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, 15th floor
320 Queen Street
Ottawa ON K1A 0L5
[Addressee]
Case Number: 139675
August 21, 2012
Dear [Client]:
Subject: GST/HST INTERPRETATION
Trade-In of Leased Equipment
Thank you for your letter of October 17, 2011, concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to a trade-in of leased equipment.
HST applies at the rate of 15% in Nova Scotia, 13% in Ontario, New Brunswick, and Newfoundland and Labrador, and 12% in British Columbia. GST applies at the rate of 5% in the remaining provinces and territories.
All legislative references are to the Excise Tax Act (ETA) unless otherwise specified.
We understand that in [mm/yyyy], a registrant business (Company A) leased an excavator (excavator #1) from a registrant dealer (Company B). The lease provided for monthly payments and was for a term of […] months. The lease contained a purchase option that allowed Company A to purchase the excavator at the end of the lease for $[…]. The lease also provided that all the lessor’s (Company B’s) rights and benefits under the lease, and all Company B’s interest in the excavator, were assigned to the manufacturer of the excavator (the Manufacturer).
The documents indicate that in [mm/yyyy], Company A entered into another lease with Company B for another excavator (excavator #2). The term of this lease was […] months and provided for monthly payments. It also contained an option to purchase for $[…] and also provided that Company B’s interest in the lease and the excavator were assigned to the Manufacturer.
When Company A entered into the second lease, Company B credited Company A an amount in respect of excavator #1. This was termed as a “trade-in”, as Company A was providing the excavator to Company B and presumably assigning its interest in the first lease to Company B. This information is contained in a purchase order. In both cases, in addition to the leases, there exist purchase orders. You have stated that the purchase orders were used by Company B as a work sheet calculation to indicate the “cash price” of the equipment and make any adjustments to the cash price, such as a trade-in. When the purchase order for excavator #2 was drawn up, the cash price was shown as $[…] plus a registration fee of $[…] for a total of $[…]. On the portion of the purchase order describing any trade-ins, excavator #1 was shown as a trade-in with a value of $[…]. An amount of $[…] was deducted as still owing to the Manufacturer, leaving a trade-in allowance of $[…]. The amount of $[…] was the total of two amounts - $[…] “plus PST & GST”. The PST and GST represent […]% of the $[…].
We are unable to provide you with a ruling as we were not provided with signed and dated copies of the documents. The documents are not dated and only show the signature of a Company B employee. However, we are able to provide you with an interpretation of how the GST/HST applies generally to the facts as we understand them.
INTERPRETATION REQUESTED
You would like to know whether the PST and GST added to the amount that was considered as still owing to the Manufacturer under the first lease was done so correctly.
INTERPRETATION GIVEN
We cannot comment on whether there was a requirement under [provincial] law to add PST to the amount owing to the Manufacturer.
Both leases appear to be what are known variously as capital, financing or bargain option purchase leases. That is, over the term of the lease, the total of the monthly payments equals or exceeds the fair market value of the equipment at the time of entering into the lease, and the lessee, if it exercises the option, can take title to the equipment at the end of the lease for a nominal amount. Such leases are often recorded for financial statement purposes as sales. A lessee in such a case can build up “equity” in the leased property, depending on whether the fair market value at any point in time exceeds the amount still owing under the lease.
The ETA does not define what a lease is and does not differentiate operating leases from finance or capital leases. Capital leases may sometimes be treated by the lessees as purchases of property for purposes of their financial statements. The CRA has indicated that all transactions that are leases will be treated as leases for GST/HST purposes, regardless of their accounting for purposes of financial statements, unless the terms of the agreement between the parties indicates that it constitutes some other form of financing.
The ETA contains a provision, subsection 153(4), which addresses transactions where other property is traded-in for the property being purchased or leased. It provides that the value of the property being traded-in (which can include a leasehold interest) can be used to reduce the consideration for GST/HST purposes on the new property being acquired. In other words, GST/HST is levied on the net amount. However, that provision applies where the person trading-in the used property is not required to collect tax on the value of the trade-in (the trade-in being a supply from the recipient to the supplier). Given that Company A is a GST/HST registrant, subsection 153(4) does not apply in this case.
In a situation where subsection 153(4) does not apply, the trade-in does not reduce the consideration being paid for the other property. In a trade-in situation, there is a supply of a good by the supplier (i.e., Company B). If it is a taxable supply that is not zero-rated, the supplier (if a registrant) must collect tax on the value of the consideration. If the value of the trade-in is less than the value of the good being supplied so that an amount in money is still owing (as is often the case), the consideration for the supply consists of the money and the trade-in. The trade-in is being offered as partial payment for the new good. This is not only evident from contract principles, but in fact is expressly spelled out in subsection 153(1) of the ETA, which provides that the consideration for a supply is equal to the amount expressed in money plus, where the consideration or a part is other than money, the fair market value of the non-monetary consideration.
