Debt Security

Table of Contents

Cases

2441-0946 Québec Inc. (c.b.a., Insta-chèques) v. Agence du revenu du Québec, 2017 QCCA 1491

cheques were debt securities in context of cheque-cashing business

The appellant derived 80% of its revenue from cashing cheques, i.e., it would receive endorsed cheques from clients, and charge them a fee for depositing the cheques in its bank account. Whether it was subject to compensation tax under Part IV.1 of the Taxation Act (Quebec) turned on whether it was a financial institution under ETA s. 149(1)(a).

The Court found that the appellant was a financial institution under s. 149(1)(a)(iii) as a person “whose principal business is as a … dealer in … financial instruments.” In this regard, the Court first found (at para. 26) that the cheques were “debt securities,” namely, “a right to be paid money,” with “cheques” being assimilated to money under the s. 123(1) definition of money. The Court also noted (also at para. 26, TaxInterpretations translation):

Furthermore, in Elgin Mills Leslie Holdings … the Tax Court of Canada indicated that a cheque is a “financial instrument” within the meaning of subsection 123(1) … .

Locations of other summaries Wordcount
Tax Topics - Excise Tax Act - Section 149 - Subsection 149(1) - Paragraph 149(1)(a) - Subparagraph 149(1)(a)(iii) company in a cheque-cashing business was a "dealer in … financial instruments" 251

See Also

Casa Blanca Homes Ltd. v. The Queen, 2013 TCC 338 (Informal Procedure)

non-refundable deposit under purchase agreement was a debt security

The appellant bought and resold the right and obligation to acquire lots from a land developer. Hogan J found that the "non-refundable" deposits collected thereon were each a "debt security" under s. 123(1), given that the collection of a sum under a contract as a "deposit" implies an obligation to return the deposit if the collector does not perform the contract - in this case, if the land developer were unable to complete the lots on time (para. 24). In the alternative, the purchaser's assignment of the deposits to third parties was not a supply at all, because money is neither property not a service (para. 22, adopting Barnett 2011).

Words and Phrases
deposit
Locations of other summaries Wordcount
Tax Topics - Excise Tax Act - Section 123 - Subsection 123(1) - Supply possible to structure separate assignments 252

Administrative Policy

10 May 2019 GST/HST Ruling 167225 - Royalty Payments

a loan assimilated to a royalty agreement, so that "principal" advanced was taxable

The Investors entered into a loan agreement (“Agreement #1”) and a royalty agreement (“Royalty Agreement #1”) with Company #1. Agreement #1 provided for the Investors to make a loan to Company #1 (which did not bear interest absent default) provided that Royalty Agreement #1 had been entered into. Company #1 is required to make quarterly instalments to the Investors equal to a stipulated percentage of its Gross Revenue for the quarter (being the aggregate revenue of Company #1, and all affiliates, derived from all sales of the specified products (the “Products”). The total amount of these instalments was not to exceed the amount of the advance (the “Principal Amount”). In addition, if the total instalments paid by a specified date were less than the Principal Amount, the difference became due and payable on that date.

The Investors agreed to pay a specified sum, described as an interest free loan in exchange for the payment of a royalty fee (Royalty Fee #1), which was required to be paid (in addition to the instalments described above) at a stipulated percentage of Gross Revenue from retail sales of the Products (and a stipulated percentage of the Gross Revenue from Wholesale Orders of the Products) to the Investors beginning on the date that Company #1 has paid a total of a stipulated amount to the Investors.

Pursuant to Royalty Agreement #2, the investor (the “Business”) agreed to pay a specified sum to Company #2 in exchange for the payment of a royalty fee (Royalty Fee #2) that was calculated at a rate equal to a stipulated percentage of the gross revenue, including but not limited to revenue attributed to sales of the Products of Company #2 and/or its Affiliates up to a specified maximum, after which Royalty Fee #2was reduced to a lower percentage.

CRA stated:

[A] “debt security” does not include a contingent right. …

Under Agreement #1 and Royalty Agreement #1, Company #1 has made a single supply to the Investors … of the right to receive money, that is, the instalments … and Royalty Fee #1. …[T]he Investors have acquired a contingent right to be paid money under Agreement #1 and Royalty Agreement #1. The consideration for this taxable supply is the Principal Amount … paid by the Investors to Company #1. As such, where Company #1 is a GST/HST registrant, the Investors are required to pay GST/HST to Company #1.

