Please note that the following document, although correct at the time of issue, may not represent the current position of the Agency. / Veuillez prendre note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'Agence.
TO:
XXXXX
XXXXX
XXXXX
XXXXX
XXXXX
XXXXX
XXXXX
XXXXX
XXXXX
XXXXX
CASE NUMBER:
102898
DATE:
May 12, 2008
SUBJECT:
_GST/HST Interpretation
GST Treatment of Assignment of Lease and Related Payments
This memorandum is in response to your XXXXX to Dawn Weisberg XXXXX, wherein you requested an opinion as to the application of the GST to payments made in connection with assignments of leases to XXXXX. In this regard, you provided us with the following documents:
1. Authorization by XXXXX to XXXXX to wire funds in connection with an advance relating to the assignment of a lease with XXXXX dated XXXXX;
2. Lease XXXXX between XXXXX as Lessor and XXXXX as Lessee, dated XXXXX;
3. Master Lease between XXXXX as Lessor and XXXXX as Lessee, as of XXXXX;
4. Notice of Assignment by XXXXX to XXXXX and XXXXX, on or about XXXXX, Acknowledgement of Assignment by XXXXX to XXXXX;
5. Assignment of lease, XXXXX Assignor, XXXXX Assignee, as of XXXXX;
6. Amendment and Assumption Agreement, between XXXXX as Assignor, and XXXXX (Assignment Agreement for Lease Funding Program), as of XXXXX;
7. Assignment Agreement for Lease Funding Program (Lessor Payment Collection), as of XXXXX.
ISSUES
You have asked for our opinion as to the appropriate GST treatment of the following:
1. the lump sum amount paid/loaned by XXXXX to its client on the assignment of lease receivables to XXXXX;
2. the periodic amounts paid by lessors such as XXXXX to the assignee (XXXXX) under the assigned leases, and
3. the periodic amounts paid by XXXXX to XXXXX under the loan/assignment.
The GST treatment is complicated by the fact that the amendment and assumption agreements (items 6, 7 above) purport to amend the lease assignment agreements on both a retroactive and prospective basis, and by the fact that some of the periodic payments under the leases straddle the date of the amendment and assumption agreements.
BACKGROUND FACTS
• XXXXX. The transactions involved and possible supplies for GST purposes are set out below.
Summary of transactions/potential supplies
1. Lease: Lease of equipment from XXXXX as lessor to a lessee (XXXXX), in consideration for periodic lease payments to XXXXX.
2. Assignment: Assignment of Lease from XXXXX to XXXXX, in consideration for a lump sum payment equal to the present value of the future payment stream, as per notice of assignment, acknowledgement of assignment XXXXX.
3. Advance/Repayment: Lump sum payment on assignment called advance, periodic lease payments remitted to XXXXX called repayment of advance.
4. Possible Agent/Administrative Services: XXXXX to act as agent for XXXXX, to continue to collect periodic lease payments from XXXXX, remit them to XXXXX net of applicable taxes; no consideration identified for these services.
5. Amendment of the Lease Assignment in 2 above under (a) Amendment and Assumption Agreement XXXXX, and (b) Assignment Agreement for Lease Funding Program, as of XXXXX. These documents purport to re-characterize the assignment as follows:
(i) Advance: There is an advance by XXXXX to XXXXX; repayments of the advance are drawn from XXXXX account concurrent with lease payment due dates;
(ii) Assignment: There is an assignment by XXXXX to XXXXX of lease-related assets to secure repayment of the advance;
(iii) Possible Administrative Services: XXXXX is to continue to collect lease payments and taxes from XXXXX XXXXX; XXXXX is to be responsible for expenses in connection with admin services relating to the administration of the leases. Thus, there does not appear to be any separate consideration for such a supply.
• However, it should be noted that the Amending Agreement purports to retroactively change relationships and transactions that have already commenced, such as assignments that have occurred; in some cases (XXXXX) the periodic lease payments will straddle the date of the Amending Agreement.
• You have advised in XXXXX and in discussions with Luba Baran that it appears that no GST was paid on the advance by XXXXX to XXXXX, no GST was paid on the periodic payments by XXXXX to XXXXX, but that GST was paid on the periodic payments by XXXXX to XXXXX under the lease and remitted by XXXXX.
• The assignments involve significant sums of money; the documentation provided refers to a loan of $XXXXX.
OUR COMMENTS
• Our comments are based on the documents provided, as set out above.
• The payment of an advance by XXXXX to XXXXX is consideration for the assignment to XXXXX. For GST purposes, a lease assignment could be structured as a taxable supply that would include the leased property, the lease, as well as the right to the future stream of payments thereunder, or as the transfer of a security interest for purposes of securing payment of a loan or advance, which would be deemed not be a supply.
1. Supply Of Leased Property And Right To Future Lease Payments
• If the lease assignment from XXXXX to XXXXX is structured as the assignment of the lease, the right to periodic payments thereunder, and the leased property, then XXXXX would be characterized for GST purposes as making a supply to XXXXX which would be taxable.
