28 September 2006 GST/HST Interpretation 78322 - 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 a lease renewal clause.

All legislative references are to the Excise Tax Act (ETA) and the regulations therein, unless otherwise specified.

The Minister of Finance announced in the Federal Budget of May 2, 2006, a proposal to reduce the rate of the GST and the federal portion of the HST by 1%, effective July 1, 2006. Bill C-13 was tabled in Parliament on May 2, 2006, and received royal assent on June 22, 2006. The general rule is that the rate of GST will be reduced from 7% to 6% and the rate of the HST from 15% to 14% on supplies for which the GST/HST is paid on or after July 1, 2006, without having become payable before that date. Specific transitional rules apply to certain supplies, for example, real property. For more information on the transitional rules for the reduction of the GST/HST rate, please refer to Reduction in the Rate of the GST/HST - Questions and Answers http://www.cra-arc.gc.ca/agency/budget/2006/gstrateqa-e.html on the CRA Web site.

The following information was presented in your letter.

•   Lease payments are made by a corporation resident in Canada (the "Lessee") to a non-resident corporation, who is not registered for GST/HST purposes (the "Lessor") resulting from the leasing in favour of the Lessee of tangible personal property (the "TPP") owned by the Lessor, in accordance with the terms of a renewal clause included in the proposed lease agreement (the "Agreement").

•   The Agreement is for an initial duration of XXXXX years.

•   On the first day of the Agreement, the Lessee, a duly registered person for GST/HST purposes, will take possession of the TPP outside Canada and the Lessor will make available the TPP to the Lessee outside Canada;

•   In order to benefit from the use of the TPP, the Lessee will pay monthly lease payments to the Lessor in accordance with the terms of the Agreement.

•   The Agreement specifically provides for a renewal clause.

•   According to the renewal clause, the Lessee has the option of extending the duration of the Agreement for a period of XXXXX years upon presentation of a written or oral notice to the Lessor.

Interpretation Requested

1. Should the exercise by the Lessee of its right to extend the duration of the Agreement for XXXXX years upon presentation of a written or oral notice to the Lessor, as provided for under the renewal clause of the Agreement, be regarded as being continuous to the Agreement so that the exercise of such right should not entail a separate and distinct supply by the Lessor to the Lessee at the time of exercise of such right with respect to the same TPP that should be leased during the additional period of XXXXX years in consideration of which lease payments should be paid by the Lessee under the original terms of the Agreement.

2. Would the position be similar where a lease agreement provides for an automatic renewal clause, i.e., the lease is extended automatically for a period of XXXXX years, unless a written or oral notice is given by the Lessee to the Lessor.

3. Would the position be identical where the renewal clause is not specifically provided for in the initial lease agreement but is rather concluded by parties after the original lease agreement is signed but before the original lease agreement is terminated?

4. Is there any difference in the conclusion if the original lease agreement is modified during its duration and an option right is added to it by the parties?

Interpretation Given

Whether an existing agreement has been terminated and a new agreement entered into may be relevant for GST/HST purposes. For your information, we have enclosed Draft GST/HST Policy Statement - Agreements and Novation. This policy addresses the issue of whether an agreement has been modified, varied or otherwise materially altered to the extent that the existing agreement is terminated and a new agreement is entered into and, as a result, whether novation has occurred.

Novation has the effect of replacing an existing agreement with a new one that either extinguishes a debt or obligation or introduces a new party as debtor or creditor, as the case may be. Therefore, a novation serves to substantially alter an existing agreement and generally provides for a new liability in respect of a debt or the performance of some obligation, or both. In essence, a novation creates new rights entitlements and liabilities.

Based on the information provided, the extension of the lease period in the first two scenarios described above, as contemplated in the Agreement, would be considered to be part of the same agreement and would not result in a separate and distinct agreement for a separate and distinct supply for GST/HST purposes. There are no changes made to the lease agreement in these two scenarios. In those scenarios, the Agreement provides for a renewal clause. In scenarios 3 and 4, the original Agreement does not provide for a renewal clause or an option right. The addition of the renewal clause and option right to the Agreements in scenarios 3 and 4 are significant changes that go to the root of the Agreements changing their fundamental aspects. Novation is, therefore, considered to have occurred in these scenarios resulting in new agreements for new supplies being considered to have been entered into for GST/HST purposes.

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, Goods and Services Tax Rulings, 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.

For your convenience, find enclosed a copy of GST/HST Memorandum 1.4, Goods and Services Tax Rulings.

If you require clarification with respect to any of the issues discussed in this letter, please call me directly at (613) 952-6743.

Yours truly,

Cheryl R. Leyton
Border Issues Unit
General Operations and Border Issues Division
Excise and GST/HST Rulings Directorate

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