GST/HST Rulings and Interpretations Directorate
Place Vanier, Tower C, 9th Floor
25 McArthur Road
Vanier, Ontario
XXXXX K1A 0L5
XXXXX Case: HQR0000519
XXXXX Registration No: XXXXX
Dear XXXXX
Thank you for your letter of January 22, 1997 (with attachments) addressed to Les Jones concerning the application of subsection 153(4) of the Excise Tax Act (ETA) to the auto leasing operations of XXXXX I apologize for the delay in responding.
This response to your letter is divided into two parts. The first part answers your questions with respect to the required contents of an invoice or statement for the lease of an automobile. The second part reviews the six sample lease calculations contained in your letter.
PART ONE - INVOICING REQUIREMENTS
Interpretation Requested
In your letter of January 22, 1997, you enquire as to the invoicing requirements for the lease of an automobile where the lessor pays on behalf of the owner of the used vehicle trade-in an outstanding loan. Normally, the amount of such a payment plus interest is paid back to the lessor by the lessee over the term of the lease, thereby increasing the amount of the monthly lease payments. This increase in the monthly payments due to the payment of an outstanding loan on the trade-in is ignored, however, for the purposes of calculating the amount of goods and services tax (GST) or harmonized sales tax (HST) which is payable on the monthly lease payments. You wish to know whether an invoice or statement can or must identify separately the amount of the monthly payment used to calculate the amount of GST or HST payable from the amount of the monthly payment which goes towards the repayment of the amount paid by the lessee on account of the outstanding loan on the trade-in. You also wish to know whether the amount of GST or HST on the monthly lease payments is affected by whether or not these two amounts are shown separately on an invoice or statement.
Interpretation Given
Based on the information provided it is the Department's position that both an invoice and a statement (as those terms are defined in your letter) are "invoices" for the purposes of the ETA. In subsection 123(1) of the ETA, the term "invoice" is defined as including "a statement of account, a bill and any similar record, regardless of its form or characteristics ...". The term includes any document which either notifies a recipient of the obligation to pay or records payment.
Because both an invoice and a statement are "invoices" for the purposes of the ETA, the requirements in subsection 223(1) apply to both documents. This subsection requires the invoice or the statement to clearly show either:
a) the total tax payable in respect of the supply in a manner that clearly indicates the amount of that total; or
b) the total of the rates at which tax is payable in respect of the supply (i.e. 7%, 15% or 0%) and, where the invoice relates to supplies in respect of which tax is payable and supplies in respect of which no tax is payable, the supplies to which tax at those rates applies.
Thus it is not necessary to identify separately the amount of the monthly payment used to calculate the amount of GST or HST payable from the amount of the monthly payment which goes towards the repayment of the amount paid by the lessee on account of the outstanding loan on the trade-in.
Whether the amount of the monthly payment used to calculate the amount of GST or HST payable is shown separately from the amount of the monthly payment which goes towards the repayment of the loaned amount has no effect on the amount of GST or HST which must be charged on each monthly lease payment.
Any information which may be required by the lessee for the purposes of claiming an input tax credit should also be included on the invoice or statement, as pursuant to subsection 223(2) this information must be provided to the lessee by the lessor in writing at the request of the lessee. The required information is listed in the Input Tax Credit Information (GST/HST) Regulations (with draft amendments).
PART TWO - SAMPLE LEASE CALCULATIONS
You have asked us to review the six example lease calculations contained in your letter of January 22, 1997. For each of the following examples, the following facts apply:
1. The selling price of the new vehicle by the dealer to the leasing company, before GST, was $21,000.
2. The residual value for the vehicle was $10,600.
3. The difference between the selling price and the sum of the residual value and the trade-in allowance is referred to as the "Leasing Depreciation Value" (LDV).
4. The lease term is 36 months.
5. The interest portion of the lease payment is calculated by multiplying a pre-established interest "Rated Factor" by the sum of the residual value and the difference between the selling price of the new vehicle and the trade-in allowance. This value represents the amount of the return on the initial investment of the funds to acquire the vehicle plus the risk cost of financing the residual value of the vehicle over the lease term.
6. Provincial sales tax (PST) will not be factored into these examples.
For all of the following examples it will be assumed that all of the conditions of subsection 153(4) have been met, and none of the exceptions listed in subsection 153(5) of the ETA apply. It will also be assumed that GST, and not HST, applies to all of the transactions below.
