20 February 1997 GST/HST Interpretation HQR0000274 - Application of the GST on Receivable Collection Services

This is in reply to your fax referral concerning an interpretation request from XXXXX on the tax consequences of a number of situations concerning receivable collection services. (We noted that the request only provided us with the hypothetical situations with non specified persons. Hence, pursuant to GST memorandum Series 1.4, only an interpretation can be given.) We offer our comments as follows:

First Situation:

Company A is a GST registrant carrying on a taxable retail operation (commercial activities). Company A also provides credit card services to its customers and encourages the customers to use its credit card when purchasing products from Company A. Company A incurs expenses in running its credit card program.

Confirmation Requested: Tax can be recovered by Company A for inputs acquired exclusively for use in its taxable retail operation; and tax cannot be recovered for inputs acquired for use in its credit card operation.

Comments:

It is our view that by virtue of subsection 169(1) of the Excise Tax Act (the "Act"), Company A may claim input tax credits on inputs acquired for use exclusively in its taxable retail business provided other requirements under that subsection are met. Company A cannot claim an input tax credit on inputs acquired for use in operating its credit card services. The supply of the credit card services is an exempt supply of financial services under paragraph (i) of the financial service definition. Hence, the inputs cannot be said to have been acquired by Company A for use or consumption in the course of its commercial activities.

Second Situation:

Company A sells its total credit card operation to Company B (non-related), but Company A's name and logo still appear on the card. Company B acquires from Company A, its current credit card receivables. Company B is a GST registrant also carrying on other commercial activities. For example, a customer (e.g. "Mr. X") may use the credit card (now Company B's credit card with Company A's name and logo on it) to purchase merchandise from Company A. Company A now seeks payment (plus GST) from Company B for the value of the product it sold to the customer. Company B pays Company A for the amount, and puts that amount on the credit card statement to Mr. X for payment.

Confirmation Requested: Company B cannot recover GST on supplies acquired for use exclusively in administering its credit card operation.

Comments:

The provision of the credit card services by Company B is a supply of financial services under paragraph (i) of the financial service definition. Hence, these supplies cannot be said to have been acquired by Company B for use or consumption in the course of its commercial activities. Tax on these supplies cannot be recovered by Company B.

Third Situation:

Company B sells the credit card receivables to Company D , but continues to administer the receivables without taking any risks (non recourse basis).

Two situations:

a) Company D is a person resident in Canada.

b) Company D is a person resident outside Canada.

Confirmation Requested:

i) In situation a), the services of administering the receivables by Company B are subject to tax at 7%.

ii) In situation b), the services of administering the receivables by Company B for Company D, a non resident, are zero rated services by virtue of section 7, Part V of Schedule VI to the Act and subject to tax at 0% rate (as of July 1, 1996).

iii) Answer to ii) will not change if Company D is related to Company B.

iv) Answer to ii) will not change if Company D is a GST registrant.

Comments:

i) The supply is subject to GST under section 165. The services of administering the receivables do not qualify as financial services since the supplier, Company B, is not a person a risk under the Financial Services Regulations.

ii) The supply of the services of administering the credit card receivables on a non recourse basis is a taxable supply. Since the supply is made to a non resident section 7, Part V, Schedule VI to the Act will apply to zero rate the supply.

We note your concern that this may be a case of tax avoidance since the companies as a group would be able to recoup the tax paid on supplies acquired for use in administering the credit card receivables simply by transferring the receivables to a related company resident outside of Canada. The existing zero rating provisions in section 7, Part V, Schedule VI of the Act do not apply to services that are "primarily for consumption, use or enjoyment in Canada". The proposed amendment (applies to supplies for which the consideration is due after June 30, 1996) to this paragraph however deletes the "primarily for consumption, use or enjoyment in Canada" restriction. Hence, under the circumstances described, it would be difficult to deny the zero rating treatment to the supply of the collection services made by Company B to Company D.

We are unable to advise if the transaction described is a "tax avoidance transaction" under section 274 of the Act since this is only an interpretation request, but does not relate to a factual case. A consideration of section 274 application can be made only on a particular transaction in a specific case based on an examination of all the facts surrounding the transaction.

iii) The supply still qualifies as a zero rated supply even if Company B and Company D were related to each other.

iv) Whether Company D is a GST registrant does not change the application of section 7, Part V, Schedule VI to the Act.

We trust the above will be of assistance to you in replying to XXXXX[.] Should you wish to discuss the issue further, please do not hesitate to contact the undersigned at (613) 954-1433.

Phil Tang
Rulings Officer
Financial Institutions and Real Property Division
GST Rulings and Interpretations.