25 February 1997 GST/HST Interpretation HQR0000268 - Proposed Amendment to Section 153 - The "Trade-in Approach"

                                                                        Section 153

Dear XXXXX

This is in reply to a letter sent by XXXXX of your staff on September 6, 1996 in which he requested information with respect to the proposed amendment to section 153 of the Excise Tax Act (the "ETA"). Bill C-70, as tabled on December 2, 1996, proposes the addition of new subsections 153(4) and (5) to the ETA that provide for the use of the "trade-in approach" in certain circumstances. Proposed subsection 153(4) of the ETA provides rules in respect of calculating the value of the consideration for a supply of tangible personal property made by a supplier. This is done by reducing the value of the consideration for such a supply in circumstances where all the other conditions of that subsection have been met and where the exceptions listed in subsection 153(5) of the ETA do not apply. The amount of the reduction is equal to the value of the consideration for the trade-in.

XXXXX has forwarded to us an interpretation request sent to XXXXX[.] The specific issue being addressed is the calculation of GST liability in a situation where proposed subsection 153(4) of the ETA applies. XXXXX requests information on the correct manner to determine consideration for a supply where a registrant accepts a non-registrant individual's trade-in of a vehicle with a lien at the time of entering into a new vehicle leasing agreement with the individual. XXXXX presents the facts as listed below.

Our understanding of the facts is as follows:

1. A non-registrant individual wishes to begin leasing a new XXXXX with a capital cost of XXXXX[.]

2. The term of the lease is XXXXX months, the interest rate is XXXXX and the residual is XXXXX[.]

3. Using a pre-programmed "XXXXX special lease calculator", XXXXX cost is equal to XXXXX monthly.

4. XXXXX chooses to add a lease profit of XXXXX on each monthly payment so that the customer's monthly lease payment before tax is XXXXX[.]

5. XXXXX agrees to accept the individual's XXXXX as a trade-in on the lease of the new XXXXX.

6. The XXXXX is valued at XXXXX and there is a XXXXX lien on the vehicle.

Interpretation Requested:

XXXXX asks whether the consideration for the supply of a new leased vehicle is reduced in a situation where a lessor accepts a lessee's trade-in of a vehicle where the value of the used vehicle is equal to the lien on the vehicle. XXXXX submission proposes that GST of XXXXX is payable on each XXXXX monthly lease payment.

Interpretation Given:

There is insufficient information in XXXXX submission (his letter and attached formula) in order to be able to confirm that, in the facts at issue, GST of XXXXX is payable on each XXXXX monthly lease payment.

However, the Department can confirm that, where the conditions of proposed subsection 153(4) of the ETA have been met and the exceptions listed in proposed subsection 153(5) of the ETA do not apply, the consideration for the supply of "new" property is reduced by the value of the trade-in without taking into account any lien that may exist on the traded in property. Therefore, where the circumstances described in the previous sentence arise and XXXXX uses a pre-programmed XXXXX, it would use the following method to calculate GST on a monthly lease payment:

Calculation 1: Monthly lease payment

Step (A) Enter the specific facts of the case (including taking into account that a lien exists on the traded in vehicle) in the pre-programmed XXXXX in order to determine XXXXX monthly cost. In our scenario, the result is XXXXX per Statement of Fact #3.

Step (B) Add XXXXX lease profit in order to determine the customer's monthly lease payment before tax. In our scenario, the lease profit is XXXXX and the resulting monthly lease payment before tax is XXXXX per Statement of Fact #4.

Calculation 2: GST on monthly lease payment

Step (A) For GST purposes only, enter the specific facts of the case in the pre-programmed XXXXX with the following modification - do not take into account the fact that a lien exists on the traded in vehicle. In other words, in our scenario, the trade-in allowance would be XXXXX and no reduction on the trade-in allowance would be made to recognize the fact that a XXXXX lien exists on the traded in vehicle. The result of this calculation is XXXXX monthly cost for GST purposes. Note that there is insufficient information in the submission in order for us to be able to calculate this amount.

Step (B) Add XXXXX lease profit [i.e., XXXXX the same amount as added in Calculation 1, Step (B)] in order to determine the customer's monthly lease payment for GST purposes.

Step (C) The GST payable is equal to 7% of the amount determined in Calculation 2, Step (B).

To summarize, the customer would be liable to pay the monthly lease payment before tax as determined in Calculation 1, Step (B) plus the GST as determined in Calculation 2, Step (C) [i.e., 7% of the amount calculated in Calculation 2, Step (B)].

Additional Information

The last part of this letter will present two samples of calculating the amount of GST payable on a monthly lease payment where the conditions of proposed subsection 153(4) of the ETA have been met. The samples will use a formula that is common in the auto leasing industry. Assume that an individual will be leasing a new vehicle valued at XXXXX equal monthly lease payments will be made for a period of XXXXX months and the residual at the end of the term of the lease is XXXXX[.] For simplicity, we have assumed that the lessor does not add an amount as "lease profit" to the monthly lease payment as calculated in the formula. Further, we have assumed that the money factor is XXXXX[.] The product of the money factor and the finance base is equal to the monthly Finance Charge in the formula. The money factor is derived from an interest rate. Refer to the example for information on the application of the money factor in the formula.

Example 1:

The lessor accepts the individual's used vehicle as a trade-in. The traded in vehicle is worth $10,000.00 and there is a lien on it of $10,000.00.

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 Finance Base or the Depreciation Base.

Therefore, the GST payable on each monthly lease payment of $415.57 is equal to $11.93.

Example 2:

The lessor accepts the individual's used vehicle as a trade-in. The traded in vehicle is worth $10,000.00 and there is a lien on it of $4,000.00.

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 Finance Base or the Depreciation Base.

Therefore, the GST payable on each monthly lease payment of $268.49 is equal to $11.93.

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

RITS CASE # HQR0000268