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Subject:
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GST INTERPRETATION
(er) Amendment to Section 153 - The "Trade-in Approach"
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Dear XXXXX
Thank you for your facsimile of February 12, 1997 concerning the application of the Goods and Services Tax (GST) in respect of recently amended section 153 of the Excise Tax Act (the ETA). You present two examples where new subsection 153(4) applies and would like confirmation that your calculation of the consideration in each scenario is correct.
Interpretation Requested
Prepaid Lease Arrangement
An individual wishes to prepay his lease in full. Calculate the GST payable on the supply by way of lease where the conditions of subsection 153(4) have been met. Assume that the lease period is XXXXX months.
Step 1: Calculate prepayment amount.
| Selling Price |
$24,000.00 |
| Less Present Value of Residual |
13,000.00 |
| Lease Prepayment Amount |
11,000.00 |
| Less Gross Trade-in Amount |
10,000.00 |
| Plus Lien on Trade-in |
5,000.00 |
| Net Payment Due to Lessor |
6,000.00 |
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 Net Payment Due to Lessor.
| Selling Price |
$24,000.00 |
| Less Present Value of Residual |
13,000.00 |
| Lease Prepayment Amount |
11,000.00 |
| Less Gross Trade-in Amount |
10,000.00 |
| Base for GST purposes |
1,000.00 |
| GST Payable on Prepayment Amount ($1,000.00 x 7%) |
70.00 |
Interpretation Given
It is the Department`s position that, where subsection 153(4) applies to the supply, the recipient of the supply would be required to pay GST of $70.00 on the lease prepayment amount of $6,000.00.
Interpretation Requested
Cash-outs
Calculate the GST payable on the following supply by way of lease where the customer is a non-registrant. Assume that the lease period is 24 months and the money factor is 0.0040178.
Step 1: Calculate monthly lease payment.
| Selling Price |
$40,000.00 |
| Less Gross Trade-in |
10,000.00 |
| Plus Cash Payment to Lessee |
5,000.00 |
| Plus Lien on Trade-in |
2,000.00 |
| Adjusted Capital Cost |
37,000.00 |
| Plus Residual |
19,000.00 |
| Finance Base |
56,000.00 |
| Depreciation Base (Adjusted Cap. Cost less Residual) |
18,000.00 |
| Finance Charge per month (Finance Base x Money Factor) |
225.00 |
| Depreciation Charge per month (Depreciation Base / Term) |
750.00 |
| Lease Payment per month (Finance Charge + Depreciation Charge) |
975.00 |
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 Finance Base or the Depreciation Base. The amount of the cash payment to lessee is added when determining the Adjusted Capital Cost and therefore does form part of the Finance Base and the Depreciation Base.
| Selling Price |
$40,000.00 |
| Less Gross Trade-in |
10,000.00 |
| Plus Cash Payment to Lessee |
5,000.00 |
| Plus Lien on Trade-in |
2,000.00 |
| Adjusted Capital Cost |
35,000.00 |
| Plus Residual |
19,000.00 |
| Finance Base |
54,000.00 |
| Depreciation Base (Adjusted Cap. Cost less Residual) |
16,000.00 |
| Finance Charge per month (Finance Base x Money Factor) |
216.96 |
| Depreciation Charge per month (Depreciation Base / Term) |
666.67 |
| GST Base (Finance Charge + Depreciation Charge) |
883.63 |
| GST per month (GST Base x 7%) |
61.85 |
Interpretation Given
Note that the amounts calculated differ from the figures presented in your submission. However, further to a telephone conversation on February 14, 1997, it is agreed that it is the methodology that is truly at issue and not the actual figures. Therefore, we confirm that the calculation properly reduces the consideration for the supply of the new item by the value of the trade-in less the cash payment made to the lessee. As noted above, the lien is not reduced when calculating the consideration.
The bill enacting subsection 153(4) received Royal Assent on March 20, 1997. It is our intention to draft policy in this area that will provide a more formal presentation of the information contained in this letter.
The foregoing comments represent our general views with respect to the subject matter of your letter. Proposed or future amendments to the legislation may result in changes to our interpretation. These comments are not rulings and, in accordance with the guidelines set out in GST Memoranda Series (1.4), do not bind the Department with respect to a particular situation.
For your convenience, find enclosed, copy of GST Memoranda Series (1.4). If you need additional information, please feel free to contact us again.
If you require further information, please contact me at (613) 941-3971.
Yours truly,
Robert Smith
Rulings Officer
Industries Unit
General Operations and Border Issues Division
GST Rulings and Interpretations Directorate
Legal References: ss. 153(4) and (5)
| b.c.c.: |
Originator's Desk Copy |
b.c.c.: P. Lafond
b.c.c.: K. Mathews
| b.c.c.: |
NCS Subject Code(s) - I 11650-9 |
XXXXX
i1 This implies that there is no GST on the commission charged by.
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