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: 132342
Business Number: [...]
August 2, 2013
Dear [Client]:
Subject: GST/HST RULING - Sale and servicing of mortgages
Thank you for your letter of [mm/dd/yyyy], concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to the sale and servicing of mortgages. We apologize for the delay in responding to your request.
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 (effective April 1, 2013) and 15% in Nova Scotia. The GST applies in the rest of Canada at the rate of 5%.
Effective April 1, 2013, the 12% HST in British Columbia has been replaced by the 5% GST and a provincial sales tax.
All legislative references are to the Excise Tax Act (ETA) unless otherwise specified.
We have received the following agreements in addition to your written request:
1. The [...] ("Origination Agreement") between [...] (Purchaser) and [...] (Seller) dated [mm/dd/yyyy].
2. The [...] ("Administration Agreement") between the Purchaser and the Seller dated [mm/dd/yyyy].
3. The Fee Agreement between the Purchaser and the Seller dated [mm/dd/yyyy] ("Fee Agreement").
Statement of Facts
You have written that [...] ([...][Company A]) is requesting this ruling on behalf of its client, the Purchaser. The Seller is a limited partnership pursuant to the laws of [...][Province A]. The Seller originates and funds mortgages and subsequently sells them to third parties. The Seller's primary business is to source, originate, fund, sell and service prime residential mortgages. The purchasers are required to use the Seller to provide them with ongoing mortgage servicing for a fee. [...]
Origination Agreement
1. The Purchaser wishes to fund loans under eligible mortgages and the Seller may sell to the Purchaser mortgages under the terms and conditions of the Origination Agreement. [...]
2. Under [...], which deals with the origination of mortgages, the Purchaser appoints the Seller as its agent for the purpose of identifying and approving a mortgagor and negotiating the terms of the mortgage, and prime residential mortgages are serviced by the Seller [...]. The subsequent mortgage may be made in the name of the Seller and the Seller, in entering into the mortgage, is at all times acting in its capacity as agent of the Purchaser so that the Purchaser's rights, title and interest in the related mortgages completely vest in the Purchaser at the time of receipt by the Seller [...]. The term "origination" is defined to mean the making of a loan by the Purchaser on behalf of the Seller [...].
3. A mortgage includes a mortgage, charge or hypothec that is insured as to payment or principal and interest by the Canadian Housing and Mortgage Corporation (CMHC) or another insurer approved by the Purchaser. A mortgage also includes all obligations and monies, rights, benefits and documents thereunder. [...]
4. The Purchaser and Seller will agree on the maximum principal amount of loans in respect of which the Purchaser will be entitled to enter into commitment letters on behalf of the Seller [...] at a rate of interest approved by the Purchaser [...] . Each loan must be in respect of an eligible mortgage which is a mortgage which meets all the applicable criteria set out in the Origination Agreement [...].
5. The Seller has a list of due diligence requirements under the Origination Agreement with respect to each loan originated by the Seller. [...]
6. The Seller is required to deliver to the Purchaser a list of those mortgages funded by the Seller or the Purchaser's behalf. Information to be included on the list include: the funding date; name of the mortgagor(s); address of the property; principal amount; rate of interest and maturity date. Upon receipt of the list, the Purchaser will pay to the Seller the principal amount and accrued interest with an Origination Fee for each mortgage within specified time frames. [...]
7. Under [...], the Seller is to provide [#] signed copies of an offering and settlement schedule that sets out the relevant eligible mortgages and other required information. The Purchaser may accept the mortgages by executing and returning the schedule within a specified time period to the Seller. Upon acceptance, subject to the conditions precedent [...], discussed in Fact 8 below a binding agreement is entered into between the Seller and the Purchaser for the purchase of the mortgages. The purchase price is payable by the Purchaser by a specified time. If the Purchaser fails to accept the offered mortgages within the specified time period, the Purchaser is deemed to have declined the purchase of the mortgage. [...]
8. On or before the settlement date of any purchased mortgage, the Seller is required to deliver to the Purchaser a blanket assignment of the mortgage indicating that the Seller "sells, transfers, and assigns" to the Purchaser and the Purchaser purchases from the Seller the mortgage together with all related rights in the mortgage. [...]. The Seller is also required to provide the information referred to in Fact 6 and any other documents necessary to convey to the Purchaser beneficial ownership of the mortgage. [...]
