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XXXXX
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11650-9(rs)
Section 153
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Dear XXXXX
This is in reply to your letter of September 25, 1996 in which you requested information with respect to the proposed amendment to section 153 of the Excise Tax Act (the "ETA"). We apologize for the delay in responding to your submission. We were awaiting further clarification from the Department of Finance on this issue which arrived with the release of the technical bill. 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 provide rules in respect of calculating the value of the consideration for a supply of tangible personal property made by a supplier. This is accomplished 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) do not apply. The amount of the reduction is equal to the value of the consideration for the trade-in.
Prior to responding to your question, it should be noted that in drafting the example in the "Information concerning the Trade-in and Sale of Used Vehicles" released on April 29, 1996 for "Trade-ins of Used Vehicle from Consumers (Non-registrants) - Leases", a simplified approach was used in determining the value of the consideration for the supply made by way of lease. The example assumed that finance charges were nil. Therefore, the conclusions drawn from the example have limited application.
PART I - TRADE-IN FROM LEASE
Question 1:
Statement of Facts:
1. A non-registrant individual is entering into an agreement to purchase an automobile with a registered automobile dealership. The individual will be purchasing a new vehicle valued at XXXXX[.]
2. The individual is currently leasing an automobile. The payment required by the individual to discharge the current lease is XXXXX[.]
I must assume that where the individual chooses to pay the amount to discharge the current lease, the individual takes legal title to the vehicle.
3. The leased automobile is valued at XXXXX (and, therefore, the leasehold interest equals XXXXX[.] You have asked whether the consideration for the supply of the new vehicle should be reduced by XXXXX where proposed subsection 153(4) applies to the supply.
Note: In order to answer this question, it must first be determined the nature of the property being supplied by the individual as a trade-in. The individual may supply used tangible personal property or a leasehold interest therein as a trade-in for the purposes of proposed subsection 153(4). Currently, the individual has a leasehold interest in the leased vehicle valued at XXXXX[.] Where the individual wishes to make a supply of the currently leased vehicle (i.e., the used tangible personal property), he must first take legal title to the vehicle by making the payment of XXXXX that is required to discharge the current lease.
Scenario (a): The individual makes a supply of the leasehold interest in the currently leased automobile.
Response:
| New vehicle purchase price |
XXXXX |
| Less: Trade-in allowance |
XXXXX |
| Adjusted Consideration |
XXXXX |
| GST payable on new vehicle |
XXXXX |
Scenario (b): The individual makes a supply of the automobile.
Response:
| New vehicle purchase price |
XXXXX |
| Less: Trade-in allowance |
XXXXX |
| Adjusted Consideration |
XXXXX |
| GST payable on new vehicle |
XXXXX |
However, note that the individual was required to pay GST of XXXXX on the XXXXX amount that he was required to pay in order to take legal title to the leased automobile.
Therefore, the net GST liability in both scenarios is identical XXXXX The only difference is that in scenario (b) the individual will have paid GST on two supplies. The GST payable of XXXXX on the purchase of the leased vehicle and the GST payable of XXXXX on the purchase of the new vehicle.
Question 2:
Statement of Facts:
1. A non-registrant individual is entering into an agreement to lease an automobile with a registered automobile dealership. The individual will be leasing a new vehicle valued at XXXXX[.]
2. The individual will be required to make equal monthly lease payments over the 48 month term of the lease, finance charges are nil and the buy-out amount is XXXXX[.]
3. The individual is currently leasing an automobile. The payment required by the individual to discharge the current lease is XXXXX[.] I must assume that where the individual chooses to pay the amount to discharge the current lease, the individual takes legal title to the vehicle.
3. The leased automobile is valued at XXXXX (and, therefore, the leasehold interest equals XXXXX[.] You have asked whether the consideration for the supply of the new vehicle should be reduced by XXXXX where proposed subsection 153(4) applies to the supply.
The same determination as described in the Note to Question 1 must be made before being able to answer Question 2.
Scenario (a): The individual makes a supply of the leasehold interest in the currently leased automobile.
Response:
| New vehicle purchase price |
XXXXX |
| Less: trade-in allowance (Step 1) |
XXXXX |
| Adjusted Capital Cost |
XXXXX |
| Less: residual value (Step 2) |
XXXXX |
| Depreciation Base |
$18,000.00 |
Monthly lease payment XXXXX GST payable on monthly lease payment XXXXX[.]
Scenario (b): The individual makes a supply of the automobile.
Response:
| New vehicle purchase price |
XXXXX |
| Less: trade-in allowance (Step 1) |
XXXXX |
| Adjusted Capital Cost |
XXXXX |
| Less: residual value (Step 2) |
XXXXX |
| Depreciation Base |
XXXXX |
Monthly lease payment XXXXX GST payable on monthly lease payment XXXXX[.] However, note that the individual was required to pay GST of XXXXX on the XXXXX amount that he was required to pay in order to take legal title to the leased automobile.
Therefore, the net GST liability in both scenarios is identical (i.e., $1,260.00). In scenario (a) the individual is liable to make 48 payments of GST of XXXXX In scenario (b) the individual is liable to make 48 payments of GST of XXXXX and GST of XXXXX for a total GST liability of XXXXX variance due to rounding).
