19 November 2002 GST/HST Interpretation 42355 - GST Status of Third Party Collection Agency Services

Dear XXXXX:

Thank you for your letter dated XXXXX (with attachments) concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to third party debt collection agency services.

Statement of Facts

Our understanding of the facts is as follows:

The XXXXX ("Bank") enters into various agreements with collection agencies to collect on loans and XXXXX accounts written off by the Bank. In particular, this interpretation analyses the services provided pursuant to two service agreements. The first agreement relates to the collection of unpaid loans ("Loan Agreement") between the Bank and XXXXX (the "Company") and the second for unpaid XXXXX accounts ("XXXXX Agreement") between the Bank and XXXXX (the "Agency").

Loan Agreement

•   The services provided under the Loan Agreement include the provision of collection and management services in relation to the unpaid accounts ("Accounts").

•   The Bank does not assign the Accounts to the Company and the Bank retains the power to request the return of the Accounts (XXXXX of the Loan Agreement). The Company is also required to return an Account if the debtor becomes bankrupt or dies.

•   The Company is required to provide a copy of a monthly complaints journal detailing the complaints on the Accounts (XXXXX to the Loan Agreement).

•   According to XXXXX to the Loan Agreement the Company is allowed to XXXXX. For all other settlements, the company must obtain the prior approval of the Bank in writing.

•   If written approval is obtained from the Bank the Company is allowed to commence legal proceedings against the debtor.

•   The Company is responsible for all the collection costs relating to these Accounts. The Company prepares various detail reports and monthly reports with regard to the Accounts.

•   The Bank reviews the methods used and the service level offered by the Company when collecting on the Accounts ("XXXXX to the Loan Agreement").

•   The Company is required to have a separate trust account to hold the money collected.

•   The Company is an independent contractor and is not an agent of the Bank (XXXXX of the Loan Agreement).

•   The Company is paid a commission according to a formula set out in XXXXX to the Loan Agreement. The Bank was charged GST on the commission paid to the Company. The Bank did not claim input tax credits for this purpose as the payments were done outside the normal GST reporting system.

Collection of XXXXX Accounts

•   Under the XXXXX Agreement the Agency provides XXXXX in relation to XXXXX accounts ("Accounts") held by the Bank. The details of the services provided by the Agency are set out in XXXXX to the XXXXX Agreement.

•   Under the XXXXX Agreement the Agency has the authority to demand payment on Accounts and provide receipts acknowledging receipt and commence lawful proceedings to collect on the Accounts XXXXX.

•   If the Agency has applied its XXXXX. The terms of authorization are set out in XXXXX of the XXXXX Agreement.

•   The Agency was paid commission on amounts collected and the details are set out in XXXXX to the XXXXX Agreement. The Bank has paid GST on the commission paid to the Agency. The Bank did not claim input tax credits on the GST paid, as it was not recorded in the GST reporting system.

•   With the exception of XXXXX the Agency is required to return the Accounts to the Bank in accordance with XXXXX of the XXXXX Agreement. The Agency is not entitled to charge a fee on the Accounts returned to the Bank. XXXXX means Accounts in respect of which legal costs have been incurred by the Agency and a Statement of Claim or other like document commencing an action or application as part of the collection effort has been filed with a court of competent jurisdiction.

•   The Agency is required to provide detailed reports on the Accounts as specified in XXXXX of the XXXXX Agreement.

Interpretation Requested

1. Are the services provided by the Agency/Company hired by the Bank subject to the GST?

2. If the services provided by the Agency/Company are not subject to GST does the amount qualify as tax paid in error under section 261 of the Excise Tax Act (the "ETA")?

3.  If the services provided by the Agency are exempt supplies, confirmation on whether the agencies are entitled to input tax credits.

