right, title and interest in the Term Sheet and the Credit Facilities.
* [ACo] represents that the Term Sheet is in full force and effect and unamended and [ACo] has not knowingly discharged [BCo] from the Term Sheet or assigned any rights or obligations under the Term Sheet;
* [CCo] accepts the assignment of [ACo’s] rights and obligations in the Term Sheet and indemnifies [ACo] from any claims by [BCo] arising in connection with the Term Sheet or the performance of the Lender’s obligations under the Term Sheet;
* [BCo] acknowledges that it has taken notice of the assignment and expressly consents to it.
* The Assignment Agreement sets forth the entire agreement and understanding among the parties with respect to the subject matter and supersedes any prior agreements or understandings, whether oral or in writing. The Assignment Agreement may not be modified except in writing signed by the parties.
Acknowledgement Agreement
8. On [mm/dd/yyyy], […], on behalf of [BCo], signed an Acknowledgement and Agreement (the Acknowledgement Agreement) which is addressed to [CCo] (in this agreement called the Lender).
9. The Acknowledgement Agreement states that it is regarding the demand loan to [BCo] in the amount of $[…] (in this agreement called the “Loan”) pursuant to the Term Sheet as assigned by [ACo] to [CCo].
10. The Acknowledgement Agreement also provides that in consideration of [CCo] providing financial assistance to [BCo] and for other valuable consideration, the receipt and sufficiency of which is acknowledged, [BCo] acknowledges and agrees that the Term Sheet and all terms and conditions thereof will continue in full force and effect notwithstanding the advance of the Loan by [CCo] and will govern the relationship between [CCo] and [BCo] in relation to the Loan as if the Term Sheet were a loan agreement entered into at the time of the advance of the Loan.
11. [CCo] advanced the funds to [BCo] in [mm/yyyy] and, since that time, has been collecting the interest and HST for the loan. It is expected that [CCo] will be collecting the Closing Fee when the loan matures or is paid out.
RULING REQUESTED
You would like to know if the interest and the Closing Fee are subject to GST/HST.
RULING GIVEN
Based on the facts set out above, we rule that the interest and the Closing Fee are consideration for [CCo’s] supply of a financial service which is exempt under section 1 of Part VII of Schedule V to the ETA. Accordingly, [CCo ] is not required to charge GST/HST on the interest or the Closing Fee.
In accordance with the qualifications and guidelines set out in GST/HST Memorandum 1.4, Excise and GST/HST Rulings and Interpretations Service, the Canada Revenue Agency (CRA) is bound by the ruling given in this letter provided that: none of the issues discussed in the ruling 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.
EXPLANATION
A GST/HST registrant is not required to charge GST/HST on an exempt supply. A supply of a financial service is exempt under section 1 of Part VII of Schedule V to the ETA unless it is zero-rated under Part IX of Schedule VI to the ETA. A supply of a financial service may be zero-rated when supplied by a financial institution to a non-resident, if certain other conditions are met.
A “financial service” is defined in subsection 123(1). A supply is a financial service where it is included in any of paragraphs (a) to (m) of the definition of financial service and is not otherwise excluded by any of paragraphs (n) to (t) of that same definition.
A financial service as defined in subsection 123(1) includes in paragraph (g) the making of any advance, the granting of any credit or the lending of money. [CCo] is making a supply of a financial service to [BCo] under paragraph (g) of the definition of financial service which is exempt under section 1 of Part VII of Schedule V to the ETA. The interest and the Closing Fee are consideration for this exempt supply. Accordingly, [CCo] is not required to collect GST/HST on the interest or the Closing Fee.
It should be noted that where a person pays an amount as or on account of tax in error (e.g., an amount charged as GST/HST was paid on an exempt supply), the supplier may credit, adjust, or refund the amount to the person, if certain conditions are met. For further information on refunding, adjusting or crediting amounts of tax that were charged in error, refer to GST/HST Memorandum 12.2, Refund, Adjustment, or Credit of the GST/HST under Section 232 of the Excise Tax Act.
[CCo] may be considered to be a de minimis financial institution. In general, a person is considered to be a de minimis financial institution if the person earns a significant amount of interest, certain dividends, or income from separate fees or charges for financial services. For further information, refer to GST/HST Memorandum 17.7, De Minimis Financial Institutions, or go to www.cra.gc.ca/slfi.
If you require clarification with respect to any of the issues discussed in this letter, please call me directly at (780) 495-5512. 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,
Heather Gibbard
Financial Services Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate
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