The TCC concluded in Rojas (2016 TCC 177) that the taxpayer’s mortgage-related services were exempt from HST as financial services under ETA subsection 123(1) and not taxable as administrative services provided to a brokerage firm.

The taxpayer was a real estate agent and also assisted clients in obtaining mortgages on the properties they wished to purchase. Because she provided mortgage services, Ontario required her to be licensed as a mortgage broker and also to obtain registration under a mortgage brokerage firm’s umbrella.

The taxpayer’s mortgage work involved determining the borrowing needs of her client; receiving a written mortgage application from her client; using an on-line computer program only available to mortgage brokers to determine client qualification and to find willing lenders; explaining available mortgage products to clients; working with her brokerage firm to obtain a lending commitment from the chosen lender; receiving 75 percent of the commission paid by the lender (the balance was paid to the brokerage firm); and dealing with any subsequent issues between her client and the lender.

On reassessment, the minister said that the taxpayer’s mortgage services were in the nature of administrative services, primarily the collection of information for a mortgage brokerage firm; thus related commissions that she received were not HST-exempt. On appeal, the taxpayer argued that her services constituted arranging for the lending of money and were thus exempt as financial services under 123(1)(l).

In the “financial services” definition in subsection 123(1), paragraphs (a) to (t) are of two categories: paragraphs (a) to (m) describe supplies that qualify as financial services and paragraphs (n) to (t) describe supplies that are excluded from the definition of a financial service.  Paragraph (r.4) excludes from the financial service definition a supply that is an administrative service that is either preparatory to a financial service or provided in conjunction with a financial service.

The TCC concluded that the taxpayer (i) provided a single supply and facilitated the entire lending process, noting that she was a licensed mortgage broker; (ii) determined the borrowing qualification of her clients; (iii) identified lenders and their terms; (iv) took steps to obtain lending commitments from the lenders; and (v) completed the lending process by obtaining applicable forms from the borrower and providing them to the lender.

The TCC concluded in the taxpayer’s favour, because administrative services are excluded from the meaning of financial services only if they are preparatory to or in conjunction with the provision of a financial service. Moreover, those administrative services must be supplied separately from a financial service. The taxpayer provided what the court said was a single supply and thus her services could not be characterized as merely preparatory to or provided in conjunction with the lending of money. Thus the exclusion in paragraph (r.4) did not apply.

Rojas highlights the court’s view that a compound supply is “a supply where there are a number of constituent elements, which if supplied separately, some would have been taxed and some not,” (The Great-West Life Assurance Company v The Queen (2015 TCC 225)). Thus the non-essential elements of the supply, its subordinate or ancillary parts, are ignored for the purposes of determining whether the supply is a financial service.

Rojas also concerns the relationship between the inclusionary paragraph (l), which describes as a financial service a supply that arranges for a supply described in paragraphs (a)-(k), and the exclusionary paragraph (r.4), which excludes services that are preparatory to or in conjunction with a supply described in paragraphs (a)-(m). However, the legislation does not explain how “the arranging for” described in paragraph (l) does or does not fall under the paragraph (r.4) exclusion of a service that is preparatory to a financial service or a service that is provided in conjunction with a financial service.

Kathryn Walker and Rob Kreklewetz

Millar Kreklewetz LLP, Toronto

A version of this article appeared in the October 2016 issue of Canadian Tax Highlights.