CRA finds that an amendment of a lease to extend its term would result in a new agreement for GST/HST purposes
An unregistered non-resident lessor leases equipment to a registered resident for use in the course of its commercial activities in Canada. At the start of the lease, the lessee takes possession of the equipment at the lessor’s premises outside Canada, and pays GST on its subsequent importation of the equipment into Canada.
Before the end of the lease, the lessor and lessee negotiate a lease renewal to extend the lease term. CRA indicated that this would result in a new lease agreement, even if it was only the lease term that was amended rather than any other terms such as the monthly rent, stating:
[T]he 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.
Thus, if the situs of the equipment was inside Canada at the time of the lease renewal, the place of supply of the equipment under the lease would commence to be in Canada pursuant to ss. 142(1)(b) and 136.1(1)(d), and the lease payments would commence to be taxable.
CRA did not mention the General Electric case, which most would interpret as indicating that the mere extension of the term of an agreement (in that case, a loan agreement) would not give rise to a new agreement, or the position of the Income Tax Rulings Directorate also emphasizing the question of whether, under the applicable provincial law, there is a novation, or a mere amendment (e.g., Folio S3-F9-C1, para. 1.9 and 2012-0451431R3; see also 2000-0050255).