While many businesses are involved in financial transactions, providing financial services is not their primary business focus. Automobile dealerships often help their customers arrange for financing with a third-party financial institution. This third-party institution then pays the dealership for its assistance in arranging the loan or lease transaction. It is this dealership's revenue that must be carefully reviewed to ensure the proper Goods and Service Tax (GST/HST) treatment.
The Canada Revenue Agency (CRA) has been reviewing these sources of revenue of automobile dealerships and in many cases has issued assessments for GST/HST that should have been charged. It has been a common practice to treat the fee received from the financial institution as an exempt financial service, meaning that the dealership would not collect any GST/HST on the fee. As a result of changes to the definition of a financial service that came into effect in December 2009, it may be that some of these fees are now considered taxable and subject to GST/HST. Under the current legislation, preparatory services provided to obtain financing are taxable. If the dealership fails to collect the GST/HST on the fee, the CRA will look to the dealership for the uncollected tax and interest and potential penalties for non compliance.
Consider the following example published by the CRA in GST/HST Technical Information Bulletin B-105, Changes to the Definition of Financial Service.
An independent automotive dealership assists customers in obtaining financing by referring them to a financial institution. The dealership receives a referral fee from the financial institution for every successful loan and explains the different financing options, loan terms and interest rates available to the customer. It would also provide a loan application to the customer and help complete the forms. The information on the application is verified by the dealership, which will forward the loan application to the financial institution for approval.
In this example, it is the CRA's position that the activities of the dealership would not be considered to be a financial service and would be subject to GST/HST. Keep in mind that not all dealerships structure their financing arrangements this way. Since financing arrangements may vary among automobile dealerships across Canada, each specific arrangement requires its own analysis before a conclusion on the status can be reached. It is prudent that automobile dealerships review with their tax advisors the sources of income that they consider to be exempt financial services to ensure that these transactions are treated appropriately.
The Québec Sales Tax (QST) rules for financial services have been harmonized with the GST/HST effective January 1, 2013. As such, for those dealerships which operate in Québec, and in cases where these arrangements would be considered taxable for GST/HST purposes they would be subject to QST.
For more information on the GST/HST and QST implications with respect to financing arrangements offered by automobile dealerships, contact your BDO advisor.
The information in this publication is current as of June 13, 2013.
This publication has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The publication cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it.
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