Mortgage Brokers – Do GST/HST Changes Affect Your Service Agreements?

Members of the mortgage brokerage industry may need to review and revise their service agreements due to recent amendments to the definition of “financial service” for GST/HST purposes. As a result of these changes, certain services that were previously considered GST/HST-exempt financial services became GST/HST taxable as of December 14, 2009. The Department of Finance and the Canada Revenue Agency (CRA) have recently issued additional guidance on the amendments. This announcement summarizes the changes and the guidance as they relate to the mortgage brokerage industry.

New Definition of “Financial Services”
The new definition of GST-exempt “financial service” now excludes a service that is preparatory to the provision of (or the potential provision of) intermediary services, or provided in conjunction with intermediary services, and that is a service of collecting, collating or providing information or market research, product design, document preparation, document processing, customer assistance, promotion, or advertising service, or a similar service. Thus, these services are now GST-taxable.

As originally proposed, the new definition of “financial service” is structured with broad exclusions and has caused significant concern for financial intermediaries such as mortgage brokers and agents, as well as insurance brokers and agents.

The Department of Finance has alleviated some of these concerns by issuing revised Explanatory Notes in which it is noted that the new definition would not affect the “arranging for” the issuance of a mortgage loan. Having said that, mortgage brokers and agents are still required to sufficiently establish that their services are indeed considered the “arranging for” the issuance of a mortgage loan.

The CRA’s Revised Policy
In its revised GST/HST Notice 250, the CRA provides further guidance to financial intermediaries with respect to the new definition of “financial service” and the “arranging for” concept. Based on the CRA’s notice, “arranging for” the issuance of a mortgage loan is a question of fact based on the circumstance surrounding the transaction and the weighing of certain factors, including:

  • The degree of direct involvement and effort of the financial intermediary in the issuance of the mortgage loan
  • The time expended by the financial intermediary in the issuance of the mortgage loan
  • The degree of reliance of either or both the lender and borrower on the financial intermediary in the course of the issuance of a mortgage loan
  • The intention of the financial intermediary to effect the issuance of a mortgage loan
  • The normal activities of the financial intermediary in the mortgage industry.

In addition, revised Notice 250 now includes two examples specific to the mortgage industry relating to the issuance of a mortgage loan. In particular, it is important to note that the CRA reached different conclusions on the tax status of services provided by mortgage brokers to lenders and services provided by consultants to mortgage brokers.

In example no. 9, a mortgage broker enters into an agreement with a lender for the preparation and submission of residential mortgage loan applications to the lender and assists the mortgage applicant in securing a mortgage loan in exchange for a commission fee for each funded mortgage loan. Based on these facts, the CRA concluded that the broker is providing an exempt service of “arranging for” the issuance of a mortgage loan.

In example no. 10, a consultant enters into an agreement with a mortgage broker for mortgage referrals made to the broker for a referral fee. The duties of the consultant includes completing forms for the borrower, ensuring paperwork is correct and duly executed by the borrower, and submitting paperwork to the broker, without further contact with the borrower and without any attempts to find suitable lenders.  Based on these facts, the CRA concluded that the consultant is providing a GST/HST taxable service to the broker and not an exempt service of “arranging for” the issuance of a mortgage loan.

KPMG's observation
The CRA doesn’t provide a specific definition of “consultant” and the examples in Notice 250 don’t specifically address mortgage agents. It is therefore important to note that depending on the relationship between a mortgage broker and its mortgage agents, as well as the activities performed by these agents, the CRA could take the view that mortgage agents are included as “consultants.”

Based on the new definition of “financial service” and the revised Notice 250, financial intermediaries in the mortgage brokerage industry, including mortgage brokers and consultants/agents, will need to review the nature of their service agreements, the nature of their services, and the facts under their particular circumstances.

If the financial intermediaries’ services and facts meet the guidelines provided in Notice 250 and are identical to the facts of example no. 9, the CRA should view the services as exempt from GST/HST. Financial intermediaries may have to produce documentation to support their facts, circumstances, and tax position. However, where such services do not meet the guidelines of Notice 250 or any of the facts are not identical to the ones in example no. 9, there should be some concern that the services provided are in fact taxable for GST/HST purposes. The application of the amendments may vary depending of the specific facts and circumstances of each particular transaction.

Whenever any of the facts, circumstances, and the interpretation of the law are unclear, financial intermediaries are advised to consult their tax advisers. In particular, service agreements must be reviewed and may be required to be amended to document and to more accurately reflect the nature of the services provided by financial intermediaries.

Information is current to July 28, 2010. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation.

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