Example 1 - Trade-in (no loan)
Facts:
In this example the trade-in allowance does not exceed the LDV.
|
Selling price of new vehicle
|
$21 000.00
|
|
Less: Residual value (buy out option)
|
10 600.00
|
|
Net difference
|
$10 400.00
|
|
Less: Trade-in allowance
|
5 000.00
|
|
Amount depreciated over 36 term lease (LDV)
|
$ 5 400.00
|
|
Add: Loan repayment
|
$0.00
|
|
Gross amount owed to lessor by lessee
|
$ 5 400.00
|
|
Monthly lease payment
|
|
|
Monthly depreciation ($5,400/36)
|
$ 150.00
|
|
Add: Interest charge
|
88.90
|
|
|
$ 238.90
|
|
Add: GST ($238.90 x 0.07)
|
16.72
|
|
Total amount per month lessee remits to lessor
|
$ 255.62
|
Response:
The above calculation of the amount of GST on each lease payment ($16.72) is correct.
Example 2 - Trade-in (with loan)
Facts:
This example is the same as example 1, except that there is a $3,000 lien on the traded-in vehicle which the lessor pays off on behalf of the lessee.
|
Selling price of new vehicle
|
$21 000.00
|
|
Less: Residual value (buy out option)
|
10 600.00
|
|
Net difference
|
$10 400.00
|
|
Less: Trade-in allowance
|
5 000.00
|
|
Amount depreciated over 36 term lease (LDV)
|
$ 5 400.00
|
|
Add: Loan repayment
|
$ 3 000.00
|
|
Gross amount owed to lessor by lessee
|
$ 8 400.00
|
|
Monthly lease payment
|
|
|
Monthly depreciation ($5,400/36)
|
$ 150.00
|
|
Add: Interest charge
|
88.90
|
|
|
$ 238.90
|
|
Add: GST ($238.90 x 0.07)
|
16.72
|
|
Amount per month lessee remits to lessor re lease
|
$ 255.62
|
|
Monthly loan payment
|
|
|
Monthly principal repayment (3,000/36)
|
$ 83.33
|
|
Add: Interest factor for loan amount
|
10.50
|
|
|
$ 93.83
|
|
Total amount per month lessee remits to lessor
|
$ 349.45
|
Response:
The above calculation of the amount of GST on each lease payment ($16.72) is correct. For the purpose of calculating the amount of GST on the monthly lease payments only, the amount of the lien on the trade-in is ignored when determining the monthly depreciation and interest charges.
Example 3 - Trade-in (no loan)
Facts:
This example is the same as example 1, except that the trade-in allowance is now greater than the difference between the selling price and the residual value, resulting in a negative LDV.
|
Selling price of new vehicle
|
$21 000.00
|
|
Less: Residual value (buy out option)
|
10 600.00
|
|
Net difference
|
$10 400.00
|
|
Less: Trade-in allowance
|
12 000.00
|
|
Amount depreciated over 36 term lease (LDV)
|
$(1 600.00)
|
|
Add: Loan repayment
|
0.00
|
|
Gross amount owed to lessor by lessee
|
$(1 600.00)
|
|
Monthly lease payment
|
|
|
Monthly depreciation (($1,600)/36)
|
$ (44.44)
|
|
Add: Interest charge
|
64.40
|
|
|
$ 19.96
|
|
Add: GST ($19.96 x 0.07)
|
1.40
|
|
Total amount per month lessee remits to lessor
|
$ 21.36
|
Response:
The above calculation of the amount of GST on each lease payment ($1.40) is correct. The Department will allow a negative monthly depreciation to be used to reduce the monthly lease payment for the purposes of calculating the GST to an amount equal to, at minimum, nil.
Example 4 - Trade-in (with loan)
Facts:
This example is the same as example 3, except that there is a $8,000 lien on the traded-in vehicle which the lessor pays off on behalf of the lessee.
| Selling price of new vehicle |
21 000.00
|
| Less: Residual value (buy out option) |
10 600.00
|
| Net difference |
$10 400.00
|
| Less: Trade-in allowance |
12 000.00
|
| Amount depreciated over 36 term lease (LDV) |
$(1 600.00)
|
| Add: Loan repayment |
8 000.00
|
| Gross amount owed to lessor by lessee |
$ 6 400.00
|
| Monthly lease payment |
|
| Monthly depreciation (($1,600)/36) |
$ (44.44)
|
| Add: Interest charge |
64.40
|
|
$ 19.96
|
| Add: GST ($19.96 x 0.07) |
1.40
|
| Amount per month lessee remits to lessor re lease |
$ 21.36
|
| Monthly loan payment |
|
| Monthly principal repayment (8,000/36) |
$ 222.22
|
| Add: Interest factor for loan amount |
28.00
|
|
$ 250.22
|
| Total amount per month lessee remits to lessor |
$ 271.58
|
Response:
The above calculation of the amount of GST on each lease payment ($1.40) is correct. The Department will allow a negative monthly depreciation to be used to reduce the monthly lease payment for the purposes of calculating the GST to an amount equal to, at minimum, nil. Further, for the purpose of calculating the amount of GST on the monthly lease payments only, the amount of the lien on the trade-in is ignored when determining the monthly depreciation and interest charges.
