2 June 2006 GST/HST Interpretation 80179 - PROPOSED LAW/REGULATION 2006 Budget Proposal for GST Rate Reduction

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 lease contracts.

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

We understand that XXXXX require clarification of the proposed rate reduction in the GST/HST as it relates to leasing transactions.

Interpretation Requested

Question 1

An invoice for the lease interval from July 1, 2006 to July 31, 2006 will be issued sometime in June showing a due date of June 30, 2006. How will the reduction in the rate of GST/HST apply to leases of property where the lease interval is from July 1 to July 31, 2006 but the lease payment is contractually due to be paid in advance (i.e., on June 30, 2006)? What rate of tax will apply if the customer misses paying on the due date and makes payment on July 1, 2006?

Question 2

How will the reduction in the GST/HST apply to leases of property where the lease interval is July 1 to July 31, 2006 and the payment is contractually due to be paid in advance with a due date of July 1, 2006 and the customer makes payment on June 25, 2006?

Question 3

How will the reduction in the rate of GST/HST apply to leases of property where the lease interval is June 1 to June 30, 2006 but payment is due to be paid in arrears on July 1, 2006?

Interpretations Given

Response 1

The supply of the property is deemed to be made on June 30, 2006 and the tax is payable under the agreement on June 30, 2006. Consequently, the rate of tax imposed will be GST at 7% or the HST at 15%.

Rationale:

Subclause 3(1) of Bill C-13, an Act to implement certain provisions of the budget tabled in Parliament on May 2, 2006, amends subsection 165(1) of the ETA to reduce the rate of GST imposed on the value of the consideration for taxable supplies made in Canada from 7% to 6%. When taxable supplies are made in a participating province, recipients are required to pay the provincial rate of tax in addition to the 6% GST. Therefore, the rate of HST will be reduced from 15% to 14% (6% federal portion and 8% provincial portion).

Pursuant to paragraph 3(2)(a) of Bill C-13, any supply (other than a supply deemed to have been made under section 191 of the Act) made on or after July 1, 2006 is subject to GST at the rate of 6% where the supply is made in a non-participating province or HST at 14% where the supply is made in a participating province.

Paragraph 3(2)(b) of Bill C-13 contains transitional provisions. For any supply (other than a supply by way of sale of real property) made before July 1, 2006, paragraph 3(2)(b) of Bill C-13 provides that the 6% GST or the 14% HST applies to the portion of the tax that becomes payable on or after July 1, 2006, without having been paid before that day, or is paid on or after July 1, 2006, without having become payable.

Under the provisions of subsection 136.1(1) of the ETA, supplies of property by way of lease, licence or similar arrangement are treated as a series of separate supplies for each period (referred to as a "lease interval") to which a particular lease payment is attributable. For each lease interval, the supplier is deemed to have made, and the recipient is deemed to have received, a separate supply of the property on the earliest of the first day of the lease interval, the day on which the payment for that interval becomes due, and the day on which the payment attributable to the lease interval is paid.

Subsection 168(1) of the ETA provides that tax in respect of a taxable supply is payable by the recipient on the earlier of the day the consideration for the supply is paid and the day the consideration for the supply becomes due.

When a taxable supply of property is made by way of lease, licence or similar arrangement under an agreement in writing, subsection 152(2) of the ETA provides that the consideration, or any part thereof, becomes due on the day the recipient is required to pay the consideration, or a part, pursuant to the agreement.

Under the provisions of subsection 136.1(1) of the ETA, the supply of the property is deemed to be made on June 30, 2006. Given that the supply is deemed to have been made before July 1, 2006, the application of paragraph 3(2)(b) of Bill C-13 to impose GST at 6% or HST at 14% will depend on whether the tax became payable on or after July 1, 2006, without having been paid before that day or is paid on or after July 1, 2006 without having become payable. In this case, the tax became payable on June 30, 2006. Therefore, the rate of tax imposed will be 7% GST or 15% HST.

It should be noted that the issuance of an invoice in lease situations will not cause consideration to become due. For example, if payments are required on specific dates under a written agreement and invoices are issued in advance of those dates, the written agreement will determine the time of liability for tax. However, if payment is made before the due date required under the agreement, tax will become payable on that earlier date.

Response 2

The consideration for the July lease interval is due under the agreement on July 1, 2006. The customer paid the consideration for the lease interval on June 25, 2006. Based on the provisions in our discussion in the response to question 1 above, the supply is deemed to have been made on June 25, 2006 pursuant to subsection 136.1(1) of the ETA. The conditions in paragraph 3(2)(b) of Bill C-13 are not met in that the customer paid the tax before July 1, 2006 without it having become payable. Therefore, the rate of tax imposed will be GST at 7% or HST at 15%.

Response 3

It is our understanding that the phrase "payment is due to be paid in arrears" means that the payment for the lease interval is due at a time after the end of the lease interval.

Based on the provisions in our discussion in the response to questions 1 and 2 above, the supply is deemed to have been made on June 1, 2006. The application of paragraph 3(2)(b) of Bill C-13 to impose GST at 6% depends on whether the tax becomes payable on or after July 1, 2006, without having been paid before that day or is paid on or after July 1, 2006 without having become payable. Under the provisions of subsection 168(1) of the ETA, the tax in respect of a taxable supply is payable by the recipient on the earlier of the day the consideration for the supply is paid and the day the consideration for the supply becomes due. Pursuant to subsection 152(2) of the ETA, the consideration, in this case, is due on July 1, 2006. Therefore, if the recipient does not pay the consideration before July 1, 2006, the rate of GST will be 6%.

The foregoing comments represent our general views with respect to the proposed amendment to the Excise Tax Act as it relates to the subject matter of your request. Any change to the wording of these proposed amendments or any future proposed amendments to the ETA, 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 GST/HST Memorandum 1.4, Goods and Services Tax Rulings, do not bind the Canada Revenue Agency with respect to a particular situation.

If you require clarification with respect to any of the issues discussed in this letter, please call me directly at (613) 954-7931.

Yours truly,

Anne Kratz
General operations Unit
General Operations and Border Issues Division
Excise and GST/HST Rulings Directorate

2006/06/23 — RITS 80206 — GST Rate Reduction and Lease Contracts