4 April 2007 GST/HST Interpretation 82751 - Application of the GST/HST to XXXXX Leases and Trade-Ins

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 transactions under XXXXX leases and trade-ins in certain leases or purchases of passenger vehicles.

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

You have provided the following information relating to scenarios that you have presented.

•   When a customer (the Lessee) chooses to lease a vehicle, the Lessee will lease the vehicle from a dealer, who will then assign the lease to XXXXX. Title to the vehicle is transferred to XXXXX as a result of the lease contract and the vehicle remains titled to XXXXX during the term of the lease.

•   The Lessee makes all the lease payments owing under the lease contract up front, at lease inception to the dealer; these are known as XXXXX. The dealer collects and remits all relevant taxes. No further payments are required to be made during the lease term.

•   At the end of the lease, the vehicle is inspected and any excess wear and tear charges or excess mileage charges that are determined then become payable to XXXXX. The Lessee has the option to purchase the vehicle at the end of the lease for a price which is stated in the contract and is based on the estimated market value of the vehicle at the end of the lease.

•   XXXXX is listed as an insured party under the insurance contract covering the leased vehicle. In the event that the vehicle is destroyed during the lease term, XXXXX is entitled to the insurance settlement. However, under the XXXXX contract, the Lessee is also entitled to a refund of the portion of the XXXXX payment that covers the remaining unused lease term. XXXXX pays the XXXXX refund to the Lessee.

•   A sample XXXXX contract has been provided.

•   When a customer enters into a lease or purchase agreement for a vehicle, the dealer may accept a trade-in vehicle as partial payment toward the new acquisition.

•   An individual may have a passenger vehicle registered only in the individual's name that is used only for personal use and that the individual wishes to trade in. The dealer accepts the individual's vehicle as a trade-in to the lease or purchase contract where:

–   the individual, a sole proprietor and registered for GST/HST purposes is the lessee or purchaser and the vehicle will be used by the individual for business purposes; or

–   the individual and a corporation registered for GST/HST purposes are co-lessees or co-purchasers of a vehicle that will be used solely by the corporation for business purposes; or

–   a corporation that is registered for GST/HST purposes is the lessee or purchaser of the vehicle which will be used solely by the corporation for business purposes.

Interpretation Requested

Based on the scenarios provided, you would like to know if:

•   The dealer may refund the GST/HST on the refunded XXXXX payment, pursuant to subsection 232(2).

•   The Lessee is entitled to a refund of the GST/HST on the refunded XXXXX payment, in accordance with the XXXXX contract.

•   If there is any provision in the ETA that will allow XXXXX to refund the GST/HST on the refunded XXXXX payment.

•   Subsection 153(4) applies to reduce the consideration payable on the supply of a vehicle in the case where a dealer accepts a trade-in vehicle registered in the name of an individual toward the lease or purchase of the vehicle by the individual or with another person as co-lessee or co-purchaser.

•   Subsection 153(4) applies to reduce the consideration payable for the supply of a vehicle in the case where a dealer accepts a trade-in vehicle registered in the name of an individual toward the lease or purchase of a new vehicle by a different person such as a corporation.

Interpretation Given

Refund of GST/HST under XXXXX

Subsection 232(2) states:

Where a particular person has charged to, or collected from, another person tax under Division II calculated on the consideration or a part thereof for a supply and, for any reason,

the consideration or part is subsequently reduced, the particular person may, in or within four years after the end of the reporting period of the particular person in which the consideration was so reduced,

(a) where tax calculated on the consideration or part was charged but not collected, adjust the amount of tax charged by subtracting the portion of the tax that was calculated on the amount by which the consideration or part was so reduced; and

(b) where the tax calculated on the consideration or part was collected, refund or credit to that other person the portion of the tax that was calculated on the amount by which the consideration or part was so reduced.

Where a dealer charges or collects the GST/HST and under the XXXXX contract the Lessee is entitled to a refund of the lease payments, and where there is such a reduction in consideration pursuant to the contract, subsection 232(2) will apply to allow the dealer to refund the GST/HST even though it is XXXXX that gives the Lessee the refund of the consideration. The reduction in consideration must be given to the original purchaser of the supply (or that person's authorized agent) and it must relate to an amount that has already been paid or charged. The reduction in consideration must also relate to the original supply. Based on the scenario described above, subsection 232(2) does not apply to allow XXXXX to refund the GST/HST and there is no other provision whereby XXXXX may do so.

Trade-ins

Subsection 153(4) states:

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 (in this subsection and subsection (5) 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, for the purposes of this Part, to be equal to the amount, if any, by which the value of the consideration for that supply (as otherwise determined under this Part) 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.

Where the above provision applies, it is referred to as "the trade-in approach". Under the trade-in approach, the tax is calculated on the net difference in price between the supply of tangible personal property and the supply of used tangible personal property (or a leasehold interest therein) accepted as a trade-in. GST/HST Technical Information Bulletin B-084, Treatment of Used Goods, states "The trade-in approach applies only where the supplier makes a supply of tangible personal property to a recipient who supplies used tangible personal property (or a leasehold interest therein) as full or partial consideration for that supply."

Subsection 123(1), defines "recipient" to include, in part, where consideration for the supply is payable, the person liable to pay the consideration for a supply. It is a question of fact in any given situation whether a particular person is a recipient of a supply.

In the scenario provided, an individual trades in a vehicle which prior to the trade-in was used only for personal use. As a result, the individual will not be required to collect GST/HST on the supply of the trade-in vehicle. The newly leased or purchased vehicle is to be used in the commercial activities of the individual. Therefore, the individual trading in the vehicle used solely for personal use is also the recipient of the supply of the vehicle. Providing that the requirements of subsection 153(4) are also met, the trade-in approach will apply. The trade-in approach will also apply where the circumstances are the same as above except the trade-in is in respect of a lease with the individual as co-lessee or co-purchaser with another person (for example, a corporation).

The trade-in approach, however, does not apply where a person trades in a vehicle on the lease or purchase of a vehicle that is being leased or purchased solely by a different person. For example, subsection 153(4) will not apply where an individual trades in a personal use vehicle on the lease of a vehicle by a corporation because the person providing the vehicle for trade-in is not the recipient of the supply of the newly leased vehicle.

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, Excise and GST/HST Rulings and Interpretations Service, 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 613-952-9585.

Yours truly,

Ben Boboski
Goods Unit
General Operations and Border Issues Division
Excise and GST/HST Rulings Directorate

2007/04/19 — RITS 84251 — Independent Medical Examinations and Related Services