7 November 1996 GST/HST Interpretation 11650-9[1] - Application of GST to Vehicle's Monthly Sales Tax Lease Payement

Dear XXXXX

This is further to your letter dated September 16, 1996, and your telephone conversation with Michael Matthews, Manager, Industries Unit, in which you request a GST application ruling regarding 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.

As explained in our previous letter dated August 15, 1996, the department reserves the right not to issue a GST ruling when it considers that one would be inappropriate. Since this request for a GST ruling is in respect of proposed or draft legislation that is not yet law, the department will not issue a GST ruling in the circumstance. However, you will find below a general interpretation of the proposed legislative changes based on the example provided in your letter. We also attached to our last letter a copy of chapter 1.4 Goods and Services Tax Rulings from the department's GST Memoranda Series. Again, we refer you to Paragraph 11 of this memorandum entitled No Rulings with Draft Legislation which discusses the above-noted issue.

Statement of Facts

In your letter you provide the following example for our consideration:

•   An automobile dealer (the "dealer") leases a vehicle to a non-registrant (the "lessee");

•   Agreed value of the vehicle: $20,000.00

•   Lease period on the vehicle leased from the dealer: 24 months

•   Agreed value of the trade-in vehicle accepted by the dealer: $15,000.00

•   Outstanding lien on the trade-in vehicle: $12,000.00

•   Residual value on the leased vehicle: $11,600.00

•   Lease factor/Money factor: 11.25%/.0052346

•   Calculation of the Monthly Lease Payment to the lessee on the vehicle per Appendix A to your letter: $374.71/mth

•   Calculation of the monthly Sales Tax Lease Payment to the lessee on the vehicle per Appendix B * to your letter: ($188.11/mth)

•   Immediately after the lease is executed, the lease and the leased vehicle are sold by the dealer to XXXXX GST equal to 7% of the consideration paid by XXXXX to the dealer is collected by the dealer from XXXXX and added to the dealer's net tax for the relevant reporting period. XXXXX claims an input tax credit for such tax. Furthermore, XXXXX as lessor, collects and remits the GST payable in respect of any monthly payments made by the lessee under the lease;

•   If at the termination of the lease, the lessee decides to exercise the purchase option contained in the lease, the lease and the leased vehicle are first sold by XXXXX to the dealer. GST equal to 7% of the consideration paid by the dealer to XXXXX is collected by XXXXX and added to XXXXX net tax for the relevant reporting period. In turn, the dealer will claim an input tax credit for such tax. The vehicle subject to the lease is then sold by the dealer to the lessee for an amount equal to the residual value (i.e., $11,600);

You ask that we confirm the following statements:

1. Pursuant to proposed subsection 153(4) of the ETA:

a. the initial payment of $3,000 in the form of the trade-in will not be subject to GST; and

b. no GST is collectible in respect of the monthly lease payment when the Monthly Sales Tax Lease Payment is either zero or a negative amount.

2. GST will apply to the full consideration (i.e., $11,600) paid by the lessee to acquire the vehicle from the dealer pursuant to the purchase option.

Department's Position

Firstly, please note that we have reviewed your determination of the vehicle's Monthly Lease Payment (Appendix A *) and the Monthly Sales Tax Lease Payment (Appendix B *) based on the above-mentioned facts and concur with your findings.

Answer to Question 1a).

As indicated in Appendix B to your letter, to calculate the Monthly Sales Tax Lease Payment, the dealer must first reduce the total vehicle price of $20,000 by the trade-in allowance of $15,000 to obtain a Net Lease Cost for the vehicle equal to $5,000. Note that for purposes of calculating the value of the consideration for the leased vehicle under proposed subsection 153(4) of the ETA, the amount credited to the lessee for the trade-in vehicle is not reduced by the outstanding lien of $12,000. GST on the Monthly Lease Payment is then determined by formula based on the Net Lease Cost of $5,000. As a result, for GST purposes, the amount of $15,000 credited to the lessee as the trade-in allowance (which amount includes the $3,000 net trade-in payment) will not be subject to GST.

Answer to Question 1b).

As stated above, we have reviewed your submission of the Monthly Sales Tax Lease Payment calculation (Appendix B) including the Monthly Depreciation Charge and the Monthly Lease Service Charge and agree with your findings, i.e., the Monthly Sales Tax Lease Payment is ($188.11) and, accordingly, no GST is charged to the lessee on the Monthly Lease Payment. More specifically, it is our position that where the Monthly Sales Tax Lease Payment is determined to be nil or a negative amount, the lessor is not required to collect GST on the lessee's Monthly Lease Payments (however, no GST credit is available to the lessee where the Monthly Sales Tax Lease Payment is determined to be a negative amount). This is consistent with our position discussed with you in our previous letter dated August 15, 1996 (example #4, page 5).

Answer to Question 2.

We confirm that the dealer will be required to collect GST from the lessee on the full consideration paid by the lessee to acquire the vehicle in accordance with the purchase option contained in the lease agreement. Therefore, where the lessee exercises the purchase option at the termination of the lease period, the dealer will be required, in your example, to collect GST from the lessee in the amount of $812 (7% x $11,600).

This interpretation is based upon our current understanding of the proposed amendments of the ETA and Regulations thereunder in their present form and does not take into account the effects of any future amendments thereto or future changes in interpretation.

Further, while we trust that our comments are of assistance to you, we would advise that they do not constitute a GST ruling and are, therefore, not binding upon the Department in respect of any particular fact situation.

If you require further information, please contact the undersigned at (613) 954-9700.

Yours truly,

Paul Lafond
Rulings Officer, Industries Unit
General Operations and Border Issues Division
GST Rulings and Interpretations Directorate

HQR 0000292

Attachment

Telephone: (613) 954-5021

Facsimile: (613) 990-1233