10 January 2005 GST/HST Interpretation 52590 - Rebates - Emergency Evacuation - XXXXX

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 concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to fees paid pursuant to the provincial Personal Property Security Act ("PPSA") at the inception of a motor vehicle lease.

We previously issued a technical interpretation to your XXXXX office XXXXX concerning various fees that arise at the inception of motor vehicle leases. You would like to clarify the GST/HST status of fees paid pursuant to the provincial PPSA when the fees are not included in the capitalized lease cost of the vehicle as stated in the original interpretation but rather charged as a separate item on the lease agreement.

You have provided the following fact scenario:

A motor vehicle dealer (the "Dealer") leases a vehicle to a customer (the "Lessee") and then assigns the lease and the vehicle to a finance company (the "FinanceCo"). The Lessee is not a GST/HST registrant and is not related to the Dealer or to the FinanceCo. The Dealer and the FinanceCo are both GST/HST registrants.

To secure its interest in the vehicle under lease, the FinanceCo registers the lease under the personal property security legislation in the relevant province. In this respect, the FinanceCo hires a third party service provider to register the lease on its behalf. The third party service provider recovers the cost of the registration fee from the FinanceCo and charges the FinanceCo a service fee for undertaking the registration. The third party provider charges GST on the service fee, but not on the registration fee.

The FinanceCo recovers the cost of the registration and the service fee from the Lessee by adding it as a separate item on the lease agreement (the "PPSA fee"). The PPSA fee is payable by the Lessee upon entering into the lease with the Dealer and the Dealer collects this fee.

When the FinanceCo purchases the vehicle from the Dealer, the consideration for the supply is the sale price payable by FinanceCo to the Dealer, based on the capitalized lease cost of the vehicle, less the first month's payment and the PPSA fee. The first month's lease payment is deducted because this amount is paid to the Dealer upon the execution of the lease and before the assignment to the FinanceCo. The PPSA fee is deducted because it is an amount paid by the FinanceCo and not the Dealer.

Interpretations Requested

1. What is the GST/HST status of the PPSA fees when they are not capitalized in the lease cost but rather recovered by FinanceCo as a separate charge on the lease agreement and collected by the Dealer at the inception of the lease?

2. Who is responsible for the collection of the GST/HST, if any, in the above circumstances?

Interpretation Given

Pursuant to personal property security legislation in each province ^[xlii]1 and territory, security interests in personal property are registered in a personal property registry. Registering a security interest allows the lender or other secured party to establish the existence and priority of the security interest. Under the PPSA in many provinces, a security interest in respect of personal property that is leased for a term of more than one year may be registered.

Generally, every recipient of a taxable supply (other than a zero-rated supply) made in Canada shall pay to Her Majesty in right of Canada tax in respect of the supply calculated at the rate of 7% on the value of the consideration for the supply, pursuant to section 165 of the Excise Tax Act (ETA). As defined in subsection 123(1) of the ETA, "consideration" includes any amount that is payable for a supply by operation of law.

Supplies that are exempt from tax are listed in Schedule V to the ETA. Paragraph 20(a) of Part VI of Schedule V to the Excise Tax Act (ETA) states that a supply of a service of registering any property or filing any document in a property registration system is exempt when made by a government or municipality or by a board, commission or other body established by a government or municipality.

The third party service provider registers the lease under the personal property registry in the relevant province on behalf of the FinanceCo. The registration fee paid to the province is consideration for an exempt supply of a service of registering the property in the property registration system when supplied by the provincial government. Although the third party service provider will be completing the registration, the security interest in the vehicle will be registered in the name of the FinanceCo, as it is the FinanceCo and not the third party service provider that has a security interest in the leased vehicle. In other words, the third party service provider is acting as agent of the FinanceCo in registering the lease under the PPSA. The government makes the supply of the service of registering the property in the property registration system to the FinanceCo, and tax does not apply pursuant to paragraph 20(a) of Part VI of Schedule V.

The third party service provider pays the registration fee to the provincial government on behalf of the FinanceCo, and recovers the cost of that fee from the FinanceCo. Since the third party service provider is acting as agent of the FinanceCo, tax does not apply to the FinanceCo's reimbursement of the registration fee. The third party service provider is required to charge tax on its fee for services.

