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.
Excise and GST/HST Rulings Directorate
Place de Ville, Tower A, 15th floor
320 Queen Street
Ottawa ON K1A 0L5
XXXXX
XXXXX
XXXXX
XXXXX
Case Number: 103665
Attention: XXXXX
October 15, 2008
Subject:
GST/HST INTERPRETATION
Application of GST/HST to used goods and the trade-in approach
Dear Mr. XXXXX:
Thank you for your email of XXXXX, concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to used goods and the trade-in approach.
All legislative references are to the Excise Tax Act (ETA) and the regulations thereunder, unless otherwise specified.
Interpretation Requested
You have provided the following scenario and four related questions for the purpose of this interpretation.
Person A leases a car for $40,000 and provides a trade-in valued at $20,000 that has a lien against it, for the same amount ($20,000). Subsequently, Person A decides he does not want the vehicle any more and wants to assign the vehicle to Person B who will step in the shoes of Person A and become the lessee with the vehicle lessor.
Question 1
Despite the fact that there is a lien, please confirm that the value of the trade-in vehicle ($20,000) is applied against the lease payments so as to reduce the amount of GST/HST applicable on each lease payment by reducing the price for purposes of calculating GST/HST.
Question 2
Please confirm that if Person A subleases the vehicle to Person B such that Person A is still the lessee (and still liable if Person B does not pay the lease payments) Person B will be entitled to the benefit of the lower GST/HST payment due to the trade-in value.
Question 3
If there is a novation of the contract so that Person A is no longer a party to the contract and is not in any way liable for the payments on the vehicle (in other words, is completely out of the contract and has no rights or obligation) can Person B who becomes a party to the contract still pay less GST/HST because of the trade-in value?
Question 4
Does Person A have a right to pay less GST/HST under the agreement and can that right be transferred to Person B?
Interpretation Given
Under subsection 153(4), where, at the time a supplier makes a supply of tangible personal property to a recipient, the supplier accepts, in full or partial consideration for the supply, other property (referred to as the "trade-in") that
(a) is used tangible personal property or a leasehold interest therein, and
(b) is acquired for consumption, use or supply in the course of a commercial activity of the supplier,
and the recipient is not required to collect tax in respect of the supply of the trade-in, the value of the consideration for the supply made by the supplier is deemed to be equal to the amount, if any, by which the value of the consideration for that supply exceeds
(c) except where paragraph (d) applies, the amount credited to the recipient in respect of the trade-in, and
(d) where the supplier and the recipient are not dealing with each other at arm's length at the time the supply is made and the amount credited to the recipient in respect of the trade-in exceeds the fair market value of the trade-in at the time ownership thereof is transferred to the supplier, that fair market value.
Information on the "trade-in approach" is found in GST/HST Technical Information Bulletin B.084, Treatment of Used Goods.
Question 1
Despite the fact that there is a lien, please confirm that the value of the trade-in vehicle ($20,000) is applied against the lease payments so as to reduce the amount of GST/HST applicable on each lease payment by reducing the price for purposes of calculating GST/HST.
Response
Pursuant to subsection 153(4), where a person trades in used tangible personal property on the purchase or lease of another property, the GST/HST is calculated on the difference between the amount credited as a trade-in allowance and the value of consideration of the other property.
The value of the trade.in for purposes of calculating the GST/HST is not affected by any outstanding loans or liens. As a result, the lien is ignored when determining consideration for GST/HST purposes. Therefore, we can confirm that the calculation of GST/HST on the lease payments will be based on the amount of $20,000 (i.e., $40,000 - $20,000).
Question 2
Please confirm that if Person A subleases the vehicle to Person B such that Person A is still the lessee (and still liable if Person B does not pay the lease payments) Person B will be entitled to the benefit of the lower GST/HST payment due to the trade-in value.
Response
Where the transfer is a sublease such that the sublessee assumes the primary liability to perform the obligations of the lessee under the original lease (in effect one person is substituted for another within an existing lease contract), the manner in which the GST/HST is calculated will continue to be the same as prior to the sublease.
Person B has assumed the primary liability to perform the obligations of the lessee under the original lease contract but Person A is still considered the lessee of the vehicle and consequently still has rights and obligations under the original lease agreement.
As the original lease agreement between the lessor and Person A is still in effect, GST/HST under that agreement will continue to be paid based on the inclusion of the trade-in in the amount of $20,000, even though Person B is paying the lease payments.
Question 3
If there is a novation of the contract so that Person A is no longer a party to the contract and is not in any way liable for the payments on the vehicle (in other words, is completely out of the contract and has no rights or obligation) can Person B still pay less GST/HST because of the trade-in value?
Response
Where there is novation (i.e., the legal effect of which is that a new lease replaces an existing lease), we consider the new lease to be a new supply. Whether a novation has occurred is a question of mixed fact and law. Information on novation can be found in GST/HST Policy Statement P-249, Agreements and Novation.
The trade-in of the vehicle by Person A was applied to the original lease between the lessor and Person A and is not available to be applied to the new lease. Under subsection 153(4), the recipient of the supply must also supply the trade-in. Person B did not supply a trade-in. Therefore, GST/HST applies to lease payments that are calculated on the full value of the new vehicle.
Question 4
Does Person A have a right to pay less GST/HST under the agreement and can that right be transferred to Person B?
Response
No, Person A does not have a right to pay less GST/HST, and there is no right that can be transferred to Person B. Subsection 153(4) sets the amount of consideration on which tax applies in a certain situation; it does not create a right. Therefore, the supply of the vehicle to Lessee B is subject to GST/HST on its full value ($40,000).
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 613-952-9585. 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,
Ben Boboski
Goods Unit
General Operations and Border Issues Division
Excise and GST/HST Rulings Directorate
UNCLASSIFIED
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