Further to your telephone conversation of October 26, 1994 with Sara Nixon of my staff, with respect to certain payments made by XXXXX the following is a summary of our understanding of documentation you have provided and our comments on the application of GST.
When a customer approaches an authorized XXXXX to lease a vehicle, the customer has the choice of using the XXXXX to finance the lease or the dealer could make alternative financing arrangements with another finance company.
If the customer chooses to use XXXXX offers a financing assistance program in the form of reduced interest factors. To make this possible, XXXXX pays interest rate subvention amounts to XXXXX[.]
If the customer does not want to use XXXXX, without further adjustment, the monthly lease payments would be subject to a higher interest rate factor because the alternative financing company will be charging a higher interest rate. To assist the dealer in successfully negotiating a lease with a customer who is not using XXXXX pays an amount directly to the dealer which allows the dealer to reduce the vehicle cost base on which the monthly lease payments are calculated.
XXXXX has been treating the payment made to the dealer as the payment of an exempt financial service. XXXXX has not been claiming input tax credits and presumably, the dealer has not been accounting for GST on the receipt of the payment. This treatment has likely been as a result of the treatment for GST purposes of the payment made by XXXXX when a customer chooses that financing company. XXXXX is arranging and providing the lease financing under such circumstances. Depending on the terms of the agreement between XXXXX the payment may qualify as an exempt financial service. However, when a dealer receives a payment from XXXXX the dealer is not arranging or providing the lease financing. He uses the payment to reduce the cost of the vehicle to be leased. Under such circumstances, the payment cannot be treated as an exempt financial service.
To date, advice has been provided to XXXXX that the payment cannot be regarded as an exempt financial service and that the payment should be treated as deferred price adjustment under the provisions of subsection 232(2).
In requesting our comments on this advice, you have provided extensive documentation to illustrate two typical leasing transactions involving XXXXX[.] Initially, a vehicle is purchased by the dealer from XXXXX. Copies of the purchase documents have been included in your package. There is no evidence of any amount being paid by XXXXX to the dealer at this time. When a customer leases this vehicle and does not use XXXXX the dealer sells the vehicle to its leasing operations, XXXXX[.] The invoices to document the sale of vehicles by the dealer to the leasing company, reflect the receipt of a payment from XXXXX the dealer. This payment allows the leasing company to purchase the vehicle at a lower price and to then calculate the monthly lease payments payable by the customer, on a lower base.
To qualify as a "deferred price adjustment" under subsection 232(2) of the Excise Tax Act ("the Act"), the payment made by XXXXX to the dealer must meet four criteria as set out in Technical Information Bulletin B-042:
1) the payment must be a reduction in consideration which occurs at some point in time after the GST has been charged or collected;
2) the payment must be given to the original purchaser of the supply;
3) the payment must be a reduction in consideration which relates to the original supply; and
4) the payment may be made for any reason, but must not depend upon any action undertaken, or supply made, by the recipient.
To qualify under these criteria, the payment being made by XXXXX to the dealer would have to be viewed as a reduction of the original consideration paid by the dealer to XXXXX to purchase the vehicle. Although such an interpretation does meet some of the critieria, it is very difficult to reconcile the circumstances surrounding the leasing transaction with the fourth critieria. The payment being made by XXXXX to the dealer depends entirely on the dealer successfully negotiating a lease with a customer who decides not to use XXXXX as his financing arrangement. At the time the dealer purchases the vehicle from XXXXX he does not know how the final sale of the vehicle will be completed. The vehicle could in fact be sold outright, or it could be leased through XXXXX. Under such circumstances, the dealer would not receive any payment from XXXXX[.] The dealer must take the action of leasing the vehicle through a non-XXXXX financing arrangement to receive the payment. The payment can therefore not be treated as a deferred price adjustment.
It must now be determined whether the payment, which is now, not a deferred price adjustment, is consideration for a supply. The dealer is being given an incentive to successfully negotiate the lease of a XXXXX[.] Both the dealer and XXXXX directly benefit from such a successful transaction. The payment is very similar to the inducement payment that a landlord pays a tenant to enter into a lease. In both cases, the payment is consideration for a supply. Schedule V of the Act does not contain a provision to describe the supply as an exempt supply, therefore tax will apply to the transaction.
It is difficult to determine from the documentation provided whether the payment is consideration for the supply of the vehicle by the dealer to the leasing company, or whether it is an entirely separate supply between XXXXX and the dealer.
If it is a condition of the sale of the vehicle to the leasing company that the capital cost of the vehicle is reduced by the payment from XXXXX to the dealer, there is only one supply (i.e. the sale of the vehicle to the leasing company), but there are two recipients. The accounting used by the dealer tends to support this interpretation. When the vehicle is sold by the dealer to the leasing company, the dealer records a credit to gross sales revenue which is before the XXXXX payment adjustment. The balancing entry then consists of two receivables. The payment to be received from XXXXX is set up as one receivable and the balance of the sale price is set up as a receivable from the leasing company. It is entirely possible to have one supply with two recipients. Each is required to pay the appropriate portion of the tax and, where appropriate, each may be eligible to claim a corresponding input tax credit.
If it is not a condition of the lease that XXXXX makes a support payment to the dealer, there are two separate supplies occurring. The vehicle is being sold to the leasing company for eventual lease to the customer and XXXXX is paying an amount to the dealer for successfully negotiating a lease.
As is evident from the above discussion, the requirement for the dealer to collect and account for tax on the incentive payment remains the same regardless of whether there is only one transaction or if there are two.
As a consequence of our discussions, you may wish to contact XXXXX again. It appears from some of the correspondence received from XXXXX that if the payment could not be considered an exempt financial service, XXXXX would treat the payment as a deferred price adjustment under 232 and elect not to issue a credit note. Since section 232 does not apply, this action is not an option.
Should you require any further assistance in this matter, contact one of the members of the Application Team in the Tax Provisions Unit. They are: Lalith Kottachchi (613) 952-9588, Ken Mathews (613) 952-9585, Suzanne Leclaire (613) 952-7931, and Sara Nixon (613) 952-8812.
H.L. Jones
Director General Tax Policy
Policy and Legislation
Excise/GST
XXXXX
| c.c.: |
Mitch Bloom
Application Team |
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