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M. Guerra Case: HQR0000609
File: 11715-6
September 16, 1997
Dear XXXXX
This letter is in reply to your inquiry dated March 19, 1997, regarding the application of the goods and services/harmonized sales tax (GST/HST) to leases.
The description of the lease taken from your letter is as follows:
"A customer (the "lessee") leases taxable tangible personal property ("TPP") in Canada from a leasing company (the "lessor"). The lessor and lessee are not related companies. The lessor retains ownership of the TPP during the lease period. The lease agreement requires the lessee to make monthly lease payments during the lease period. The lease contains a "stated purchase option". It is not mandatory for the lessee to exercise this option. The stated purchase option, if exercised by the lessee, allows the lessee to purchase the leased TPP at the end of the lease period for an amount which is substantially below its fair market value at the time the option is exercised. This amount is usually a percentage of the capitalized cost of the TPP (e.g. 10%) or a flat dollar amount (e.g. $1.00). If the option is not exercised by the lessee, the lessor retains ownership of its leased property."
Interpretation Requested
1. Is the lessor required to charge and collect GST on the monthly lease payment or is the lessor required to charge GST on the total lease amount (i.e., the total amount of all lease payments over the lease period which would include an interest value) at the time the lessee enters into the lease agreement?
2. If the lessor is required to charge and collect GST on the monthly lease payments, is the lessor also required to charge and collect GST on the amount paid by the lessee to exercise the stated purchase option? If so, on what amount is GST charged: the stated purchase amount, which is substantially below the fair market value of the TPP, or the fair market value of the TPP?
3. If the lessor is required to charge and collect GST on the total lease amount (i.e., the total amount of all lease payments over the lease period which would include an interest value) at the time the lessee enters into the lease agreement, is the lessor also required to charge and collect GST on the amount paid by the lessee to exercise the stated purchase option? If so, on what amount is GST charged: the stated purchase amount, which is substantially below the fair market value of the TPP, or on the fair market value of the TPP?
Interpretation Given
Based on the description of the lease as stated above:
1. The lessor is required to charge and collect GST (HST, where applicable) on the monthly lease payments.
2. The lessor is required to charge and collect GST (HST, where applicable) on the amount paid by the lessee to exercise the stated purchase option. GST (HST, where applicable) is charged on the stated purchase amount.
3. This question is not relevant since the lessor charges and collects GST (HST, where applicable) on the monthly lease payments and not on the total lease amount.
Analysis
Subsection 136(1) of the Excise Tax Act (the "Act") stipulates that a supply by way of lease, licence, rental or other similar arrangements for the use or right to use real property or tangible personal property is deemed to be a supply of that property.
Subsection 136.1(1) of the Act provides that supplies of property by way of lease, licence or similar arrangement will be treated as a series of separate supplies for each period (referred to in the subsection as a "lease interval") to which a particular lease payment is attributable. For each lease interval, the supplier is deemed to have made, and the recipient is deemed to have received, a separate supply of the property on the earliest of the first day of the lease interval, the day on which the payment for that interval becomes due, and the day on which the payment attributable to the lease interval is paid. This subsection is particularly relevant for purposes of the place of supply rules set out in Schedule IX in order to determine the appropriate amount of tax applicable to each separate lease payment. This subsection applies to lease intervals that begin on or after April 1, 1997.
Subsection 152(2) of the Act provides that, where property is supplied under a written lease agreement, tax becomes payable on the lease payments as they fall due under that agreement, notwithstanding the fact that an invoice or notice of payment may be issued to the lessee in advance of that date.
Interest included as an element in the payments required under a lease agreement, where the supply is of tangible personal property is subject to GST. The definition of "debt security" in subsection 123(1) of the Act specifically excludes leases to ensure that the rental of property is treated as a supply of that property and not as a financial services. As a result, the GST applies to all leasing transactions.
A bargain purchase option lease, where the agreement is considered to be a lease at law (i.e., the agreement is in form and substance a lease), will be treated as a lease for GST purposes, and not in the same manner as a conditional sales agreement. The GST would apply to each lease payment and any consideration paid to exercise a buy-out option is also subject to the GST.
The transitional rules relating to the implementation of the HST are not relevant since there will not be any leases straddling the start-up of the HST. In determining whether the HST applies first requires a determination of whether a given supply is made in Canada such that GST would normally apply and if so, section 144.1 of the Act, which refers to Schedule IX containing the place-of-supply rules, governs whether the HST applies.
Section 2 of Part II of Schedule IX and section 4 of Part I of Schedule IX of the Act outline three rules governing the supply of tangible personal property by any means other than sale (e.g., lease). The first rule applies to periods of three months or less, the other two for longer periods.
Where continuous possession of an item is provided for no more than three months, the rental is deemed to occur in the province in which the supplier delivers or makes the item available.
Under the second rule, where the property is a specified motor vehicle, it is considered to be leased in the province in which it must be registered under provincial motor vehicle legislation. Specified motor vehicles are most motor vehicles other than certain racing cars and prescribed vehicles. Under the third rule, where the item is not a specified motor vehicle, it is considered to be rented in the province in which the item is ordinarily located. The lessor and lessee can agree on the ordinary location of an item, and this will be deemed to be its ordinary location for HST purposes.
The foregoing comments represent our general views with respect to the subject matter of your letter. Proposed amendments to the Excise Tax Act, if enacted, could have an effect on the interpretation provided herein. These comments are not rulings and, in accordance with the guidelines set out in section 1.4 of Chapter 1 of the GST Memoranda Series, do not bind the Department with respect to a particular situation.
Should you have any further questions please do not hesitate to contact me at (613) 952-9577 or Duncan Jones at (613) 952-9210.
Sincerely,
Marilena Guerra,
C.M.A.
Rulings Officer
Financial Institutions and Real Property Division
GST/HST Rulings and Interpretations Directorate
Policy and Legislation Branch
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