13 August 1996 GST/HST Interpretation 11650-1[1] - GST Payable on Leased Vehicle Transactions

                                                                        Telephone: (613) 954-5021
Fax: (613) 990-1233
XXXXX                                                                                 August 13, 1996
XXXXX                                                                                 11650-1 (pl)
XXXXX                                                                                 Subsections 136(1), 153(4) & 123(1)
XXXXX

Dear XXXXX

This is in reply to your facsimile transmission dated July 4, 1996, from XXXXX of your office in which you request a GST interpretation of new subsection 153(4) of the Excise Tax Act (the "ETA") in reference to the amendments proposed in the Notice of Ways and Means Motion tabled April 23, 1996.

Statement Of Facts:

Our understanding of the relevant facts are as follows:

•   In a letter dated June 11, 1996, the XXXXX provided the following fact situation for your consideration:

•   XXXXX asked that the department determine the amount of GST to be charged to the individual on the monthly lease payments.

•   In your letter dated June 21, 1996 to XXXXX you provided, among other things, the following interpretation with respect to the issue at hand:

"Interest included as an element in the payments required under a lease agreement, where the supply is of tangible personal property, is subject to GST. It is true that interest paid in respect of a financial instrument is a financial service and GST would not apply to this interest. Also, a debt security is a financial instrument. However, the definition of a debt security specifically excludes "a lease, licence or similar arrangement for the use of, or the right to use, property other than a financial instrument".

As a result, the interest amount included in the lease payment is not considered to be consideration for an exempt financial service but is considered to be part of the taxable lease payment for the vehicle and the GST will apply. Thus, in your second example, GST will apply, at a rate of 7%, to the interest portion as well. In the example the GST amount would be 7% x [($20,000 - $5,000 - $8,000) / 48) + $95.68 (the Monthly Interest Portion of Lease Payment)] or 7% of (145.83 + 95.68) = $16.91.

Please note, this method of calculating GST applies to all supplies made after April 23, 1996."

•   Further to your letter, you were subsequently advised by XXXXX that, for purposes of calculating the provincial sales tax and the GST on the monthly lease payment, the "Monthly Interest Portion" was recalculated as follows:

$18,000 + $8,000 - $3,000 (outstanding loan on trade-in) x 0.00368 = $84.64/mth

You request that we confirm your understanding based on the above facts provided.

Department's Position:

The GST base amount for calculating the GST payable on a monthly vehicle lease payment is equal to the aggregate of the GST determined on the "Monthly Finance Charge" and the "Monthly Depreciation Charge". In most instances the GST base amount will differ from the amount determined to be the monthly lease payments. Accordingly, based on the facts provided, the total GST payable on the monthly lease payment is determined to be $16.13 per month (rather than $16.91 per month as indicated in your recent letter to XXXXX calculated in three steps as follows:

Step 1: Calculation of the Monthly Finance Charge

Step 2: Calculation of the Monthly Depreciation Charge

We therefore suggest that you amend your letter to XXXXX and provide them with the above calculation.

If you require further information, please contact Michael Matthews, Manager, Industries Unit at (613) 952-8806.

Yours truly,

H.L. Jones
Director
General Operations and Border Issues Division
GST Rulings and Interpretations Directorate

GAD #: 1797 (REG)