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 0L5XXXXX
XXXXX
XXXXX
|
Case Number: 80649XXXXX
XXXXXAugust 1, 2006
|
|
Subject:
|
GST/HST RULING
Instalment Sale Contract
|
Dear XXXXX:
Thank you for your recent XXXXX concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to an instalment sale contract entered into between XXXXX and its customers.
All legislative references are to the Excise Tax Act (ETA) and the regulations therein, unless otherwise specified.
Effective July 1, 2006, the rate of the GST has been reduced from 7% to 6% and the rate of the HST from 15% to 14%. The new rates apply to 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.
You have provided us with the following documents:
• a copy of a sample agreement, XXXXX (face of the Agreement);
• the Standard Terms and Conditions, XXXXX (Terms and Conditions);
• and the Appendix to the Standard Terms and Conditions (Appendix)
collectively referred to as the Agreement, under which, XXXXX agrees to sell to a customer certain equipment.
Statement of Facts
We understand the following:
1. The contract type (i.e. instalment sale or purchase), the payment frequency, number of payments, term in months and amount of the Periodic Payment, all appear on the face of the Agreement.
2. Originally the Agreement provided that a Customer could acquire the Equipment by way of lease XXXXX or by way of purchase XXXXX. XXXXX the Terms and Conditions was retitled and changed from "Lease Agreement" to XXXXX "Instalment Sale".
3. XXXXX the Terms and Conditions provides that a Customer will acquire Equipment as described in the Agreement either by purchase or instalment sale as indicated in the Agreement. There is also a mention of the licensing of the software that comes with the Equipment and maintenance service that may be provided by XXXXX for the said Equipment.
4. XXXXX the Terms and Conditions contains general terms and conditions that apply to an instalment sale or a purchase such as:
• XXXXX refers to the obligation of the Customer to make all payments due under the Agreement within XXXXX days from the invoice date or due date as provided under the Agreement;
• XXXXX provides for Equipment trade-in;
• XXXXX specifically addresses the software.
5. The maintenance of the Equipment is further described in XXXXX the Terms and Conditions.
6. Amended XXXXX of the Terms and Conditions relates to an instalment sale. Amended XXXXX provides that Periodic Payments, including GST/HST as well as the total interest due over the term of the Agreement, are to be paid XXXXX days after the day of the delivery and are due on the first day of each following payment period. Each Periodic Payment includes principal and interest as calculated in the Agreement and may also include a refinanced amount. XXXXX
7. Amended XXXXX provides that title and risk of loss is passed on to the Customer when the Equipment is delivered to the Customer and that XXXXX retains a security interest in the Equipment until complete performance of the Customer's obligation.
8. Pursuant to new added information incorporated into the Agreement by amendment, the Customer may make payments before they become due under the Agreement but must pay a $XXXXX administration fee for each prepayment.
9. XXXXX the Terms and Conditions refers to a purchase by the Customer of the Equipment. XXXXX states that title passes to the Customer when the Equipment is delivered to the Customer. Upon installation Periodic Payments are billed according to XXXXX the Terms and Conditions.
10. The calculation of the Periodic Payments due under the Agreement is detailed XXXXX as follows:
• The XXXXX Net Price is the consideration payable for the Equipment and is shown on the first line of the calculation.
• The Total is calculated by adding GST/HST and other taxes to the XXXXX Net Price.
• The XXXXX Cash Price is calculated by adding any refinanced amounts to the Total. A note indicates that taxes may or may not be applicable to the refinanced amounts.
• The XXXXX Balance of Principal (A) is calculated by subtracting any down payment to the XXXXX Cash Price.
• A financing charge is calculated separately and identified as a rate per $XXXXX financed (B).
• The Periodic Payment is calculated with the following formula A * B / XXXXX.
11. XXXXX currently remits GST/HST on the XXXXX Net Price by the last day of the month following the month in which the transaction occurred.
Ruling Requested
You would like to know how GST/HST applies to an instalment sale as provided under the Agreement.
Ruling Given
(1) Based on the facts set out above, we rule that GST/HST applies on the XXXXX Net Price and, subject to paragraph (2), is payable on or before the last day of the calendar month immediately following the month when possession of the property is transferred under the Agreement.