Interpretation Given

Based on the information provided as set out in the statement of facts, our interpretation is as follows:

1. Are the services provided by the Agency/Company hired by the Bank subject to the GST?

As indicated in the Loan Agreement and the XXXXX Agreement the collection Agency/Company collects on overdue XXXXX and loan Accounts for the Bank. The Agency/Company is collecting on Accounts for which it is not financially at risk. The Agency/Company has not purchased an interest in the Accounts as the Agency/Company is contracted to provide a "management and collection service". The Bank suggests that the collection Agency/Company is "arranging for" a financial service listed in paragraphs (a) through (i) as defined in paragraph (l) of the definition of "financial service" in subsection 123(1) of the ETA. In our opinion, the collection Agency/Company is not "arranging for" the supply of a financial service referred to in paragraphs (a) to (i) of the definition of "financial service" found in subsection 123(1) of the ETA.

The concept of "arranging for" is clarified in our GST/HST Policy Statement P-239, "Meaning Of The Term "Arranging For" As Provided In The Definition Of "Financial Service" as follows:

In general, an "arranging for" service can be described as the activities of one or more intermediaries as 'go-betweens" in bringing together two (or more) persons for the supply of a financial service by one person to the other. There must be a clear nexus between the activities of the intermediary and the supply of the financial service. Whether the intermediary's service can be considered to be a service of arranging for a supply of a financial service is a question of fact depending on the degree of involvement of the intermediary in each particular case.

In the present situation, the issuance of the "debt security" (the supply of the financial service) has already taken place. Therefore, the Agency/Company is not "bringing" the lender and the debtor together to facilitate the supply of the financial service. The collection on the "debt security" does not result in the supply of a new financial instrument rather it is a taxable, administrative service that facilitates the collection of overdue Accounts. The examples referred to in the Arranging for Policy P-239, referenced above refers to situations where the person "arranging for" the service is involved in the supply of the financial service such as the completion of a loan agreement, the issuance of shares or facilitating the completion of a credit card application. These examples indicate that to qualify under paragraph (1) of the definition of "financial service" in subsection 123(1) of the ETA the intermediary should be involved in the supply of the financial service. The collection Agency/Company is not "arranging for" the supply of a "debt security" as the relationship between the debtor and the Bank already exists.

As an alternative, the Bank suggests that, the Agency/Company is "arranging for" the "variation, ... of a financial instrument" (i.e. financial instrument) in accordance with paragraph (d) of the definition of "financial service" found in subsection 123(1) of the ETA.

The Bank suggests that the financial instrument is varied when the Agency or the Company negotiates a settlement and accepts part payment XXXXX of the outstanding loan amount. In our view the Company/Agency is hired to collect the entire debt and it is only if it is unable to collect on this amount that the Company/Agency is allowed to collect XXXXX of the outstanding amount. The primary reason for the Loan Agreement and the XXXXX Agreement is to facilitate the collection and management of overdue Accounts. The Company/Agency is not hired to "arrange for" the variation of the original Loan or XXXXX agreement. The negotiated acceptance of XXXXX of the outstanding loan amount is one of the consequences of the Agency/Company's inability to collect the entire amount. The primary reason for the collection contract is to facilitate the collection of the total outstanding amount.

As the collection Agency/Company does not "arrange for" a financial service listed in paragraphs (a) through (i) of the definition of "financial service" in subsection 123(1) of the ETA the collection services are taxable services. As we have concluded that the services of the Company/Agency are taxable a discussion of issues (2) and (3) becomes unnecessary.

The foregoing comments represent our general views with respect to the subject matter of your letter. Proposed amendments to the ETA if enacted, could have an effect on the interpretation provided herein. These comments are not rulings and, in accordance with the guidelines set out in section 1.4 of Chapter 1 of the GST/HST Memoranda Series, do not bind the Canada Customs and Revenue Agency with respect to a particular situation.

For your convenience, find enclosed a copy of section 1.4 of Chapter 1 of the GST/HST Memoranda Series.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 957-8222 or Duncan Jones at (613) 952-9210.

Yours truly,

Manjula Vethanayagam
Financial Institutions Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate

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