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

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XXXXX                                                                                 11650-9(rs)
Section 153

                                                                        AUGUST 16, 1996

Dear XXXXX

This is in reply to your fax on July 18, 1996, in which you forwarded a letter sent to the XXXXX by XXXXX. You have requested our comments on the issues raised by XXXXX with respect to the Ways and Means Motion tabled on April 23, 1996, and the proposed addition of new subsection 153(4) to the Excise Tax Act (the "ETA") that provides for the use of the "trade-in approach" in certain circumstances.

You have requested our views on the proposed amendment with respect to the following situations.

Issue 1:

Part A: Calculate the GST payable on the following supply by way of sale. The purchaser is a non-registrant and is trading in a vehicle valued at $20,000. There is a $15,000 lien against the purchaser's trade-in vehicle.

Note: The conditions of proposed subsection 153(4) have been met therefore the consideration for the supply of the new vehicle is reduced by the amount credited for the trade-in. The amount credited for the trade-in is not reduced where there is a lien on the vehicle.

Part B: Calculate the GST payable on the following supply by way of lease. The purchaser is a non-registrant and is trading in a vehicle valued at $20,000. There is a $15,000 lien against the customer's trade-in vehicle. The term of the lease is 48 months and there are no interest charges (for illustration purposes).

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 Depreciation Base.

* Note: The proposed subsection 153(4) trade-in approach does not provide for negative amounts. Further, no excess amount may be carried forward to the residual amount when the buy-out option is exercised.

Part C: Calculate the GST payable on the buy-out option. Assume that the buy-out option is exercised at the completion of the 48 month lease.

As mentioned above, the proposed subsection 153(4) trade-in approach does not provide for an excess amount that has resulted from a lease payment calculation to be carried forward to the residual amount (thereby reducing the value of the consideration when the buy-out option is exercised).

Issue 2:

Calculate the GST payable on the following supply by way of lease. The non-registrant consumer is currently leasing an automobile and has chosen to lease a new automobile. The cost to terminate the old lease is $23,000. The lessor agrees that the value of the old automobile is $26,000. Therefore, the lessor will credit $3,000 for the leasehold interest against the value of the consideration of the new automobile when calculating the monthly lease payment.

Step 1: Calculate monthly lease payment. Assume that the residual is $13,500 and that the term of the lease is 48 months and there are no interest charges (for illustration purposes).

Step 2: Re-calculation of lease payment (for GST purposes only). In this example, the calculation of the lease payment for GST purposes is identical to the calculation of the monthly lease payment. The conditions of proposed subsection 153(4) have been met therefore the consideration for the supply of the new vehicle is reduced by the amount credited for the trade-in. (In this case, the credit has been given in respect of the leasehold interest in the old lease.) The GST payable on the monthly lease payment is $16.77 ($239.58 x 7%).

We can only provide very general comments on the alternative treatment described by XXXXX wherein the leasing company refunds the excess amount ($3,000) to the lessee. The leasing company may refund an amount to the lessor however where the credit note includes an amount in respect of GST there may be some question as to the leasing company's eligibility to deduct the GST amount in respect of that refund when calculating its net tax. The amount refunded as the tax portion is clearly not an input tax credit given that the supply of the leasehold interest is being made by a non-registrant.

Issue 3:

Calculate the GST payable on the following supply by way of lease. The customer is a non-registrant and is trading in a vehicle valued at $28,000. There is no lien on the customer's vehicle. For economic reasons, the leasing company permits a maximum of 35% of the new vehicle purchase price to be credited as a trade-in. Any amount in excess of this is paid in cash to the customer. In the example the new vehicle price is $40,000. Therefore, the maximum trade-in credit is $14,000 ($40,000 x 35%). As a result of his trade-in, the customer receives a credit for $14,000 when calculating the monthly lease payment and also receives a cheque for $14,000 for the excess amount. The term of the lease is 24 months and there are no interest charges (for illustration purposes).

Step 1: Calculate monthly lease payment.

Step 2: Re-calculation of lease payment (for GST purposes only). In this example, the calculation of the lease payment for GST purposes is identical to the calculation of the monthly lease payment. The conditions of proposed subsection 153(4) have been met therefore the consideration for the supply of the new vehicle is reduced by the amount credited for the trade-in. In our view, the amount credited to the customer in respect of the trade-in cannot exceed the maximum amount that a leasing company permits to be credited as a trade-in. Therefore, the GST payable on the monthly lease payment is $20.42 ($291.67 x 7%).

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

Yours truly,

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

GAD #: 3167 (GEN)