8 March 2006 General Information Letter 53918 - GENERAL INFORMATION LETTER GST/HST Treatment of XXXXX Products

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 the transaction described below. We apologize for the delay in responding to your request.

All legislative references are to the Excise Tax Act (ETA) unless otherwise noted.

Based on the scenario you provided, our understanding of the transaction is as follows:

1. An unregistered purchaser (hereinafter referred to as the Lessee) is trading in a used vehicle on the lease of a new vehicle.

2. The value of the new vehicle is $XXXXX and the agreed upon value of the trade-in is $XXXXX. The guaranteed residual value of the new vehicle at the end of the lease term is $XXXXX.

3. The Lessee wishes to be paid a cash-back amount equal to the agreed upon value of the trade-in.

Interpretation Requested

1. You want to confirm your understanding that the $XXXXX cash-back amount is a loan and therefore the monthly lease payments would be considered a repayment of the loan and therefore not subject to the GST/HST.

2. If the Lessee purchases the vehicle at the end of the lease term for the guaranteed amount of $XXXXX, is that subject to GST/HST? You have indicated that there are two possible results:

(i) The $XXXXX payment is the final balance of the loan payment and therefore not subject to GST/HST, or

(ii) The $XXXXX is a separate transaction for the purchase of the vehicle and therefore subject to GST/HST since there is no trade-in at that time.

3. If the actual value of the vehicle at the end of the lease term was $XXXXX and the Lessee did not purchase the vehicle but rather simply paid the $XXXXX shortfall, what is the GST/HST implication with respect to the $XXXXX?

Interpretation Given

Pursuant to section 165 of the ETA, every recipient of a taxable supply (other than a zero-rated supply), made in Canada, is required to pay GST calculated at the rate of 7% or HST at the rate of 15% for a supply made in a participating province (i.e., Nova Scotia, New Brunswick, and Newfoundland and Labrador) on the value of the consideration for the supply.

Under subsection 153(4) of the ETA, where, at the time a supplier makes a supply of tangible personal property to a recipient, the supplier accepts, in full or partial consideration for the supply, other property (referred to as the "trade-in") that

(a) is used tangible personal property or a leasehold interest therein, and

(b) is acquired for consumption, use or supply in the course of a commercial activity of the supplier,

and the recipient is not required to collect tax in respect of the supply of the trade-in, the value of the consideration for the supply made by the supplier is deemed to be equal to the amount, if any, by which the value of the consideration for that supply exceeds

(c) except where paragraph (d) applies, the amount credited to the recipient in respect of the trade-in, and

(d) where the supplier and the recipient are not dealing with each other at arm's length at the time the supply is made and the amount credited to the recipient in respect of the trade-in exceeds the fair market value of the trade-in at the time ownership thereof is transferred to the supplier, that fair market value.

Subsection 136(1) of the ETA states that a supply, by way of lease, licence or similar arrangement, of the use or right to use real property or tangible personal property shall be deemed to be a supply of real property or tangible personal property, as the case may be.

1. Application of the GST/HST with respect to the $XXXXX cash-back amount

We do not agree with your conclusions that the cash-back paid to the Lessee is a loan and that the monthly lease payments would not be subject to GST/HST since, in your view, they represent the monthly repayment of that loan. There is nothing in the definition of financial service found in subsection 123(1) that would capture the payments in the manner in which you describe.

In general, where a person receives a cash advance from the supplier against the value of the trade-in, the trade-in approach applies such that the cash advance does not reduce the value of the trade-in provided that the cash advance is clearly segregated on the agreement and any subsequent billings or other statements that are provided to the person.

Where the arrangement is not clear (for example, where the supplier only indicates on the lease agreement the net value of the trade after providing the cash advance to the person) the amount given in cash to the person will not be considered to be an amount credited against the new tangible personal property.

However, in order to determine how the GST/HST applies to the transaction you describe above, more information would be required. This information would include copies of any agreements related to the transaction (such as the lease agreement) and any subsequent billings or other statements that are provided to the Lessee.

2. Application of the GST/HST where the Lessee purchases the vehicle at the end of the lease term for the guaranteed amount of $XXXXX

GST/HST Technical Information Bulletin B-084, Treatment of Used Goods, states: "the trade-in approach does not reduce the amount of the GST/HST charged on the amount of the buy-out option when the person exercises the option." Therefore, if the Lessee purchases the vehicle at the end of the lease term for the guaranteed amount of $XXXXX, the $XXXXX is subject to GST/HST as you have indicated in the second possible result.

3. Application of the GST/HST where the Lessee does not purchase the vehicle at the end of the lease term but makes a payment making up the shortfall of the vehicle's end of lease term value compared to the guaranteed amount

GST/HST Technical Information Bulletin B-084, Treatment of Used Goods, states: "Where a lessee is obligated under the terms of a lease agreement to pay the Lessor for any shortfalls below the guaranteed amount in the vehicle's value at the termination of the lease period, any shortfall in that amount is considered for GST/HST purposes to be additional consideration paid in respect of the vehicle." The Lessee's payment with respect to the shortfall is part of the consideration for the lease of the vehicle, which is a taxable supply.

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.

If you require clarification with respect to any of the issues discussed in this letter, please call me directly at (613) 952-8814.

Yours truly,

Robert Douthwright, CGA
Goods Unit
General Operations and Border Issues Division
Excise and GST/HST Rulings Directorate

2006/03/15 — RITS 55993 — GST/HST Treatment of Interchange Fee