21 August 1996 GST/HST Interpretation 11650-9[8] - Leased Vehicle Transactions

                                                                        Telephone: (613) 954-5021
Fax: (613) 990-1233
XXXXX                                                                                 August 21, 1996
XXXXX                                                                                 11650-9 (pl)
XXXXX                                                                                 Subsections 165(1) & 221(1)

Dear XXXXX

This is in reply to your facsimile transmission dated July 12, 1996, to XXXXX in which you request a GST interpretation under the Excise Tax Act (the "ETA") in reference to leased vehicle transactions. Your request has been forwarded to our attention for review and response.

Statement of Facts:

In your facsimile transmission you provide the following fact situations:

Situation 1:

•   The terms of a lease agreement obligate a lessee to guarantee to a lessor that a vehicle will be worth a minimum of XXXXX on the termination date of the lease. There is no obligation on the lessee, upon entering into the lease agreement or at any time thereafter, to purchase the vehicle. The lessee is simply obligated to be responsible to the lessor for any shortfall below the guaranteed amount in the vehicle's value at termination;

•   Upon termination of the lease, the market value of the vehicle is XXXXX (this is the amount the lessor is able to obtain upon the sale of the vehicle). When the vehicle is sold for XXXXX GST is charged on that amount;

•   The lessee pays the lessor XXXXX being the shortfall below the guaranteed amount;

Your question is whether the lessee is obligated to pay GST on the XXXXX shortfall in the value of the vehicle.

Response:

Since the lessee is obligated under the terms of the lease agreement to pay the lessor for any shortfall below the guaranteed amount (i.e., XXXXX in the vehicle's value at the termination of the lease period, any shortfall amount paid XXXXX in this example) is considered for GST purposes to be additional consideration paid in relation to the supply of the vehicle. Accordingly, the lessee is required to pay, and the lessor is required to collect GST equal to 7% of the value of the consideration for the supply (i.e. ,XXXXX in accordance with subsections 165(1) and 221(1) of the ETA.

Situation 2:

•   Same facts as Situation 1 except that the lessor is able to obtain XXXXX upon the resale of the vehicle. Therefore, the lessor pays the lessee the XXXXX excess value over the guaranteed value.

Your question is whether the lessor is obligated to refund the lessee the excess GST of XXXXX (i.e., 7% x XXXXX[)] that the lessee has paid and, if so, whether the lessor is allowed to claim that amount back from the department by reducing their net tax remittance for the next filing period.

Response:

[Please note that our response below to Situation 2 assumes that, under the lease agreement, the lessee has the right to purchase the vehicle from the lessor at the termination of the lease period for an amount equal to the vehicle's guaranteed value (i.e., the buy-out option is XXXXX].

The amount of XXXXX paid by the lessor to the lessee at the termination of the lease period is not considered for GST purposes to be an adjustment (i.e., reduction) of the consideration paid by the lessee for the supply of leasing the vehicle from the lessor during that period but is regarded as consideration paid in relation to the vehicle's leasehold interest. It is our view that by accepting the amount of XXXXX the lessee has relinquished the right to the vehicle's leasehold interest (i.e., precludes the lessee from exercising the buy-out option at XXXXX) and, in turn, the lessor maintains ownership of the property. As a result, there is no excess GST to be remitted by the lessor to the lessee on this transaction nor is the lessee required to charge GST to the lessor on the XXXXX payment provided that the lessee is a non-registrant.

This interpretation is based upon our current understanding 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 #: 3152 (GEN)