The Lessee does not have a security interest in the vehicle, and the registration of the lease is not undertaken in the name of the Lessee or on its behalf. When the Lessee pays the amount identified on the lease agreement as a PPSA fee, it is not paid as a fee to register a security interest on behalf of the Lessee in the provincial personal property registry. The lease is registered under the personal property registry to establish the FinanceCo's security interest in the lease. Paragraph 20(a) of Part VI of Schedule V to the ETA does not apply to the PPSA fee paid by the Lessee, since the provincial government is not supplying the service of registering the property in the property registration system to the Lessee.

The FinanceCo recovers its costs in registering the lease under the PPSA from the Lessee by adding the PPSA fee to the lease agreement; it is one of several itemized costs on the lease. The Lessee is required to pay the PPSA fee under the agreement for the supply of the leased vehicle. Whether the PPSA fee is included in the capitalized lease cost, or charged as a separate item on the lease agreement and collected by the Dealer at the inception of the lease, it is paid for the same reason. The PPSA fee is part of the consideration for the supply of the vehicle by way of lease made to the Lessee, and GST/HST will apply.

The PPSA fee is not similar to either the lien repayment or the licence fee, which are not subject to tax as indicated in the previous interpretation. When the Lessee trades in another vehicle, on which there is an outstanding lien, to reduce the capitalized lease cost, the Dealer will extinguish the lien by making a loan to the Lessee. The lien repayment is consideration for a separate supply of a loan made to the Lessee, an exempt financial service. The licence fee paid to the provincial government is consideration for a separate supply of an exempt licence. When the Dealer pays the licence fee to the provincial government on behalf of the Lessee, the reimbursement of the licence fee by the Lessee is not subject to tax because the Dealer is acting as the Lessee's agent. As noted above, the PPSA fee is payable by the FinanceCo, and the FinanceCo passes this cost onto the Lessee by adding it to the lease agreement. It is not paid on behalf of the Lessee, as is the licence fee. Nor is it consideration for an exempt supply to the Lessee. While it is separately identified under the lease, it is still part of the consideration for the supply of the leased vehicle.

Who is responsible for the collection of the GST/HST, if any, in the above circumstances?

The Dealer enters into the lease agreement with the Lessee and, after collecting the first month's payment and the PPSA fee, assigns the lease and the vehicle to the FinanceCo. After the lease and the vehicle are assigned, the FinanceCo assumes the obligations and rights as lessor under the lease. The Dealer is not acting as agent of the FinanceCo in signing the lease with the Lessee or when collecting the amounts due at the inception of the lease from the Lessee. At the inception of the lease, the Dealer is supplying the leased vehicle to the Lessee.

Subsection 221(1) of the ETA states that every person who makes a taxable supply shall, as agent of Her Majesty in right of Canada, collect the tax payable by the recipient in respect of the supply. Subsection 228(2) requires that the positive net tax for a reporting period of a person be remitted, where the net tax, as calculated pursuant to subsection 225(1), includes all amounts collected and collectible by the person in the reporting period as or on account of tax.

Subsection 168(2) of the ETA states that where consideration for a taxable supply is paid or becomes due on more than one day, tax in respect of the supply is payable on each day that is the earlier of the day a part of the consideration is paid and the day that part becomes due, and the tax that is payable on each such day shall be calculated on the value of the part of the consideration that is paid or becomes due, as the case may be, on that day.

Subsection 152(2) of the ETA states that where property is supplied by way of lease, licence or similar arrangement under an agreement in writing, the consideration, or any part thereof, for the supply shall be deemed to become due on the day the recipient is required to pay the consideration or part to the supplier pursuant to the agreement.

The Lessee is required to pay the Dealer the first month's payment and the PPSA fee upon entering into the lease with the Dealer. Both amounts are part of the consideration for the supply of the vehicle by way of lease. Assuming that the Lessee actually pays these amounts at this time and not earlier, the first month's payment, the PPSA fee, and the tax on these amounts are due on the day the leased vehicle is delivered to the Lessee.

As the Dealer is the supplier of the vehicle at the inception of the lease, the Dealer is required to collect and account for the tax collected from the Lessee on the first monthly payment and the PPSA fee in its net tax calculation.

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) 957-8253.

Yours truly,

Jacqueline Russell
Goods Unit
General Operations and Border Issues Division
Excise and GST/HST Rulings Directorate

2005/01/17 — RITS 53254 — Sections 7, 9 and 13 of Part II of Schedule V to the Excise Tax Act