Transfer of Instalment-Sale Contracts and Commissions
When selling an automobile, a dealer sometimes enters into an instalment-sale contract with the buyer. When the contract is subsequently transferred to a financial institution, the dealer receives the balance of the selling price plus a premium, also referred to as a “commission.”
For GST and QST purposes, an instalment-sale contract is considered to be a debt security and a financial instrument, since it represents a right to be paid money. When the instalment-sale contract is transferred to a third party such as a financial institution, the third party acquires the right to collect the buyer's subsequent payments. The transfer of this right constitutes a financial service and is therefore exempt from GST and QST.
In general, the commission received by the dealer from the financial institution is part of the consideration received for the transfer of the instalment-sale contract and is therefore exempt from GST and QST, like the transfer of the instalment-sale contract.
Services preparatory to the supply of a financial service
When a dealer receives a commission for helping a client obtain a loan from a third party under a financing contract, it must be determined whether the dealer is taking measures to provide a financial service and, if so, whether this financial service is the predominant element of the supply provided.
For example, the services provided by a dealer constitute services preparatory to the supply of a financial service and are taxable where the dealer:
- provides a loan application to the buyer;
- helps the buyer to complete the application;
- verifies the information entered on the application;
- transmits the application to a financial institution.
In this case, the dealer is required to charge GST and QST on any commission for a referral paid to the dealer by the financial institution.
For more information, refer to Technical Information Bulletin B-105, Changes to the Definition of Financial Service.