Published | Category: GST and QST
Mortgage Broker Franchisee and Franchise Fees
A mortgage loan supplied by a mortgage lender to a borrower is an exempt financial service. When a mortgage broker provides an “arranging for” service in relation to the supply of the mortgage loan, the mortgage broker is also making an exempt supply of a financial service.
When a mortgage broker is a franchisee and is required to pay to the franchisor a portion of the revenue earned through its exempt activity as part of its franchise fee, the tax status of the franchise fee must be determined based on the franchise agreement.
Generally speaking, the franchisee pays franchise fees for the right to operate a franchise, which includes the right to use the name of the franchisor as an advertising tool and any systems made available by the franchisor to facilitate the operation of the franchise. The supply of such a right is a supply of incorporeal movable property (“intangible personal property” under the federal system).
Supplies of incorporeal movable property are generally taxable. If the franchisor is a GST and QST registrant, the franchisor is required to charge and collect GST and QST on the franchise fee payable by the franchisee for the property. If the franchisee is required to include in its franchise fee a percentage of its revenue earned through making exempt supplies of financial services, it is still required to pay GST and QST on the entire franchise fee payable to the franchisor.
The agreement between a franchisor and a franchisee may provide that the franchise fee also includes a percentage of any incentive payments paid to the franchisee by a mortgage lender. For example, a mortgage broker franchisor may enter into an agreement with a mortgage lender which provides for incentive payments to be paid by the lender to the franchisee when certain sales volumes are reached. If a percentage of these incentive payments forms part of the franchise fee, the franchisee is still required to pay GST and QST on the entire franchise fee payable to the franchisor.
Furthermore, if the mortgage lender sends a franchisor the total amount of all the incentive payments earned by the franchisor's franchisees with instructions on how to divide the lump sum incentive payment between the franchisees and the franchisor retains an amount that corresponds to each franchisee's franchise fee, the portion of the incentive payment retained by the franchisor as part of the franchise fee is still subject to the GST and QST, which is payable by the franchisee.
For more information on financial services, refer to GST/HST Technical Information Bulletin B-105, Changes to the Definition of Financial Service.