13 March 1997 GST/HST Interpretation 11735-1, 11720-1 - The Application of GST to Certain Payments Received by Car Rental Companies -

Dear XXXXX

In response to your inquiries concerning your reply to a letter of November 18, 1994 from XXXXX requesting guidance as to the application of GST to certain payments received by car rental companies, we provide the following comments. We apologize for the delay in completing this work.

Background

 XXXXX has asked for an interpretation of the application of GST to a series of transactions which could arise in connection with the rental of a car and the subsequent repairs to that car which would be required in the event the car was involved in an accident during the rental period.

Paraphrased, you have been asked to comment on:

1) The application of tax to the invoice received by the car rental company from the body shop where the car was repaired.

2) If the amount of the invoice in (1) is consideration for a taxable supply and tax therefore becomes exigible, the ability of the car rental company to recover the tax paid through an input tax credit ("ITC") claim.

3) Where the damages to the rented car were found to be the responsibility of the person who rented the car ("the renter") and the renter had purchased a "damage waiver" from the car rental company at the time of renting the car, the application of tax to the purchase of the waiver and to the subsequent reimbursement of car repair costs received by the car rental company from its insurer.

4) Where the damages to the rented car were found to be the responsibility of the renter and the renter had not purchased what is called a "damage waiver" from the car rental company at the time of renting the car, the application of tax to any payment received by the car rental company from the renter or the renter's insurer as reimbursement for the repairs initially paid for by the car rental company.

5) Where the damages to the rented car were found to be the responsibility of someone other than the renter, the application of tax to any payment received by the car rental company from that person or that person's insurer.

Discussion

In response to (1) and (2), the body shop is supplying a taxable service to the car rental company. If the body shop is a GST registrant, the body shop would charge GST on the amount of the invoice submitted to the car rental company and if the car rental company was a GST registrant and the repaired car was used in the commercial activities of the car rental company, the car rental company would be entitled to recover the tax paid through an ITC claim.

In response to (3), generally when a renter purchases a damage waiver from a car rental company at the time of renting the car, the purchase of the waiver forms part of the agreement for the taxable supply of the car rental and is therefore subject to tax. This transaction involves one supply, that is, the rental of a car. The renter is not renting a car and purchasing insurance. The car rental company has purchased fleet insurance to cover potential damages to all of its rented cars. When repairs are required, the car rental company pays the repair bills and files a claim under its fleet insurance policy. The renter does not file an insurance claim with any third party. The car rental company is not an "insurer" as that word is defined at subsection 123(1) of the Act and therefore cannot be said to be making a supply of insurance.

There may be instances where the car rental company is selling the waiver as agent for a third party insurance company, but we are not aware that such an agreement is usual in the industry. Depending on the specific facts of the situation, this arrangement may alter the application of tax and we could not comment further without more specific details.

In the event that the rented car is damaged, the car rental company makes arrangements to have the car repaired and submits a claim to its insurer. As previously discussed, the car rental company is entitled to recover any GST payable in respect of the supply of the car repairs, through an ITC claim. When submitting a claim to its insurer, the car rental company would presumably submit the claim net of any GST otherwise recoverable, however, this is not a tax issue as much as it is a business issue between the insurer and the insured as to what will be treated as an acceptable claim pursuant to the terms of the insurance contract entered into by the two parties.

In the case of the transaction described at (4), the renter has decided not to purchase a damage waiver. The car rental company is prepared to rent the car at a lower daily rate because even though the damage waiver has not been purchased, the renter signs a statement contained in the written car rental agreement (the statement is often called an indemnity clause), which holds the renter completely responsible for payment of all required repair costs in respect of the rented car during the rental period.

If circumstances are such that damages are sustained to the car during the rental period, regardless of the fact that the renter has provided an indemnification, the car rental company will make the arrangements to have the car repaired and will receive an invoice for those repairs, from the body shop. The car rental company can recover any GST paid in respect of the car repairs by filing an ITC claim since the car rental company had the repair work done in the course of its commercial activities. The car rental company will then request reimbursement of the repair expenses from the renter who had provided the indemnification. The payment by the renter, or by an insurer on the renter's behalf, to the car rental company, as reimbursement of the car repair expenses, does not represent consideration for a supply made by the car rental company to the renter. The payment is an indemnification under the terms of the car rental agreement, of the cost incurred by the car rental company to repair the car. The renter does not own the car and therefore cannot be said to have received a supply of the parts and services needed to repair the car. Nor can it be said that the renter is paying additional consideration for the rental of the car. The reimbursement is only required to be paid by the renter in the event that repairs to the car are necessary. If the car is not damaged during the rental period, no additional payment is required even though the taxable supply of the rental of the car has still been made by the car rental company and consumed by the renter. It would therefore not be correct to categorize any additional payment that may be required, as consideration for the taxable supply of the rental of the car because the additional payment is not always required.

With respect to the application of tax to the circumstances described at (5), this would depend upon whether or not the renter had purchased a damage waiver or if you had signed an indemnity clause. If XXXXX wishes to submit more details to describe this type of transaction, we would be pleased to provide any assistance required to answer any interpretation request.

If you have any further questions on this matter, do not hesitate to call me directly at 613 954-4397.

Yours truly,

Sara R. Nixon
A/Manager
Policy Unit
General Operations and Border Issues
GST Rulings and Interpretations

1789REG.