When Company #1 pays the instalments and Royalty Fee #1 to the Investors pursuant to the right that the Investors have acquired, we do not consider the Investors to be making a taxable supply in exchange for these payments of money. Accordingly, the instalments and Royalty Fee #1 are not subject to GST/HST.

Similarly, under Royalty Agreement #2, Company #2 is making a single supply to [the Business] of a right to be paid money contingent upon Company #2 earning revenue as Royalty Fee #2 is paid to [the Business] at a rate calculated on the gross revenue of Company #2 and/or its Affiliates. This right to be paid money is a taxable supply of intangible personal property … .

Locations of other summaries Wordcount
Tax Topics - Excise Tax Act - Section 123 - Subsection 123(1) - Supply loan and royalty advance were consideration for single taxable supply of IPP 202

23 April 2019 GST/HST Ruling 186334 - S AND INTERPRETATIONS - Annual licensing fees and public service bodies’ rebate eligibility

NSF cheque charge exempt as for debt security

An incorporated non-profit organization (the “Organization”), being a provincial professional society makes NSF cheque charges. CRA stated:

With respect to the insufficient funds fee, a dishonoured cheque triggers a situation in which the [Organization] obtains a “right to be paid money” by the drawer of the cheque. This “right to be paid” meets the definition of “debt security” in subsection 123(1). The debt security is a “financial instrument” and the processing of a financial instrument is an exempt supply of a “financial service” … .

Locations of other summaries Wordcount
Tax Topics - Excise Tax Act - Schedules - Schedule V - Part VI - Section 20 law society was an “other body established by a government” 57
Tax Topics - Excise Tax Act - Schedules - Schedule V - Part VI - Section 20 - Paragraph 20(c) consideration for licensing included expired licence fees 43
Tax Topics - Excise Tax Act - Schedules - Schedule V - Part VI - Section 20 - Paragraph 20(b) - Subparagraph 20(b)(i) exempt processing and registration fees of professional society 62
Tax Topics - Excise Tax Act - Schedules - Schedule V - Part III - Section 6 jurisprudence exam fee exempt, but not charge for processing exam administered by another body 144

24 January 2018 Ruling 156434

conditional sales contracts and credit agreements were debt securities

An auto dealer sold conditional sales contracts or credit agreements arising from its sales to customers to a lender. In connection with ruling that the assignment was an exempt supply under para. (d) of “financial service” (on the basis that the conditional sales contracts or credit agreements were “debt securities,” CRA stated:

The CRA considers a conditional sale to take place when the seller transfers possession of goods to a customer, but ownership passes only after certain conditions are met, such as when the purchase price has been paid in full. In this type of sale, the customer agrees to make payments for the goods over a defined period of time. The customer takes possession of the goods, but the seller keeps title or ownership of the goods until the customer has met the specified conditions. …

Conditional sales contracts and assignments of those contracts provide a financing mechanism to the customer. A credit agreement is similar to a conditional sales contract that entitles the Dealer to receive a stream of payments from the customer. The CRA considers such a contract to be a “debt security” and a “financial instrument” as it represents a right to be paid money.

Locations of other summaries Wordcount
Tax Topics - Excise Tax Act - Section 123 - Subsection 123(1) - Financial Service - Paragraph (d) separately stated originating fee for sourcing credit agreement was part of consideration for its assignment 195

10 February 2017 Ruling 162056

royalty agreement is not a debt security unless a minimum royalty is specified

Under Agreement 1, the Investor (a registrant) pays a lump-sum Royalty Acquisition Amount to Corporation 1 (a Canadian-resident registrant) in return for a monthly Royalty Payment that is calculated as a percentage of revenue streams of Corporation 1 generated each month from certain taxable supplies of intellectual property (IP) made by Corporation 1, and does not have any stipulated minimum. The Investor is only granted the above Gross Sales Royalty and is not granted an interest in any assets or Business IP of Corporation 1.

Agreement 2 (under which Investor pays an amount referred to as the “Initial Instalment” and, if applicable, the “Second Instalment” to Corporation 2, in return for a monthly Royalty Payment that is calculated as a percentage of certain IP related revenue) is similar to Agreement 1 except that it provides for Investor to receive a minimum monthly amount.

CRA ruled that the Royalty Acquisition Amount is consideration for a taxable supply made by Corporation 1 of intangible personal property (a right to be paid money, that is, the Royalty Payments). This right is not a "debt security" because Investor’s right to be paid money is contingent on Corporation 1 earning IP Revenue (that is, there is no minimum amount guaranteed to the Investor, i.e., the "right to be paid money is a possibility but not a certainty").