Example 5 - Trade-in (no loan)
Facts:
This example is the same as example 3, except that the lessor refunds to the lessee the difference in cash to bring the LDV to zero (i.e. the $1,600 difference). According to your letter this would be the normal business practice where the trade-in value exceeds the difference between the selling price of the new vehicle and the vehicle's residual value.
| Selling price of new vehicle |
$21 000.00
|
| Less: Residual value (buy out option) |
10 600.00
|
| Net difference |
$10 400.00
|
| Less: Trade-in allowance |
|
|
Initial value
|
$12,000.00
|
|
Amount of trade-in allowed on lease
|
10 400.00
|
|
Amount given to owner in cash
|
$ 1,600.00
|
| Amount depreciated over 36 term lease (LDV) |
$ 0.00
|
| Add: Loan repayment |
0.00
|
| Gross amount owed to lessor by lessee |
$ 0.00
|
| Monthly lease payment |
|
|
Monthly depreciation ($0)
|
$ 0.00
|
|
Add: Interest charge
|
70.00
|
|
$ 70.00
|
| Add: GST ($70.00 x 0.07) |
4.90
|
| Total amount per month lessee remits to lessor |
$ 74.90
|
Response:
The above calculation of the amount of GST on each lease payment ($4.90) is correct. 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 this phrase in paragraph 153(4)(c) refers to the amount deducted against the value of the supply rather than the amount agreed between the parties to be the amount of the trade-in. In other words, the amount given in cash to the lessee in this example cannot be considered to be an amount credited against the leased vehicle. As well, the amount given in cash to the lessee cannot be considered to be an amount which was used as "full or partial consideration for the supply" of the new vehicle, as required by subsection 153(4).
Example 6 - Trade-in (with loan)
Facts:
This example is the same as example 5, except that there is a $8,000 lien on the traded-in vehicle which the lessor pays off on behalf of the lessee.
| Selling price of new vehicle |
$21 000.00
|
| Less: Residual value (buy out option) |
10 600.00
|
| Net difference |
$10 400.00
|
| Less: Trade-in allowance |
|
|
Initial value
|
$12,000.00
|
|
Amount of trade-in allowed on lease
|
10 400.00
|
|
Amount given to owner in cash
|
$ 1,600.00
|
|
Amount depreciated over 36 term lease (LDV)
|
$ 0.00
|
|
Add: Loan repayment
|
$ 8 000.00
|
| Gross amount owed to lessor by lessee |
$ 8 000.00
|
| Monthly lease payment |
|
|
Monthly depreciation ($0)
|
$ 0.00
|
|
Add: Interest charge
|
70.00
|
|
$ 70.00
|
|
Add: GST ($70.00 x 0.07)
|
4.90
|
|
Total amount per month lessee remits to lessor, re lease
|
$ 74.90
|
| Monthly loan payment |
|
|
Monthly principal repayment (8,000.36)
|
$ 222.22
|
|
Add: Interest factor for loan amount
|
28.00
|
|
$ 250.22
|
| Total amount per month lessee remits to lessor |
$325.12
|
Response:
The above calculation of the amount of GST on each lease payment ($4.90) is correct. 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 this phrase in paragraph 153(4)(c) refers to the amount deducted against the value of the supply rather than the amount agreed between the parties to be the amount of the trade-in. In other words, the amount given in cash to the lessee in this example cannot be considered to be an amount credited against the leased vehicle. As well, the amount given in cash to the lessee cannot be considered to be an amount which was used as "full or partial consideration for the supply" of the new vehicle, as required by subsection 153(4). Further, for the purpose of calculating the amount of GST on the monthly lease payments only, the amount of the lien on the trade-in is ignored when determining the monthly depreciation and interest charges.
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 or require clarification on the above matter, please do not hesitate to contact me at 613-8253.
Yours truly,
Gregory Smart
ARulings Officer
Industries Unit
General Operations and Border Issues Division
GST/HST Rulings and Interpretations Directorate
Legislative References: 153(4), 223
NCS Subject Code(s): I 9, 11705-4
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