17 June 2002 GST/HST Interpretation 38617 - Mortgage Backed Securities -

We are writing in response to your memorandum of January 2, 2002 wherein you request our assistance in determining whether the mortgage backed security arrangement of the XXXXX would be an arrangement which would be subject to GST on the subsequent servicing of the mortgages.

You have provided a copy of the XXXXX (Agreement) between XXXXX (Trust) and the XXXXX (Seller) dated XXXXX. In addition, you have provided a copy of a memorandum from XXXXX responding to questions with respect to Mortgage Backed Securities.

Our Comments

As the mortgages are sold on a fully serviced basis, the first step is to determine whether the servicing is part of the single supply of the sale of the mortgages or whether the servicing is a supply separate from the sale of the mortgages. In determining whether there is a single supply or multiple supplies, we turn to policy statement P-077R "Single and Multiple Supplies".

The first factor in the policy is to determine whether some elements of a supply are inputs or themselves supplies. XXXXX the Agreement states that the mortgages are sold on a serviced basis and that the Trust has no obligation to service the mortgages or to pay further compensation to the Seller for its services in connection with the sale. This same section goes on to state that the Seller is responsible for performing its servicing obligations XXXXX until the Trust designates another servicer XXXXX the Seller may appoint an agent acceptable to the Trust to perform its servicing obligations. These points indicate that the servicing of the mortgages is an element that is separable from the sale of the mortgages.

The second factor in the policy relates to the examination of the contracts or agreements between the parties involved. As indicated above, XXXXX XXXXX the mortgages are sold on a serviced basis however, further examination of the agreement reveals that the agreement contemplates the possibility of another party carrying out the servicing. This is supported by both XXXXX which contemplates the Seller appointing an agent to carry out its responsibilities outlined in XXXXX and, XXXXX which contemplates the appointment of a replacement servicer under certain circumstances. These points also indicate that the servicing is a separate supply from the sale of the mortgages.

The third factor in the policy relates to the number of suppliers and recipients. Once again, the agreement contemplates one supplier with respect to the sale of the mortgages but more than one supplier with respect to the servicing of those mortgages. In both cases there is only one recipient, i.e., the Trust.

All three factors lead us to conclude that there are multiple supplies in this situation. One supply being the sale of the mortgages and the second supply being the servicing of those mortgages.

As a result of the conclusion that there is more than one supply, the next step is to determine whether either of sections 138 or 139 may be applicable. Both provisions provide guidance in determining the tax status of mixed supplies of a financial and non-financial nature when the supplies are provided for a single consideration.

Neither of sections 138 or 139 apply in this situation since there is more than one consideration. As stated in the XXXXX "the Purchase Price is equal to the market value of the mortgages". XXXXX the Purchase Price is "generally equal to the Estimated Book Value". Consequently, payments received by the Seller on a monthly basis which are amounts over and above the Purchase Price after deducting relevant amounts pursuant to XXXXX of the Agreement are payments received for the administrative services provided by the Seller. The monthly payments made by XXXXX Trust to the Seller is consideration for a taxable supply.

Should you have any questions, you may contact me at (613) 952-9577.

Sincerely,

Marilena Guerra
Senior Rulings Officer
Financial Institutions Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate