15 November 1996 GST/HST Interpretation 11650-9[2] - Proposed Amendment to Section 153 - The "Trade-in Approach"

                                                                        November 15, 1996

Dear XXXXX:

This is in reply to your fax on September 12, 1996, in which you requested that we review our response to Question 3 in our letter to you of August 9, 1996, on the above noted subject. The Ways and Means Motion tabled on April 23, 1996, proposes the addition of new subsection 153(4) to the ETA that provides for the use of the "trade-in approach" in certain circumstances. At issue in Question 3 was the calculation of the GST payable on the supply of a new vehicle by way of lease where the lessor accepted a trade-in of a used vehicle as partial consideration for the lease of the new vehicle. The specific facts of the question are presented below.

The term of the lease is 48 months and the money factor is 0.00415.

Question 3: Calculate the GST payable on the following supply by way of lease where the customer is a non-registrant.

Step 1: Calculate monthly lease payment.

Step 2: Re-calculation of lease payment (for GST purposes only). The amount of the lien on the trade-in is not added when determining the Adjusted Capital Cost and therefore does not form part of the Finance Base or the Depreciation Base.

* Note: In our earlier response we took the position that where the Depreciation Base was a negative amount, the Depreciation Charge was considered to be nil. In other words, the GST Base would be equal to the Finance Charge. Therefore, the GST payable on the monthly payment was equal to $4.43 ($63.70 x 7%).

Upon further review, we have revised our position. We agree with you that our previous position may lead to inequities solely based on the calculation methodology used. As a result, in a situation where the Depreciation Base is a negative amount, the GST Base will take into account the negative Depreciation Charge. The Department will permit the negative Depreciation Charge to be used to reduce the GST Base to an amount equal to, at minimum, nil. Therefore, our revised answer is that the GST payable is equal to $3.51 [($63.70 - $13.54) x 7%].

We apologize for any inconvenience that may have arisen due to the revision of our response.

This interpretation is based upon our current understanding of the proposed amendments to 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 on interpretation.

Further, while we trust 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) 941-3971.

Yours truly,

Robert Smith
Policy Officer
Industries Unit
General Operations and Border Issues Division
GST Rulings and Interpretations Directorate

GAD #: HQROOOO293 (GEN)