At the same time, there is a supply by the recipient (i.e., Company A). By trading-in a good (or an interest in a good), the recipient is supplying that good or interest to the supplier. If that supply is a taxable supply that is not zero-rated, the recipient trading-in the good or interest is required (if a registrant) to collect tax on that supply. In accordance with subsection 153(1), the consideration for that supply is the fair market value of the good or interest being traded in, which is generally the amount that the supplier has credited to the recipient. As such, Company A is required to charge and collect GST on the value of the leasehold interest and include that amount in its net tax remittance for its reporting period that includes [mm/yyyy].
The allowance credited by Company B to Company A on the second lease was presumably based on the “equity” built up in the lease. Since for GST/HST purposes the first lease was a lease and not a sale, Company A could not supply excavator #1 in the sense of supplying ownership. However, it could supply its leasehold interest in the excavator. The value of the leasehold interest seems to have been calculated by Company B based on the fair market value of the excavator minus the amount still owing to the Manufacturer, plus PST and GST.
With respect to the value of the leasehold interest, paragraph 27 of GST/HST Memorandum 1.4, Excise and GST/HST Rulings and Interpretations Service, states that the CRA will not issue a ruling when the request is for a determination of the fair market value. However, we can state that there is no requirement in the ETA to have included PST and GST in the amount owing to the Manufacturer when calculating the amount to be credited to Company A on the trade-in. The purchase order shows the amount still owing to the Manufacturer. Had Company A not traded in excavator #1 but continued to make the monthly lease payments, that amount would eventually have been paid to the Manufacturer, and tax would have been payable on the monthly payments. In that sense, GST was owed to the Manufacturer. However, that amount was only owed by Company A if it had in fact continued making the monthly payments to the Manufacturer.
Company A traded-in its leasehold interest. In many cases, a leasehold interest is supplied to another party by the lessee assigning its rights and obligations under the lease to the other party. In this case, under the terms of the lease, Company B had assigned its rights as lessor to the Manufacturer. Accordingly, Company A was not “returning” the excavator to Company B under the lease, since Company B was no longer the lessor. If in fact there was an assignment as a result of the trade-in, Company B would become the lessee. It would have assumed the obligations of Company A to pay the Manufacturer the amount outstanding on the lease. The lease provides […]
It is unclear how Company B discharged its obligations if in fact the trade-in was accomplished through an assignment. Company B may have paid the amount owing under the lease and exercised the buy-out and become the owner of excavator #1. Or it may have been allowed by the Manufacturer to terminate the lease on whatever terms it could negotiate with the Manufacturer. If the former, GST would have been payable by Company B to the Manufacturer. If the latter, whether any GST was payable would depend on the terms under which the lease was terminated. There are no provisions in the lease itself that allow for early termination of the lease.
It may be, as noted above, that Company B paid the amount remaining and the accompanying GST. In calculating the value of the leasehold interest, Company B allotted an amount as the fair market value of the excavator, minus the amounts that it would have to pay to the Manufacturer by accepting an assignment of Company A’s obligations under the lease. Company B may have factored the GST into the calculation as a cost it would bear as the assignee. However, Company B, as a registrant acquiring the excavator presumably for use in its commercial activity, would likely be eligible to claim an input tax credit (ITC) for any tax paid or payable to the Manufacturer, and could recover the tax that way.
This is ultimately a matter of calculating the value of the leasehold interest, which is a matter the ETA does not directly touch on. The only requirement under the ETA is that subsection 153(1) requires that the value of the leasehold interest has to be based on its fair market value.
We also wish to draw your attention to another matter. We note that in both leases, […] [the individual] was a co-lessee. If the addition of [the individual] as a co-lessee was more than a legal formality such that [the individual] was a true co-lessee with an economic interest in the excavators, then this would raise additional issues with respect to the collection of tax on the trade-in of excavator #1 and the claiming of input tax credits with respect to both excavators. The information included in this letter is based on the assumption that [the individual] has no economic interest in the excavators.
The foregoing comments represent our general views with respect to the subject matter of your request. These comments are not rulings and, in accordance with the guidelines set out in GST/HST Memorandum 1.4, Excise and GST/HST Rulings and Interpretations Service, do not bind the Canada Revenue Agency with respect to a particular situation. Future changes to the ETA, regulations, or our interpretative policy could affect this interpretation.
If you require clarification with respect to any of the issues discussed in this letter, please call me directly at 613-957-8253. 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,
Gunar Ozols
Goods Unit
General Operations and Border Issues Division
Excise and GST/HST Rulings Directorate
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