• The lump sum payment made by XXXXX to XXXXX, called an advance in the documents provided XXXXX would be consideration for the taxable supply; GST payable by XXXXX would be calculated on this lump sum (i.e. the present value of future payments).
• The periodic lease payments by XXXXX would continue to be consideration for a taxable supply of leased property, and GST would be collectible and remittable by XXXXX.
- To the extent that XXXXX collected and remitted GST, it would be doing so on behalf of XXXXX.
• XXXXX would be entitled to input tax credits (ITCs) in respect of GST paid on the lump sum amount it pays to XXXXX, as property acquired for use in making taxable supplies (i.e. under the leases).
• While XXXXX is stated to be making an advance to XXXXX, as set out in the documents XXXXX, in fact, the calculation of the lump sum by taking the present value of the future stream of lease payments is the method of calculating the appropriate value of the consideration payable for the assignment of the lease.
2. Transfer as Security
• On the other hand, if the assignment to XXXXX is structured as a transfer to secure repayment by XXXXX of its debt to XXXXX in respect of the advance, then the payment of the advance would not be subject to GST. The making of an advance is an exempt financial service as defined in paragraph (g) of the definition of financial service in subsection 123(1) of the Excise Tax Act (ETA), and is a debt; the assignment or transfer of a security interest in the lease, payments, and leased property to secure repayment of the debt would be deemed not to be a supply, under section 134 of the ETA.
• Furthermore, from the standpoint of timing of liability to remit GST, under this structure, XXXXX would be required to pay GST up front on the sum of future lease payments due under the lease.
• More specifically, under this structure, XXXXX would be characterized as making a taxable supply (i.e. a lease) to XXXXX, giving rise to an account receivable/debt. XXXXX would also be characterized as assigning the debt or receivables under the lease to XXXXX, so that XXXXX would be deemed to have collected tax up front with respect to all of the future lease payments (not their present value), and would remit this amount under section 222.1 of the ETA.
3. Characterization of Assignment to XXXXX: Impact of Amendment under Doctrine of Rectification
• Relevant factors in distinguishing between a taxable supply to XXXXX by XXXXX and a transfer of a security interest would be as follows:
- If the assignee steps into the shoes of the assignor and assumes its rights and obligations under the lease, for instance, acquiring an interest in the underlying property and collecting payments, this would imply that there is a taxable supply.
- On the other hand, if the assignee acquires a security interest in the underlying property, but does not acquire all rights in and to the property, and does not collect lease payments, this would imply that there is a transfer of a security interest, which is deemed not to be a supply.
• In this case, the original documents imply that XXXXX is the recipient of a taxable supply, since it is not acquiring a security interest, instead acquiring a full interest in the lease, underlying property, and lease payments. XXXXX is specifically stated to be collecting lease payments as agent for XXXXX.
- The fact that XXXXX has the right to have the leased property resupplied to it at the end of the lease also confirms that the leased property is supplied to XXXXX at the outset, as a result of the assignment.
• On the other hand, the amendment and assumption agreement purports to confirm and clarify that XXXXX does not acquire an ownership interest in the leased property (instead acquiring a security interest) and does not collect payments under the lease, and thus implies that the assignment by XXXXX should be characterized as a transfer for the purpose of securing payment, under section 134 of the ETA.
• While the amendment and assumption agreement purports to recharacterize the relationship between XXXXX and XXXXX on a retroactive and prospective basis, it is our view that it cannot change the tax consequences of the transactions that have already occurred, in light of case law relating to the Income Tax Act and the ETA. In the documents submitted, there is no ambiguity in the terms of the original lease assignment of XXXXX and there is no evidence of a mistake between the parties as to the terms of the agreement.
• As a result, lease assignments that occurred prior to the date of the Assignment Agreement for Lease Funding Program XXXXX are to be characterized pursuant to the original agreements, so that the advance paid by XXXXX to XXXXX would be consideration for a taxable supply of leased property, the lease, and rights to payments thereunder, and XXXXX would be responsible for accounting for the tax with respect to the ongoing lease payments, even if they continue past XXXXX.
• Lease assignments entered into on or after XXXXX and subject to the Replacement Agreement would be characterized for GST purposes as transfers for purposes of securing payment, and therefore would be deemed not to constitute supplies, as set out in item 2 above.
POSITION TAKEN
• For the reasons set out above, the questions you have raised are answered as follows, with respect to the documentation provided:
(i) The amount paid by XXXXX to its client XXXXX on the assignment of lease receivables to XXXXX, as set out in the document dated XXXXX, is subject to GST as consideration paid for a taxable supply;
(ii) The periodic amounts paid by the lessor XXXXX to the assignor XXXXX under XXXXX, entered into pursuant to XXXXX, that are assigned to XXXXX under the document provided, dated XXXXX, are also subject to GST throughout the term of the lease.
(iii) The periodic amounts paid by XXXXX to XXXXX, as identified in the documents dated XXXXX are the lease payments collected from XXXXX by XXXXX on behalf of XXXXX.
If you require clarification with respect to any of the issues discussed in this memorandum, please call Dawn Weisberg at 613-952-9210.
Ivan Bastasic
Director
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate
UNCLASSIFIED
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