25 July 2005 GST/HST Ruling 45512 - Fair Market Value for GST/HST Self-Supply Purposes

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.

Dear XXXXX:

Thank you for your letter XXXXX in reply to our request XXXXX for additional information and documentation. We apologize for the delay in providing you with this interpretation.

Statement of Facts

Our understanding of the facts is as follows:

1. XXXXX, is involved in the business of providing financing to customers and commercial enterprises who purchase and lease XXXXX from XXXXX (the "Dealers").

2. XXXXX does not sell or lease XXXXX directly to customers. Customers, in all instances, purchase or lease a XXXXX from a Dealer. With respect to a customer lease the following transactions occur:

(a) A customer visits a Dealer's premises and decides to lease XXXXX from the Dealer. The Dealer and the customer agree on the value of the XXXXX (the "capitalized cost"), the lease-financing rate XXXXX, the term of the lease XXXXX and the residual value XXXXX.

(b) For example the Dealer and the customer may agree that the value of the XXXXX is $XXXXX, the lease rate is XXXXX%, the lease term will be XXXXX and the residual value will be $XXXXX. Based upon these values the Dealer calculates a monthly lease payment. Assume that the base payment before taxes is $XXXXX per month.

(c) The Customer and the Dealer then enter into a lease agreement, which is called the XXXXX (lease agreement). The lease is entered into by the customer as lessee and the Dealer as lessor. The lease agreement will specify the monthly lease payment, the term of the lease and the residual value.

(d) Immediately after the lease is entered into, the Dealer sells the leased XXXXX and the lease to XXXXX for an amount equal to the capitalized cost, XXXXX. XXXXX then becomes the lessor and collects, on its own account, each of the monthly lease payments. XXXXX also collects and remits to the relevant taxing authority any GST XXXXX payable by the customer in respect of the monthly lease payment.

(e) XXXXX will in some instances pay a fee XXXXX to the Dealer in consideration for the Dealer's services in encouraging the customer to enter into a lease agreement and in consideration for the Dealer selling the lease and leased car to XXXXX. Normally the fee is equal to $XXXXX.

(f) Subject to the exception noted in items 3 and 4 below, XXXXX will only purchase the lease and the leased XXXXX and pay XXXXX if the XXXXX specified minimum lease financing rate and residual value are used. XXXXX specifies that a minimum lease financing rate or XXXXX rate of XXXXX% and a residual value of $XXXXX must be used to determine the monthly lease payment.

3. Dealers are permitted to negotiate lease contracts with lease financing rates that are higher than the minimum lease financing rates (i.e. XXXXX rate) provided by XXXXX, subject to certain maximum amounts. For lease terms of XXXXX the Dealer may increase the minimum lease financing rate (i.e. XXXXX rate) by up to XXXXX% points in XXXXX% increments. Thus in the above example the Dealer may increase the minimum lease financing rate (i.e. XXXXX rate of XXXXX%) to between XXXXX% and XXXXX%.

4. If the Dealer successfully negotiates a lease financing rate above XXXXX minimum lease financing rate (i.e. XXXXX rate), this rate will be used to calculate the customer's base monthly payment. The difference between the monthly payment calculated at the minimum lease financing rate and the higher rate negotiated by the Dealer is referred to as XXXXX. The following is an example of how the XXXXX is calculated:

(a) Assume that the Dealer and the customer reach the same agreement as above except that it is agreed that the leasing rate charged to the customer will be XXXXX% or XXXXX% above XXXXX minimum lease financing rate (i.e. XXXXX rate) of XXXXX%. As a result a monthly lease payment is calculated based upon a capitalized cost of $XXXXX, a lease rate of XXXXX%, a lease term of XXXXX months and a residual value of $XXXXX. Assume the payment is $XXXXX per month before tax.

(b) The monthly payment before tax has increased from $XXXXX to $XXXXX. The $XXXXX per month in additional interest charges included in the lease payment is referred to as the XXXXX. The XXXXX represents the difference between the lease payment factor offered to the dealer and the lease payment factor that is charged to the customer.

(c) The entire monthly lease payment of $XXXXX plus taxes is paid by the customer to XXXXX.

5. In an attempt to minimize the administrative costs associated with XXXXX making a monthly payment to the Dealer on account of the XXXXX, each Dealer has agreed to accept a single upfront payment. The payment is calculated and paid as follows:

(a) The payment is made immediately after the lease is purchased by XXXXX and is equal to the present value of the XXXXX that will be received over the life of the lease. XXXXX[.]

(b) XXXXX calculates, on a monthly basis, all amounts due to the Dealer on account of XXXXX, prepares a statement summarizing the XXXXX and then pays the amount to the Dealer.

6. All GST XXXXX paid by the customer in respect of the monthly payment (i.e. the $XXXXX payment) is paid by the customer to XXXXX and remitted by XXXXX to the relevant taxing authority.

Interpretation Requested

You request confirmation that no GST is exigible when the XXXXX pays the XXXXX to the Dealer. It is your position that the XXXXX does not represent consideration for a supply, it represents amounts that XXXXX collect on behalf of the Dealer. The Dealer, when selling the leased XXXXX and the lease, retains the right to receive that portion of the lease payment that is equal to the XXXXX. The Dealer then sells the right to its portion of the monthly payment to XXXXX in consideration for the single payment. This represents the sale of an account receivable, which constitutes an exempt supply of a financial service.

Interpretation Given

Based on all the information provided, our interpretation is the following:

Under the XXXXX, the lease agreements are signed by the Dealer and the customer, and then the lease agreements and underlying XXXXX are assigned to XXXXX prior to the use of these XXXXX by the customers. The assignment of the lease and of the XXXXX by the Dealer to XXXXX is a taxable supply subject to the GST.

The purchase price of each contract sold by the Dealer to XXXXX is generally composed of two elements: an initial payment equivalent to the monetary value of the lease and the XXXXX when the Dealer successfully negotiated with the customer a lease financing rate above XXXXX minimum lease financing rate. The XXXXX is paid as partial consideration for the supply of the lease and leased XXXXX from the Dealer to XXXXX.

Once the Dealer supplies the lease and leased XXXXX to XXXXX, the Dealer no longer owns the XXXXX and cannot offer it for lease. Therefore, the Dealer cannot be entitled "as the lessor" to receive part of the consideration for this supply.

The foregoing comments represent our general views with respect to the subject matter of your letter. Proposed amendments to the Excise Tax Act, if enacted, could have an effect on the interpretation provided herein. These comments are not rulings and, in accordance with the guidelines set out in section 1.4 of Chapter 1 of the GST/HST Memoranda Series, do not bind the Canada Revenue Agency with respect to a particular situation.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 941-2046.

Yours truly,

Nathalie Joly
Financial Institutions Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate

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