5 December 1996 GST/HST Interpretation 11650-3[1] - Tax Treatment on the Acquisition of Equipment in a Leaseback Transaction

Dear XXXXX

This is in reply to your letter dated May 28th, 1996, concerning the tax treatment for tax payable on the acquisition of equipment XXXXX in a leaseback transaction.

It is assumed that none of the issues herein are being considered by a Revenue Canada Excise/GST Office in connection with a GST return already filed and none of the issues are under objection or appeal.

Our understanding of the facts is as follows.

Statement of Facts:

1. A registered public sector body XXXXX purchases equipment for use in a XXXXX for XXXXX purposes. The vendor is XXXXX[.]

2. The equipment consists of XXXXX and other equipment related to the operation of XXXXX.

3. Provisional title was transferred to the XXXXX ("the Region") upon delivery.

4. The contract between the Region and XXXXX provides that full title to the equipment will be transferred to the Region once testing conditions have been met. In the event the design and performance do not meet the Region's requirements, the Region may return all the equipment to the vendor. The primary obligation for testing remains with XXXXX[.]

5. Testing has been made in the context of the Region's XXXXX using the equipment in a working environment to ensure all design and performance specifications have been met.

6. Following testing, a certificate of acceptance has been issued by the Region confirming the meeting of the requirements provided for by the sale contract. The contract provides that on the issuance of the certificate, full title passes to the Region. The certificate has been issued.

7. Subsequent to final acceptance of the equipment, the Region sells the equipment to XXXXX who in turn leases the equipment to the Region. The lease contract does not provide for a buy-out option by the Region.

8. The sale by the Region to XXXXX as described in the previous paragraph occurred between XXXXX and XXXXX 19XX[.]

9. The equipment as leased by the Region from XXXXX is used primarily for making exempt supplies.

Ruling Requested:

Whether the Region can claim a full ITC for the tax payable on the acquisition of the equipment sold by XXXXX[.]

Ruling Given:

Based on the facts set out above, we rule that the acquisition of the equipment by the Region from XXXXX is an acquisition of capital personal property to be used primarily in activities other than commercial activities, as defined in the Excise Tax Act. As a result, the Region is not entitled to any ITC for the tax payable on the acquisition of the equipment.

This ruling is subject to the general limitations and qualifications outlined in the GST Memoranda Series Section 1.4. We are bound by this ruling provided that none of the above issues are presently under audit, objection or appeal, there are no relevant changes in the future to the Excise Tax Act, and provided that you have fully described all necessary facts and transactions for which you requested a ruling.

Nothing in this ruling should be construed as implying that the Department has agreed to or reviewed any tax consequences relating to the facts and proposed transactions described herein other than the one specifically described in the ruling given.

If you require further information, please do not hesitate to contact me at (613) 952-8815.

Yours truly,

Raymond Labelle
Policy Officer
Industries Unit
General Operations and Border Issues
GST Rulings and Interpretations

CN: HQR 0000248