In contrast, under Agreement 2, Investor’s right thereunder is not contingent (that is, there is a minimum amount guaranteed to Investor in the form of Minimum Monthly Amounts). Therefore, the right to receive the Royalty Payments is a debt security and is a financial instrument.

Words and Phrases
contingent right
Locations of other summaries Wordcount
Tax Topics - Excise Tax Act - Section 169 - Subsection 169(1) the purchase of an IP royalty gives rise to non-creditable GST/HST to the investor 126
Tax Topics - Excise Tax Act - Section 182 - Subsection 182(1) buyout of royalty agreement not subject to s. 182 176
Tax Topics - Excise Tax Act - Section 123 - Subsection 123(1) - Commercial Activity receipt of royalty not considertion for a taxable supply 117

CBAO National Commodity Tax, Customs and Trade Section – 2014 GST/HST Questions for Revenue Canada, Q. 18

exempt assignment of conditional sales contract future payments/related assignor commission also exempt
available with membership password at http://www.cba.org/CBA/sections_NSCTS/main/GST_HST.aspx

In 112274, CRA concluded that the assignment of an instalment contract did not constitute a financial service. Has CRA changed its view from TIB-105? CRA responded:

[Where] assignments of those contracts…provide a financing vehicle… CRA may consider a conditional sales contract to be a "debt security" and a "financial instrument" as it represents a right to be paid money. When a conditional sales contract is assigned to a third-party and the purpose of the assignment is to transfer to the third- party the right to receive a stream of payments, the assignment of the conditional sales contract may be a financial service.

Any fee or commission received by the assignor from the assignee would generally form part of the consideration received for the assignment of the conditional sales contract, and therefore would not be subject to GST/HST where the assignment of the conditional sales contract is exempt.

5 December 2003 Interpretation 44874

concurrent lease qualified as lease

Lessor enters into equipment leases (the "Asset Leases") with users of the equipment (the "Asset Lessees"), who also have options to purchase the equipment. The Lessor then assigns each Asset Lease to a securitization trust (the "Lessee"), giving rise to a "Concurrent Lease" that commences on the lease date set out in the Asset Lease and ends XX months after the termination of the Asset Lease. The Lessee appoints the Lessor as the servicer. The Concurrent Lease also gives the Lessee the option to prepay rent under the Concurrent Lease for XX% of the net present value of the Asset Lease. The Concurrent Lessee is registered for GST and satisfies its obligations relating to GST on Prepaid Rent and Deferred Rent by providing the Lessor with a promissory note.

In connection with an interpretation that the Concurrent Leases would constitute an arrangement similar to a lease for purposes of s. 136(1) and the definition of "debt security" in s. 123(1), CRA stated "the form of the lease agreement should be respected where the Lessor has title to the underlying property," and that "the option to purchase granted by the Lessor does not necessarily result in a change in the characterization of the Concurrent Lease."

Locations of other summaries Wordcount
Tax Topics - Excise Tax Act - Section 136 - Subsection 136(1) concurrent lease qualified as lease 202

April 1999 GST Memorandum (New Series), 17.1

Contingent right is excluded

8. "Debt security" does not include a contingent right. A right to be paid money is a possibility but not a certainty where a contingent right is involved. The payment is conditional upon the occurrence or non-occurrence of some future event that may never happen.

3 September 1997 Ruling HQR0000579

"A swap transaction falls under the definition of 'debt security' since the definition of debt security... includes 'a right to be paid money'."

1 December 1994 P-170 "Debt Security and Contingent Amounts"

Debt security definition

Debt security is generally defined in the Excise Tax Act as a right to be paid money. The right of one party to be paid money only comes into existence once an obligation has been performed by another party. In the case of a contingent right, however, a right to be paid money is possible, but not assured, as the payment is conditional upon the occurrence or non-occurrence of some event in the future which may never happen. Therefore, the meaning of debt security is interpreted such that a "right to be paid money" does not include a contingent right.

Ruling

The purchase for $75,000 by DEF from ABC of a right of ABC to receive fees from an investment manager firm (equal to a percentage of billings generated by that firm from clients referred by ABC to the firm) did not qualify as the purchase of a debt security because "a 'right to be paid money' does not include a contingent right." CRA stated:

The supply by ABC sales contractor to DEF sales contractor does not qualify as an exempt financial service as the supply does not constitute the transfer of a debt security. Instead, it is the Department's view that ABC sales contractor is making a supply of personal property in the course of his/her commercial activities and, accordingly, the supply is subject to the GST pursuant to subsection 165(1) of the Excise Tax Act.