15 August 1996 GST/HST Interpretation 11650-9[5] - Lease Transactions and the Trade-in Approach

                                                                        Telephone: (613) 954-5021
Fax: (613) 990-1233
XXXXX                                                                                 August 15, 1996
XXXXX                                                                                 11650-9 (pl)
XXXXX                                                                                 Subsection 153(4)
XXXXX

Attention: XXXXX

Re:      Lease Transactions and the Trade-in Approach

Dear XXXXX

This is in reply to your facsimile transmission dated June 17, 1996, your letter dated July 30, 1996, as well as your recent telephone conversations with Mr. Michael Matthews of my office 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.

Please note that the department reserves the right not to issue a GST ruling when it considers that one would be inappropriate. Since your 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 examples you provided in your facsimile transmission and letter. Lastly, for your information we have enclosed with this letter a copy of chapter 1.4 Goods and Services Tax Rulings from the department's GST Memoranda Series. Paragraph 11 of this memorandum entitled No Rulings with Draft Legislation discusses the above-noted issue.

Example #1:

(facsimile transmission, June 17, 1996)

Facts provided:

•   XXXXX (the "dealer") leases a new vehicle to a non-registrant;
•   Lease period on the new vehicle leased from the dealer:	24 months
•   Agreed value of the new vehicle:	$20,000.00
•   Agreed value of the trade-in vehicle accepted by the dealer:	$  5,000.00
•   Outstanding lien on the trade-in vehicle:	$         0.00
•   Residual value (i.e., option price) on the leased new vehicle:	$11,000.00
•   Monthly lease payment to the customer on the new vehicle:	$     370.00/mth
•   GST collected on the monthly lease payments - 7% x $370.00/mth:	$       25.90/mth

Response:

Please note that the Department cannot calculate accurately the GST payable on the monthly lease payment without having the money factor or interest rate included in your submission. However, for purposes of responding to your query we have calculated the money factor to be approximately 0.00782 based on a lease payment of $370.00 per month. With this assumption, we concur that the total GST payable on the monthly lease payment is $25.90 per month calculated using the following three step approach:

Step 1: Calculation of the Monthly Finance Charge

Selling price of the new vehicle before GST:	$20,000.00
Less: trade-in Allowance	5,000.00
Adjusted capital cost	$15,000.00
Add: residual value	11,000.00
Finance Base:	$26,000.00
Monthly Finance Charge: $26,000 (Finance Base) x .00782 (money factor)	$     203.32/mth

Step 2: Calculation of the Monthly Depreciation Charge

Adjusted capital cost	$15,000.00
Less: residual value	11,000.00
Depreciation Base:	$  4,000.00
Monthly Depreciation Charge:	$  4,000
(Depreciation Base) ÷ 24 months:	166.67/mth
GST Base:	$     369.99/mth

Step 3: Calculation of the GST Payable on the Monthly Lease Payment
7% x $369.99/mth (GST Base)	$       25.90/mth

Example #2

(facsimile transmission, June 17, 1996)

Facts Provided:

•   XXXXX (the "dealer") leases a new vehicle to a non-registrant;
•   Lease period on the new vehicle leased from the dealer:	24 months
•   Agreed value of the new vehicle:	$20,000.00
•   Agreed value of the trade-in vehicle:	$  5,000.00
•   Lien against the trade-in vehicle (owed to financial institution):	$  2,000.00
•   Agreed credit given on the trade-in vehicle ($5,000 - $2,000):	$  3,000.00
•   Residual value (i.e., option price) on the leased new vehicle:	$11,000.00
•   Monthly lease payment to the customer on the new vehicle:	$     460.00/mth
•   Non-taxable lien component of the monthly lease payment:	$       90.00/mth
•   GST collected on the monthly lease payments: 7% x ($460 - $90)	$       25.90/mth

Response:

As in example 1, we have calculated the money factor to be same (approximately 0.00782). When applying these facts, we are again in agreement with you that the total GST payable on the lease payment is determined to be $25.90 per month when using the three step approach:

Step 1: Calculation of the Monthly Finance Charge

Selling price of the new vehicle before GST:	$20,000
Less: trade-in Allowance	5,000
Adjusted capital cost	$15,000
Add: residual value	11,000
Finance Base:	$26,000
Monthly Finance Charge:
$26,000 (Finance Base) x .00782 (money factor)	$      203.32/mth

Step 2: Calculation of the Monthly Depreciation Charge

Adjusted capital cost	$15,000
Less: residual value	11,000
Depreciation Base:	$  4,000
Monthly Depreciation Charge:
$4,000 (Depreciation Base) ÷ 24 months:	166.67/mth
GST Base:	$     369.99/mth

Step 3: Calculation of the GST Payable on the Monthly Lease Payment
7% x $369.99/mth (GST Base)	$25.90/mth

Example #3:

(letter, July 30, 1996)

Facts Provided:

•   XXXXX (the "dealer") leases a new vehicle to a non-registrant;