(2) We further rule that GST/HST is payable on the day that a payment is made or becomes due where the payment is made or becomes due before the end of the month following the month where possession of the property is transferred under the Agreement.
This ruling is subject to the qualifications in GST/HST Memorandum 1.4, Goods and Services Tax Rulings. We are bound by this ruling provided that none of the above issues is currently under audit, objection, or appeal, that no future changes to the ETA, regulations or our interpretative policy affect its validity, and all relevant facts and transactions have been fully disclosed.
Explanation
Generally, the supply by way of sale of tangible personal property (TPP) by a registrant is subject to GST/HST.
Where a person enters into an agreement for the sale of TPP, by means of an instalment sale, GST/HST applies on the entire amount of the consideration paid for the supply of the property. An "instalment sale" of property is generally understood to mean a sale where the ownership (including possession) of the property passes immediately to a purchaser and the purchaser must pay the purchase price in instalments.
Subsection 168(1), subject to 168(3), provides that GST/HST is payable by the recipient (i.e. Customer) on the earlier of the day the consideration for the supply is paid and the day the consideration for the supply becomes due.
Paragraph 168(3)(a) provides that where TPP is provided by way of sale and the ownership or possession of the property is transferred to the recipient, GST/HST is calculated on the value of the consideration and is payable on or before the last day of the calendar month immediately following the month when the possession of the property was transferred under an agreement to transfer ownership of the property.
Based on XXXXX the Agreement (as amended), the title to the Equipment passes to the Customer when the property is delivered to the Customer and the consideration paid for the Equipment is the XXXXX Net Price. Where there is no down payment, GST/HST is calculated on the XXXXX Net Price and is payable on or before the last day of the calendar month immediately following the month when the possession of the property was transferred under the Agreement.
When a down payment is made before the day tax becomes payable in respect of the sale, GST/HST that relates to the amount of the down payment is payable by the recipient on the earlier day.
The following rules apply when determining which rate will apply to the transaction:
• Where GST/HST becomes payable on or after July 1, 2006 without having been paid before that day, the 6% GST rate or the 14% HST rate will apply.
• Where GST/HST is paid on or after July 1, 2006 without having become payable before that day, the 6% GST rate, or the 14% HST rate will apply.
• Where GST/HST becomes payable or is paid before July 1, 2006, the 7% GST rate or the 15% HST rate will apply.
To illustrate, assume that a customer enters into an instalment sale contract XXXXX and the property is delivered and installed on June 30, 2006. GST/HST will be calculated on the entire amount of the consideration for the property (i.e. the XXXXX Net Price) and is payable on or before July 31, 2006. Since the GST/HST is payable on or after July 1, 2006 and has not yet been paid, the applicable rate for the entire consideration for the property under the instalment sale will be 6% or 14% as applicable.
Where, in the same example, the customer pays a down payment on June 30, 2006 the applicable rate to the down payment will be 7% or 15% as applicable as the GST/HST that relates to the down payment is paid and payable prior to July 1, 2006.
Additional Information
We also provide the following additional comments to clarify the application of GST/HST to instalment sales contracts.
When a person enters into an instalment sale contract, the GST/HST on the consideration for the property is payable no later than the last day of the month following the month during which you transferred possession of the property to the customer.
The consideration paid or payable for the property (identified as the XXXXX Net Price in the Agreement) will be subject to GST/HST. On the other hand, the consideration that is paid or payable for the granting of credit (identified as the financing charge in the Agreement) will not be subject to tax as it is in respect of an exempt supply. This service falls under paragraph (g) of the definition of "financial service" in subsection 123(1). Therefore, it will be exempt under section 1 of Part VII of Schedule V.
Please note that when the financing charge is not clearly shown separately in the instalment sale agreement, GST/HST will be applicable on the entire amount given as consideration for the supply of the property.
If you require clarification with respect to any of the issues discussed in this letter, please call me directly at 613 952-0328.
Yours truly,
Hélène Bustamante
Financial Institutions Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate
2006/08/03 — RITS 80918 — Application of GST/HST on [Granola] in the Form of [Granola Bars and Other Granola Products]
Email this Content