1 May 1996 GST/HST Interpretation 11585-17[1] - Lease Assignment Agreement Between

This is in reply to the memorandum from XXXXX of your office wherein he requested an opinion concerning a lease assignment agreement between the above-noted parties.

Our understanding of the facts is as follows:

•   XXXXX (hereinafter called the Assignor) has entered into an agreement with XXXXX and XXXXX (hereinafter called the Assignee) where the Assignor sells, assigns and transfers to the Assignee all of its right, title and interest in 1) the leased equipment, 2) the lease, 3) the amounts due and to become due to the Assignor under and arising from the lease, 4) all contract rights of the Assignor against the manufacturer of the equipment, and 5) all cash and other proceeds of any of the foregoing and the insurance.

•   The assignment of the collateral (defined above) by the Assignor is in consideration of the advance, by the Assignee, of the principal amount, and a further amount of XXXXX due and payable on the 1st day of April, 1996

•   Pursuant to the agreement, the Assignor will observe all obligations binding upon it as lessor under the lease, and will save the Assignee harmless from all liability with relation to the lease.

•   The Assignor will also collect the lease payments on the Assignee's behalf and will cause the equipment to be insured. The Assignee also has the option to collect the lease payments directly from the lessee and must advise the Assignor if it so chooses. If the Assignee collects the lease payments, the Assignee agrees to apply the amounts received first to the payment of accrued interest, then to the payment of other amounts due and then to the outstanding principal owing the Assignee and to pay any excess to the Assignor.

•   If the Assignor defaults, then the agreement provides that the Assignee may exercise its rights and remedies with respect to the collateral available and can start proceedings against the Assignor for full recovery of damages arising out of the breach by the Assignor of the agreement or to recover any amounts which may be held by the Assignor in trust for the Assignee.

•   If the lease is in default, then the Assignee may exercise all rights, powers and remedies of the Assignor as lessor under the lease. To do so, the Assignor appoints the Assignee as agent to take such actions necessary to realize on the security interest of the Assignor in the equipment.

•   If the lease is in default, then the Assignee may declare the lease payments to be due and payable and may exercise its rights and remedies with respect to the collateral available (including the right to sell, lease or dispose) provided such rights are limited to enforcing its security interest in the collateral.

•   If the lease is terminated early (due to default or otherwise), the Assignor may choose to have title to the equipment reconveyed to it upon paying the present value of future lease payments to the Assignee. If the lease does not terminate early, title to the equipment will be reconveyed automatically by the Assignee to the Assignor in consideration and satisfaction of the XXXXX[.]

•   The Assignee covenants that upon payment in full of the lease payments and the other payments, it will cancel this assignment agreement, prepare and deliver to the Assignor such discharge documents required to discharge the agreement and any security registration documents filed.

You requested our opinion as to whether the assignment from XXXXX to XXXXX is a transfer done for the purpose of securing payment of a debt or performance of an obligation which falls within the scope of section 134 of the Excise Tax Act.

Based on the above facts, it is our view that XXXXX assignment of the right, title and interest in 1) the leased equipment, 2) the lease, 3) the amounts due and to become due to the Assignor under and arising from the lease, 4) all contract rights of the Assignor against the manufacturer of the equipment, and 5) all cash and other proceeds of any of the foregoing and the insurance to XXXXX, is a transfer for the purpose of securing the debt or obligation that XXXXX has towards the Assignee. Thus, pursuant to s. 134 such a transfer is deemed not to be a supply.

Our conclusion is based on the fact that the agreement includes provisions that are indicative of the transfer being done for the purposes of securing a loan, such as the following in Schedule A:

"the assignment of the collateral by the Assignor is in consideration of the advance by the Assignee, of the principal amount ... and a further amount of XXXXX ... due and payable on the 1rst day of April 1996"

the following in clause 8, which provides that the Assignee will:

"apply any Lease Payments or any other payments received by it (from the Lessee, the Assignor or otherwise) first to the payment of accrued interest, then to the payment of other amounts then due and then to the outstanding principal owing the Assignee, and to pay the excess to the Assignor".

the following in clause 4 which provides that upon payment in full of the Lease Payments, the Assignee shall:

"cancel this Agreement and deliver all such cancelled documents to the Assignor ... and deliver to the Assignor such discharges and other documents as the Assignor may reasonably require to discharge this Agreement and any security registration statements filed in connection therewith"

and the provisions in subclauses 17(2) and ss. 17(3) which provide that at the expiry of the term of the lease, title to the property will be reconveyed to the Assignor in full consideration for and satisfaction of the XXXXX[.] If you have any questions, please contact Duncan Jones at (613) 952-9210 or Danielle Laflèche at (613) 952-0329.

J. Sitka
A/Director
Financial Institutions and
Corporate Reorganizations
GST Rulings and Interpretations