3 September 1996 GST/HST Interpretation 11650-9[3] - GST Payable on Leased Vehicle Transactions

                                                                        Telephone: (613) 954-5021
Fax: (613) 990-1233
XXXXX                                                                                 September 3, 1996
XXXXX                                                                                 11650-9 (pl)
XXXXX                                                                                 Subsection 153(4)
XXXXX

Dear XXXXX

This is in reply to your facsimile transmission dated August 14, 1996, and our telephone conversation on August 27, 1996, with 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:

You have provided the following fact situations and questions concerning leased vehicles which you received recently from an accounting firm representing a leasing company:

Situation 1: Trade-in vehicle (with no lien)

Situation 2: Trade-in vehicle (with a lien)

You have forwarded the following questions from the accounting firm for our review and response :

1. Is the calculation of the GST payable on the monthly lease payments in both situations above correct?

2. If the interest portion of the monthly lease payment increases (assumption: due to an outstanding lien on the trade-in), does the GST payable increase as well? and,

3. Are the GST implications different where the amount of the trade-in is used as working cash [i.e., a portion of the amount is applied to the first payment and the security deposit (assumption: the deposit is to be applied against the leased vehicle's residual value), and the remainder is used as a cash capital reduction] or, is used solely as a cash capital reduction (i.e., to reduce the monthly payments)?

Department's Position:

Answer to Question 1:

The GST base amount for calculating the GST payable on a monthly vehicle lease payment in the fact situations above is equal to the aggregate of the GST determined on the "Monthly Finance Charge" and the "Monthly Depreciation Charge". In instances where there is an outstanding lien on the trade-in vehicle, the GST base amount will differ from the amount determined to be the monthly lease payments. This circumstance is observed in our response below to Situation 2.

Situation 1: Please note that the Department cannot determine accurately the GST payable on the monthly lease payments without having the monthly money factor included in the facts. However, for purposes of responding to your query we have calculated the money factor to be approximately 0.003347 based on an interest rate of 8% and a lease period of 48 months. With this factor, we agree that the total GST payable on the monthly lease payment is $10.52 per month (as determined by the accounting firm) calculated in three steps as follows:

Step 1: Calculation of the Monthly Finance Charge

Step 2: Calculation of the Monthly Depreciation Charge

Situation 2: In our recent conversation with XXXXX, we indicated to him that, since the interest rate charged (8%) and the lease period (48 months) in both situations are identical, the monthly money factors calculated should also be the same (notwithstanding that there is an outstanding lien on the trade-in in Situation 2). However, for reasons unknown we have determined that the money factors are dissimilar (i.e., 0.003347 in Situation 1 as noted above, and 0.003357 in Situation 2). It was agreed that, for purposes of responding to Situation 2, the same money factor would be used as in Situation 1.

With this in mind, the total GST payable on the monthly lease payment will again be $10.52 per month (rather than $11.47 per month) which is determined using the same three step approach:

Step 1: Calculation of the Monthly Finance Charge

Step 2: Calculation of the Monthly Depreciation Charge

Please note that in Situation 2, the accounting firm correctly calculated the Monthly Depreciation Charge for purposes of determining the GST Base amount, i.e., ignoring the outstanding lien to determine the trade-in amount credited against the selling price of the new leased vehicle (see footnote #3 to your facsimile), but failed to do the same when calculating the Monthly Finance Charge - see Step 1 above.

Answer to Question 2:

Where the interest portion on the monthly lease payment increases because of an outstanding lien on the trade-in, and all other factors (such as the selling price of the new vehicle, its residual value, the trade-in credit, the interest rate and the lease period) remain constant, the Monthly Finance Charge will not increase (as seen in Step 1 in both situations above). Accordingly, the GST calculated on the Finance Charge will also not increase. However, where any of the other above-noted factors increase or decrease, this will in turn increase or decrease the GST payable on the Finance Charge (and, in certain circumstances, will also increase or decrease the GST payable on the Depreciation Charge).

Answer to Question 3:

Where all the conditions under proposed subsection 153(4) of the ETA have been satisfied, the amount of the trade-in vehicle is generally applied as a credit to reduce the net cost of the leased vehicle (as outlined in Situations 1 and 2 above).

Where the amount of the trade-in vehicle is not used in this manner but rather is used by the recipient as working cash, proposed subsection 153(4) of the ETA may apply if the amount is accepted by the dealer as full or partial consideration for the supply of the leased vehicle (for instance, the trade-in amount is used by the recipient as a down payment on the leased vehicle).

Please note, however, that if any portion of the working cash is used as a security deposit [e.g., against the residual value (buy-out) of the vehicle], subsection 153(4) of the ETA will not apply on that portion. The deposit given by the recipient to the dealer will be considered to be in respect of the supply of the vehicle by way of sale (which is a separate supply) since the deposit will be applied against the vehicle's residual value and not applied against the recipient's leasehold interest in that vehicle. Furthermore, subsection 168(9) of the ETA will apply to provide that the deposit will not be regarded to be consideration paid for the supply unless and until the dealer applies the deposit as consideration for the supply. Accordingly, GST will not be payable on the deposit until the time the recipient exercises the buy-out option in respect of the vehicle.

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 #: 1869 (REG)