22 February 2007 GST/HST Ruling 62768 - Services Provided to Residents of a Condominium Complex

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 insurance premiums and carry over charges with respect to a vehicle lease agreement.

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

XXXXX (your client) which is involved in motor vehicle leasing in Canada. The following scenario was provided for purposes of this interpretation.

Scenario

A customer (the Lessee) wants to lease a vehicle from a XXXXX dealer (the Dealer). The Dealer and Lessee will enter into a vehicle lease agreement (VLA). The Lessee agrees to lease the vehicle subject to the terms of the VLA. Upon signing the lease, subject to acceptance by your client, ownership of the vehicle is transferred from the Dealer to your client and the lease is assigned to your client.

The Lessee has the option to elect to take out life and/or disability insurance offered by an insurance company (the Insurer). The coverage offered by the Insurer provides that in the event of the death or disability of the Lessee, the Insurer will pay the balance of the Lessee's remaining obligations under the VLA. It is assumed that the Insurer meets the definition of an insurer under the ETA. The Dealer pays the insurance premium to the Insurer on behalf of the Lessee and the amount is added to the balance owing by the Lessee under the VLA.

In some cases the Lessee may have a VLA on another vehicle with your client which has ended just prior to the beginning of the new VLA and amounts are still owing under the terms of the prior VLA. Such amounts may be owing because one or more lease payments have not been made, the maximum mileage allowed under the terms of the VLA have been exceeded, or the vehicle has excess wear and tear for which Lessee is liable.

Subject to your client's approval, the Dealer may agree to pay off the balance owing by the Lessee under the pre-existing VLA, including all applicable taxes (GST/HST and PST) on behalf of the Lessee. The amount paid is then added to the balance owing by the Lessee under the terms of the new VLA.

Interpretations Requested

Confirmation is requested that where:

1. A Dealer pays a life and/or disability insurance premium on behalf of the Lessee, the portion of the monthly lease payment that represents repayment of the premium amount is not subject to GST/HST.

2. A Dealer pays any amounts owing by a Lessee on an existing lease, which has been assigned to your client, on behalf of the Lessee, the portion of the monthly lease payment that represents repayment of the carry over amount is not subject to GST/HST.

Interpretation Given

The tax status of insurance as it relates to the lease of motor vehicles

As no sample contracts related to the transactions described above have been provided for our review, we are providing the following general information on the application of the GST/HST to insurance.

An insurance policy is a financial instrument, and the issue or granting of a financial instrument is a financial service. As defined in subsection 123(1), an insurance policy includes a policy or contract of insurance (other than a warranty in respect of the quality, fitness or performance of tangible property, where the warranty is supplied to a person who acquires the property otherwise than for resale) that is issued by an insurer. The term "insurer" is also defined in subsection 123(1), as a person who is licensed or otherwise authorized under the laws of Canada or a province to carry on in Canada an insurance business or under the laws of another jurisdiction to carry on in that other jurisdiction an insurance business.

Where an insurer, as defined in subsection 123(1), provides life and/or disability insurance, the supply of the insurance is exempt where the insurance policy is in respect of an individual who is resident in Canada.

In the scenario described, it indicates that the Dealer pays the insurance premium to the Insurer on behalf of the Lessee. Whether the Dealer is acting as the agent of the lessee or the insurer, or is the recipient of the supply of insurance by the Insurer is a question of fact. A review of the documentation of a particular case would be necessary to determine whether the portion of the monthly payments that relate to the insurance premiums is exempt or subject to GST/HST.

The tax status of carry over charges as they relate to the lease of motor vehicles

A Lessee may owe one or more lease payments that have not yet been paid, or may owe an amount in respect of excess mileage, or may owe an amount in respect of excess wear and tear. XXXXX refers to these amounts when transferred to a subsequent VLA as "carry over charges". These charges occur where under the terms of the VLA, the individual is required, at the termination of the VLA, to pay an amount to the lessor if the value of the vehicle at the end of the lease is less than a guaranteed value. The individual enters into a VLA for a new vehicle with the Dealer. The Dealer allows the individual to transfer the carry over charges from the first VLA to the new VLA, increasing the cost of the new leased vehicle by the amount of the carry over charges. The carry over charges are then included in the monthly lease payments and paid over the course of the new lease. It is our general view that a payment made by the Lessee in respect of the carry over charges in the lease is similar to making a payment in respect of "lease deficiency" amounts.

This issue is addressed in GST/HST Technical Information Bulletin B-084, Treatment of Used Goods (B-084). It 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 purposes to be additional consideration paid in respect of the vehicle."

Section 152 outlines when the consideration for a taxable supply is due. Subsection 152(2) applies specifically to the consideration for a taxable supply when the supply is made under a lease agreement: "Notwithstanding subsection (1), where property is supplied by way of lease, licence or similar arrangement under an agreement in writing, the consideration, or any part thereof, for the supply shall, for the purposes of this Part, be deemed to become due on the day the recipient is required to pay the consideration or part to the supplier pursuant to the agreement." A lease deficiency is due on the date that the individual is required to pay the lease deficiency under the lease agreement.

The GST/HST on carry over charges is payable on the earlier of the day the carry over charges are paid, or the day the carry over charges are due. The individual does not pay the carry over charges at the time they are due, but transfers them to the new VLA. The earlier of the two days is the day that the carry over charges are due under the VLA. Therefore, GST/HST on the carry over charge amount is due at the termination of the first lease, on the day that the carry over charge amount is due under the VLA.

The Dealer allows the individual to transfer the carry over charges from the first VLA to the new VLA. The carry over charges are then included in the monthly lease payments and paid over the course of the new lease. More information, including copies of the lease agreements and other relevant documents, is required to determine how GST/HST applies to the portion of the lease payment that corresponds to carry over charges.

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 613-952-9585.

Yours truly,

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

2007/03/26 — RITS 64509 — Tax Status of Memberships