Please note that the following document, although correct at the time of issue, may not represent the current position of the Canada Revenue Agency. / Veuillez prendre note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'Agence du revenu du Canada.
Excise and GST/HST Rulings Directorate
Place de Ville, Tower A, 11th floor
320 Queen Street
Ottawa ON K1A 0L5
[Addressee]
Case Number: 185880
[…]
Dear [Client]:
Subject: GST/HST INTERPRETATION
Lease modification and renewal
Thank you for your letter of July 14, 2017 and your revised submission of December 28, 2018 concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to the supply of tangible personal property by way of lease in the context of a lease modification and renewal.
The HST applies in the participating provinces at the following rates: 13% in Ontario; and 15% in New Brunswick, Newfoundland and Labrador, Nova Scotia and Prince Edward Island. The GST applies in the rest of Canada at the rate of 5%.
All legislative references are to the Excise Tax Act (ETA) unless otherwise specified.
Based on the information provided in your letters and subsequent conversations, our understanding of the facts is as follows. A non-resident lessor (“Lessor”) who is not registered for the GST/HST and a lessee (“Lessee”) who is resident in Canada and registered for the GST/HST enter into a lease of tangible personal property that will be used by the Lessee in the course of its commercial activities in Canada. The lease is made for a fixed term specified in the lease and the consideration under the lease is payable in monthly rental instalments.
At the start of the lease, the Lessee takes possession of the tangible personal property at the Lessor’s premises outside Canada. The Lessee subsequently brings the tangible personal property into Canada, acting as the importer of record and paying the GST on importation.
The lease agreement does not include a renewal clause or an option to renew or an automatic right to renew the lease at the expiration of the fixed term specified in the lease. In fact, the lease specifically states that any amendment or modification to the lease must be expressly agreed to in writing by both parties.
Before the end of the lease, the Lessor and the Lessee wish to enter into a lease renewal agreement to extend the term of the lease. In some cases, in addition to extending the term, the parties may also want to change the amount of rent payable. And in other cases, the parties may wish to modify the conditions for the return of the tangible personal property at the end of the lease, in addition to modifying the term and the rent. In all cases, the parties must negotiate and attempt to reach an agreement in respect of any and all such modifications to the existing lease.
Any lease renewal agreement negotiated by the parties will stipulate that, apart from the modified terms contained in the lease renewal agreement, all of the remaining terms and conditions of the original lease agreement will continue to apply equally under the new lease renewal agreement.
At the time of entering into the lease renewal agreement, possession or use of the tangible personal property may be given or made available to the Lessee either inside or outside Canada depending on where the property is situated at that particular time.
INTERPRETATION REQUESTED
You would like to know if, in each of the scenarios described below, the lease renewal agreement constitutes a new separate supply of tangible personal property by way of lease, requiring a new place of supply determination, or simply a continuation of the existing supply by way of lease.
1) The renewal agreement extends the term of the lease, without changing any of the other conditions of the original lease;
2) The renewal agreement extends the term of the lease and changes the amount of rent payable under the lease, without changing any of the remaining conditions of the original lease;
3) The renewal agreement extends the term of the original lease, changes the amount of rent payable under the lease and changes the condition for the return of the tangible personal property at the end of the lease.
INTERPRETATION GIVEN
A supply of tangible personal property by way of lease is deemed, under subparagraph 142(2)(b), to be made outside Canada if possession or use of the property is given or made available outside Canada to the recipient of the supply.
Where consideration under a lease is payable on a periodic basis, subparagraph 136.1(1)(a) deems a separate supply of tangible personal property by way of lease to be made for each rental period. In addition, subparagraph 136.1(1)(d) ensures that the place of supply determination made above under paragraph 142(2)(b) (i.e., whether the supply is made inside or outside Canada) applies to all of the subsequent deemed separate supplies.
The Lessee takes physical possession of the tangible personal property outside Canada; accordingly, the supply of tangible personal property by way of lease under the agreement is deemed to be made outside Canada by virtue of paragraph 142(2)(b). Each monthly rental payment under the lease agreement will be deemed to be consideration for a separate supply by way of lease made outside Canada, regardless of where the tangible personal property is subsequently located.
The parties wish to enter into a lease renewal agreement to modify certain essential terms and conditions of the current lease, which does not provide for a lease modification mechanism, such as a renewal clause. Consequently, the modification of the lease in respect of any of its essential elements, such as the rent or the term of the lease, would be considered a significant change that goes to the root of the agreement. These types of fundamental changes result in a new agreement between the parties and a new supply for GST/HST purposes. Accordingly, the place of supply must be established for this new supply, based on where possession or use of the tangible personal property is given or made available to the Lessee under the lease renewal agreement.
In accordance with the qualifications and guidelines set out in GST/HST Memorandum 1.4, Excise and GST/HST Rulings and Interpretations Service, the interpretation(s) given in this letter, including any additional information, is not a ruling and does not bind the Canada Revenue Agency (CRA) with respect to a particular situation. Future changes to the ETA, regulations, or the CRA’s interpretative policy could affect the interpretation(s) or the additional information provided herein.
If you require clarification with respect to any of the issues discussed in this letter, please call me directly at 613-670-9892. Should you have additional questions on the interpretation and application of GST/HST, please contact a GST/HST Rulings officer at 1-800-959-8287.
Yours truly,
Anna Messore
Border Issues Unit
General Operations and Border Issues Division
Excise and GST/HST Rulings Directorate
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