9. The Origination Agreement also requires that the Seller service the mortgages subject to the terms of the Administration Agreement. [...]
Administration Agreement
10. The purpose of the Administration Agreement is to set out the terms under which the Purchaser wishes to have the Seller service the mortgages of the Purchaser. In this agreement, the Purchaser is called the Owner, and the Seller is called the Administrator.
11. Under this agreement, the Purchaser appoints and designates the Seller for the purpose of administering and servicing certain mortgages and to hold all collected amounts in trust for the Purchaser. [...]. The mortgage will be transferred, and subject, to the National Housing Act Mortgage Backed Securities Program (NHA MBS Program). The Seller is considered a sub-servicer under the NHA MBS Program. [...].
12. The Administration Agreement provides an extensive list or duties that the Administrator is required to perform in administering the mortgages. These duties are to be performed in accordance with the policies and procedures of the relevant insurer and the CMHC servicing standard. These duties include:
a. Taking necessary action to collect amounts owing;
b. Giving notice to the mortgagor of any defaults;
c. Maintaining complete and accurate records;
d. Executing and delivering all assignments, releases and discharges of the serviced mortgage;
e. Maintaining and implementing reasonable and prudent administrative and operating procedures; and
f. Settling all losses in the event of damage or destruction to any subject property. [...]
13. All of the serviced mortgages are to be registered in the name of the Seller, or other approved entity, and all relevant documents (e.g., relating to insurance, mortgage insurance) shall be in the name of the Seller. [...]
14. If the Seller fails to follow certain of the requirements of the Administration Agreement, the Seller is required to pay to the Purchaser a price, calculated under the Origination Agreement, for the sale by the Purchaser of all of its interest in the mortgage, back to the Seller. [...]
15. As consideration for servicing the mortgages under the Servicing Agreement, the Seller is entitled to receive a servicing fee that is set forth in a Fee Agreement. The Seller is also entitled to retain certain charges payable by the mortgagors. [...]
Fee Agreement
16. The purpose of the Fee Agreement between the Purchaser and Seller is to provide the calculation of a servicing fee and certain origination fees.
17. The servicing fee is calculated as a percentage of the mortgages serviced by the Seller and is consideration for the services rendered by the Seller to the Purchaser.
Ruling Requested
Is the sale of mortgages by the Seller to the Purchaser under [...] of the Origination Agreement, and the servicing of these mortgages by the Seller for the Purchaser as provided for under the Origination Agreement and the Administration Agreement, a single supply of an exempt financial service?
Ruling Given
The sale of mortgages by the Seller to the Purchaser, under [...] of the Origination Agreement, and the servicing of the these mortgages by the Seller for the Purchaser under the Origination Agreement and the Administration Agreement, are the single supply of an exempt financial service under section 1 of Part VII of Schedule V.
This ruling is subject to the qualifications in GST/HST Memorandum 1.4, Excise and GST/HST Rulings and Interpretations Service. We are bound by this ruling provided that none of the above issues are currently under audit, objection, or appeal, that no future changes to the ETA, regulations or our interpretative policy affect its validity, and all relevant facts and transactions have been fully disclosed.
Explanation
From the information provided, the Seller is selling, transferring, and assigning certain mortgages to the Purchaser under [...] of the Origination Agreement and then, under the Origination Agreement and the Administration Agreement, all mortgages sold under [...] of the Origination Agreement by the Seller to the Purchaser shall be serviced by the Seller. This is a single supply of an exempt financial service under section 1 of Part VII of Schedule V.
Please note, the above ruling is only applicable where the Purchaser is making supplies of mortgages by way of sale as described in [...] of the Origination Agreement. Where the Seller is acting in an agency capacity only in the origination of the mortgage and is not making a supply of the mortgage and related rights, any servicing provided by the Seller in respect of the mortgage would not be considered part of the exempt supply of a sale of a mortgage to the Purchaser.
If you require clarification with respect to any of the issues discussed in this letter, please call me directly at 613-952-9577. 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,
Kirk Moore
Industry Sector Specialist
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate
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