23 June 2006 GST/HST Interpretation 80206 - PROPOSED LAW/REGULATION GST rate reduction and lease contracts

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 XXXXX concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to lease contracts for supplies of property made by way of lease by XXXXX (the Company). Please note that your question regarding conditional sales agreements has been sent to our Financial Institutions Unit for direct response to you.

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. 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.

Interpretation Requested

You would like to know how the reduction in the rate of GST/HST will apply to supplies of property by way of lease where invoices are issued in June 2006 for lease payments that become due under lease agreements during the period June 2, 2006 to July 31, 2006 given that the Company's leasing system is capable of invoicing only one rate of tax for GST/HST purposes.

Interpretation Given

Consideration due under the agreement before July 1, 2006

Where the consideration for the supply of property by way of lease is due under the agreement for the supply prior to July 1, 2006, the supply of the property for the particular lease interval is deemed, under the provisions of subsection 136.1(1) of the ETA, to be made prior to July 1, 2006.

Pursuant to subsection 168(1) of the ETA, the tax in respect of a taxable supply is payable on the earlier of the day the consideration for the supply is paid and the day the consideration for the supply is due. Given that the consideration is due prior to July 1, 2006, the tax is payable prior to July 1, 2006 and, therefore, the rate of tax will be 7% GST where the supply is made in a non-participating province or 15% HST where the supply is made in a participating province. Paragraph 3(2)(b) of Bill C-13 will not apply to impose GST at 6% or HST at 14%.

Consideration due under the agreement on or after July 1, 2006

Where the consideration for the supply is due under the agreement on or after July 1, 2006 and the recipient of the supply does not pay the consideration prior to July 1, 2006, the tax becomes payable on or after July 1, 2006 as the case may be. Consequently, the rate of tax will be 6% GST or 14% HST.

Where the consideration for the supply is due under the agreement on or after July 1, 2006 and the recipient of the supply pays the consideration prior to July 1, 2006, the tax becomes payable on the payment date and the rate of GST will be 7% or HST at 15%.

For example, under an agreement in writing, the consideration for the supply of property for the lease interval from July 10, 2006 to August 9, 2006 is due on July 10, 2006. If the recipient pays the consideration on or after July 1, 2006, the supply of the property for the lease interval is deemed to be made in July 2006 and paragraph 3(2)(b) of Bill C-13 will apply to impose the tax at the rate of 6% GST or 14% HST. However, if the recipient pays the consideration prior to July 1, 2006, the supply is deemed under the provisions of subsection 136.1(1) of the ETA to be made on the payment date. Consequently, paragraph 3(2)(b) of Bill C-13 will not apply and the rate of tax will be 7% GST or 15% HST.

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.

It should be noted that the issuance of an invoice in lease situations would 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.

You asked whether the CRA is going to revise the answer to question 8 in the June 2, 2006 publication "Reduction in the Rate of the GST/HST - Questions and Answers". We have reviewed the answer and it is our view that it is consistent with the proposed transitional rules in Bill C-13. The contracts we received from you have been forwarded to the Financial Institutions Unit for review. As previously mentioned above, your questions regarding the transitional provisions as they relate to such contracts will be answered directly by that Unit.

Please also note that any amounts collected as or on account of GST/HST are deemed to be held in trust and must be included in net tax for the appropriate reporting period.

The foregoing comments represent our general views with respect to the proposed amendment(s) to the Excise Tax Act as it (they) relate(s) 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

2006/06/02 — RITS 80647 — 2006 Budget Proposal of Rate Reduction for GST