When does a vendor take-back become a purchase money security interest?

The label matters because the Personal Property Security Act gives a purchase money security interest, or PMSI, priority rules that an ordinary security interest does not get. A seller holds a PMSI only if the security fits the Act’s definition. This page uses Ontario’s Act as the worked example. Other provinces run their own registries, and Quebec works under the Civil Code instead.

What the definition asks for

Ontario’s Act defines a PMSI to include a security interest taken or reserved in collateral, other than investment property, to secure payment of all or part of its price. It also covers a security interest taken by a person who gives value so that the debtor can acquire rights in the collateral, but only to the extent the value is applied to acquire them. For a seller, the first limb is the natural fit: the collateral is what was sold, and the note is its price.

What takes a take-back outside it

Three common set-ups fall outside the definition.

• Security over assets the seller did not sell, such as the buyer’s other equipment, because the definition ties the security to the price of the collateral.
• A pledge of shares that are securities. The definition excludes investment property, which the Act defines to include a security as defined in the Securities Transfer Act, 2006, so such shares are outside it in Ontario.
• A mortgage on land. Ontario’s online personal property service says it does not cover real property and points users to land registration, so land is a separate registration.

Why the price allocation matters

Because the definition speaks of the price of the collateral, the sale agreement should show how the purchase price is allocated among the equipment, inventory, intangibles and other assets, and which of them secure the note. A note secured on “all assets” with no allocation can leave it unclear how much of the debt each asset secures. A lawyer can settle that wording before signing.

What qualifying changes

Qualifying matters because the Act gives a PMSI priority over other security interests in the same collateral from the same debtor if its timing steps are met, and for inventory a notice step too. How purchase money security interest priority works explains those steps, and registration comes first in securing a vendor take-back loan.