•   Lease period on the new vehicle leased from the dealer:	24 months
•   Agreed value of the new vehicle:	$20,000.00
•   Agreed value of the trade-in vehicle:	$  5,000.00
•   Lien against the trade-in vehicle (owed to financial institution):	$  2,000.00
•   Agreed credit given on the trade-in vehicle ($5,000 - $2,000):	$  3,000.00
•   Residual value (i.e., option price) on the leased new vehicle:	$11,600.00
•   The monthly lease payment is calculated as follows:
Total vehicle price:	$20,000.00
Less: agreed credit given on the trade-in vehicle	3,000
Net lease cost:	$17,000
Monthly lease payment:
Net lease cost x acquisition factor ($17,000 x .047290)	$      803.93
Less: residual value x residual factor ($11,600 x .037002)	429.22
Monthly lease payment:	$      374.71
•   The monthly sales tax lease payment is calculated as follows:
Total vehicle price:	$20,000
Less: trade-in allowance	5,000
Net sales tax lease cost	$15,000
Monthly sales tax lease payment:
Net sales tax lease cost x acquisition factor ($15,000 x .047290)	$     709.35
Less: residual value x residual factor ($11,600 x .037002)	429.22
Monthly sales tax lease payment	$     280.13

•   The dealer then prepares an addendum to the lease which discloses the monthly lease payment, the sales tax lease payment, the amount of the lien and the GST payable as shown in Appendix C to your letter entitled XXXXX;

•   Immediately after the lease is executed, the lease and the leased new 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 its 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);

Response:

•   We agree that the monthly GST payable calculated on the monthly sales tax lease payment (determined above and in Appendix C to your letter) will be equal to:

7% x $280.13/month = $19.61/month;

•   We also agree that the dealer is required to collect GST from the lessee on the full consideration paid by the lessee to acquire the vehicle pursuant to the purchase option (i.e., 7% x $11,600 = $812);

Example #4:

(letter, July 30, 1996)

Facts Provided:

•   Same facts as example #3 except that the trade-in has an agreed value of $15,000 and a lien of $12,000 for a net trade-in allowance of $3,000 (and the lease payments remain at $374.71/month)

Response:

•   Using the same method of calculation and money factors provided in Appendix B to your letter, the sales tax lease payment will be calculated as follows:

Total vehicle price	$20,000
Less: trade-in allowance	15,000
Net Lease Cost	$  5,000
Lease payment:
Net price x acquisition factor ($5,000 x .047290)	$     236.45
Less: residual value x residual factor ($11,600 x .037002)	429.22
Monthly sales tax lease payment	$ Nil
Monthly GST payable (7% x $Nil)	$ Nil

•   Again, the dealer will collect GST in the amount of $812 (i.e., 7% x $11,600) from the lessee on the full consideration paid by the lessee to acquire the vehicle at the time the purchase option is exercised.

Example #5:

(letter, July 30, 1996)

Facts Provided:

•   XXXXX (the "dealer") leases a new vehicle to a non-registrant;
•   Lease period on the new vehicle leased from the dealer:	24 months
•   Agreed value of the new vehicle:	$20,000.00
•   Agreed value of the trade-in vehicle:	$11,000.00
•   Amount of the trade-in allowed by the dealer as a trade allowance	$  7,000.00
•   Customer receives cheque for remaining value of the trade-in	$  4,000.00
•   Lien against the trade-in vehicle:	$Nil
•   Residual value (i.e., option price) on the leased new vehicle:	$11,600.00
•   Monthly lease payment to the customer on the leased new vehicle:	$     185.55/mth

Response:

•   Proposed new subsection 153(4) of the ETA provides in paragraph (c) that the value of the consideration for the supply (i.e., the leased vehicle) is deemed to be equal to the value of that supply less "... the amount credited to the recipient in respect of the trade-in ...". It is our opinion that the meaning of the phrase "the amount credited ... in respect of the trade-in" in the said paragraph refers to the amount deducted (i.e., trade-in allowance) against the value of the supply rather than the amount agreed between the parties to be the value of the trade-in. In other words, based on the example you provided, the difference of $4,000.00 between the agreed value of the trade-in ($11,000) and the amount of the trade-in which reduces the value of the consideration of the leased vehicle ($7,000) does not represent an amount credited against the leased vehicle.

Having said this and based on the facts above, the GST payable on the monthly lease payments will be determined as follows by using a trade-in allowance amount of $7,000:

Total vehicle price	$20,000
Less: trade-in allowance	7,000
Net Lease Cost	$13,000
Lease payment:
Net price x acquisition factor ($13,000 x .047290)	$      614.77
Less: residual value x residual factor ($11,600 x .037002)	429.22
Monthly sales tax lease payment	$      185.55
Monthly GST payable (7% x $185.55)	$        12.99/mth

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 Michael Matthews, Manager, Industries Unit at (613) 952-8806.

Yours truly,

H.L. Jones
Director
General Applications Division
GST Rulings and Interpretations Directorate

GAD#: 3081 (GEN)
3217 (GEN)

Attachment

c.c.:

M. Matthews P. Lafond R. Smith R. Labelle