PART II - GST ON TERMINATED LEASES
Question 1:
You provide the following facts (assuming subsection 153(4) applies to the supply and that financing charges are nil):
| Selling Price |
XXXXX |
| Less Trade-in |
XXXXX |
| Plus Lien |
XXXXX |
| Residual Value |
XXXXX |
| Depreciation Base |
XXXXX |
Lease Payment per month XXXXX[.] As there is a lien on the vehicle being traded in, the amount of the lien is disregarded when calculating the GST liability on each monthly lease payment of XXXXX. As such, the calculation for GST purposes is:
| Selling Price |
XXXXX |
| Less Trade-in |
XXXXX |
| Adjusted Capital Cost |
XXXXX |
| Residual Value |
XXXXX |
| Depreciation Base |
XXXXX |
GST base XXXXX GST per month XXXXX[.] Given the above facts, you question the amount of GST payable where the lessee elects to terminate the lease prior to the expiration of the full term of the lease. You state that a lessee is required to pay an amount equal to the remaining number of lease payments plus the residual value of the vehicle, plus tax. In your example, you assume that the lessee is electing to terminate the lease with XXXXX months remaining on the term. You wish to know which of the following methods is correct when calculating the GST payable on the early termination of the lease. Also, you ask whether the application of the GST is different if the transaction is an early termination of the lease by the customer rather than the customer exercising an option to purchase the leased vehicle.
Method 1:
| Total of remaining lease payments |
XXXXX |
| Plus residual value |
XXXXX |
| Total Consideration |
XXXXX |
| GST payable |
XXXXX |
Method 2:
| GST on remaining lease payments |
XXXXX |
| Plus GST on residual value |
XXXXX |
| Total GST payable |
XXXXX |
Response:
Method 1 is the proper manner for determining the GST payable on the early termination charge. The supply by way of sale of the vehicle (i.e., upon the early termination of the vehicle's lease) is a separate supply from the original supply by way of lease of the vehicle. There are no provisions within the ETA that provide for the calculation of GST payable according to Method 2. The general rules for the value of consideration for a supply, as found in subsection 153(1) of the ETA, apply where the calculation of an early termination charge is based in part on the total of the remaining lease payments even where the lessee is paying GST on a lesser amount due to the application of subsection 153(4) to the original supply by way of lease. The value of the consideration for the supply at issue is equal to XXXXX pursuant to subsection 153(1) of the ETA. Consequently, the GST payable on the supply is equal to XXXXX[.] It is important to note that the application of GST to a supply made pursuant to an early termination of a lease by a customer is identical to the application of GST to a supply made pursuant to a customer exercising an option to purchase a leased vehicle in the question posed in Part II. In such cases, it is the nature of the supply that is relevant, not the expiration of the term of the lease.
PART III - CALCULATION OF LEASE PAYMENTS
Question 1:
In your letter you have provided the formula that you use to calculate monthly lease payments. You state that this formula is applied consistently utilizing certain factors which you list. In your example, you provide the following facts:
| Selling Price |
XXXXX |
| Plus Acquisition Fee |
XXXXX |
| Less Trade-in |
XXXXX |
| Plus Lien |
XXXXX |
| Adjusted Capital Cost |
XXXXX |
| Residual Value |
XXXXX |
| Number of Lease Payments |
XXXXX |
| Number of Advance Payments |
XXXXX |
| Interest Rate |
XXXXX |
You apply these facts to your formula and determine that the monthly lease payment is XXXXX[.] You then revise the calculation by disregarding the lien and applying the formula a second time based on the following values:
| Selling Price |
XXXXX |
| Plus Acquisition Fee |
XXXXX |
| Less Trade-in |
XXXXX |
| Plus Lien |
XXXXX |
| Adjusted Capital Cost |
XXXXX |
| Residual Value |
XXXXX |
| Number of Lease Payments |
XXXXX |
| Number of Advance Payments |
XXXXX |
| Interest Rate |
XXXXX |
The recalculation of the formula for GST purposes results in a monthly lease payment (for GST purposes) equal to XXXXX[.] You then determine that the GST on each actual monthly lease payment of XXXXX is equal to XXXXX[.] You ask us to confirm that your manner of calculating the GST payable on lease transactions involving trade-ins with liens is correct.
Response:
Based on the formula you have provided in your letter, you have calculated the GST correctly in your example of a lease transaction where subsection 153(4) applied and there was a lien on the vehicle traded in. For the purposes of applying subsection 153(4) of the ETA, the amount credited to a person in respect of a trade-in is not reduced by any liens that may be on the property being traded in. You are correct to recalculate the monthly lease payment for GST purposes by applying your formula consistently and ignoring the value of the lien.
This interpretation is based upon our current understanding of the proposed amendments to the ETA and Regulations thereunder in their present form and does not take into account the effects of any future amendments thereto or future changes in interpretation.
Further, while we trust our comments are of assistance to you, we would advise that they do not constitute a GST ruling and are, therefore, not binding upon the Department in respect of any particular fact situation.
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 # HQR0000302
| c.c.: |
S. Mailer (for signature only)
P. Lafond
R. Smith |
Telephone #: (613) 954-5124
Fax #: (613) 990-1233
11820-3 (crl)
HQR0000357
s. 132
ss. 123(1), 252(1)
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