16 March 1998 GST/HST Interpretation HQR0000669 - PROPOSED LAW/REGULATION Existing Motor Vehicle Leases and HST

                                                                        GST/HST Rulings and Interpretations
  Directorate
Place Vanier, Tower C, 10th Floor
25 McArthur Avenue
Vanier, ON
K1A 0L5

Dear XXXXX

Thank you for your letter of April 8, 1997 concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to vehicle lease contracts. We apologize for the delay in replying.

Interpretation Requested

You have requested an interpretation confirming the following treatment of vehicle lease contracts:

1. That for pre-April 24, 1996 leases, the HST must be applied to the same base on which GST was previously applied.

2. That for lease contracts entered into between April 24, 1996 and March 31, 1997, the HST applies to the same base as that on which GST was applied.

I - Analysis

All references used in the following interpretation assume that:

(i) all legislative references are to the Excise Tax Act (ETA);

(ii) the parties are dealing at arm's length; the lessor is the "supplier" and the lessee is the "recipient";

(iii) vehicles are the only tangible personal property being supplied;

(iv) the value of the vehicle being leased exceeds the value of the vehicle traded in;

(v) your characterization of the provincial sales tax legislation, as provided in your incoming letter, is correct,

(vi) subsection 153(5) does not apply to the supply, and each supply takes place in a participating province.

(For GST/HST purposes, each monthly lease interval is considered to be a separate supply).

The scenarios described in your letter seem to rely only on the date of the lease contract in determining the value of the consideration for the purpose of calculating GST/HST. Please note that it is not only the date of the lease contract which is relevant in making these determinations, but also the date upon which supply for each lease interval is deemed to be made. Subsection 136.1(1) provides that where a supply of property is made by way of lease, license or similar arrangement, for consideration that includes a payment that is attributable to a period (referred to as the "lease interval"), the lessor is deemed to have made and the lessee is deemed to have received a separate supply of the property for the lease interval. Such supply is deemed to have been made on the earliest of

(i) the first day of the lease interval,

(ii) the day on which payment for that lease interval becomes due, and

(iii) the day on which payment for that lease interval is made.

Also, the payment that is attributable to the lease interval is deemed to be consideration payable in respect of the supply for the property for the lease interval.

Subsection 153(4) provides that where a supplier accepts in full or partial consideration for the supply of tangible personal property, other property that is used tangible personal property or a leasehold interest therein, and the recipient is not required to collect tax in respect of the supply of the trade-in, the value of the consideration for the supply made by the supplier is deemed to be equal to the amount, if any, by which the value of the consideration for that supply exceeds the amount credited to the recipient in respect of the trade-in. (Note that the supplier must be acquiring the trade-in for consumption, use or supply in the course of its commercial activities.)

Subsection 153(4) applies to supplies made after April 23, 1996 other than a supply to a recipient of a particular property for which the supplier accepted, as full or partial consideration under an agreement in writing entered into before July 1996, other tangible personal property (the "trade-in") where the supplier charged or collected tax in respect of the supply calculated without reference to the amount credited in respect of the trade-in. Therefore, if, between April 24, 1996 and June 30, 1996, the supplier had calculated GST on the supply without giving credit for the trade-in, the supplier had calculated GST on the supply without giving credit for the trade-in, the supplier was not required to return that tax to the lessee. However, for all supplies made pursuant to an agreement entered into in writing after June 30, 1996, the supplier was required to calculate the GST taking the value of the trade-in into account.

Subsection 165(2) provides that effective April 1, 1997, every recipient of a taxable supply made in a participating province shall pay the amount of tax payable for such province on such supply, in addition to tax calculated at 7% of the value of the consideration, calculated at the rate applicable in the participating provinces. As you are aware, the current rate of tax applicable under subsection 165(2) is 8% in respect of supplies made in Nova Scotia, New Brunswick and Newfoundland.

As stated previously in this letter, a Notice of Ways and Means Motion was tabled in November, 1997 that proposes to add new section 354.1 to the ETA, effective March 20, 1997. The proposed wording of the new section 354.1 is as follows:

Where

(a) a supply of a specified motor vehicle is made by way of lease, license, or similar arrangement for a lease interval (within the meaning of subsection 136.1(1) under an agreement entered into before the implementation date for a participating province,

(b) used tangible personal property, or a leasehold interest therein (in this section referred to as the "trade-in") is accepted by the supplier as partial consideration for the supply,

(c) a general retail sales tax imposed under an Act of the legislature of the province at a percentage rate on all goods (other than those specifically enumerated in that Act) would have been payable by the recipient in respect of that lease interval had that tax not been suspended or repealed concurrent with the application of subsection 165(2) or 218.1(1), as the case may be, to that supply, and

(d) the value of the consideration for the supply as otherwise determined under this Part exceeds the amount (in this section referred to as the "adjusted value") that is the value, excluding the amount of any tax under Part IX in respect of the supply, on which that general retail sales tax in respect of that lease interval would have been calculated, for the purposes of subsection 165(2) or 218.1(1), as the case may be, the value of the consideration for the supply is deemed to be equal to the adjusted value.

Note that the implementation date for the HST in the provinces of Nova Scotia, New Brunswick and Newfoundland was April 1, 1997.

Our interpretation is based on the proposed amendment, which is not yet law.

II - Interpretation Given

1. Our interpretation assumes that proposed section 354.1 applies to the supply for lease contracts entered into pre-April 24, 1996, HST is calculated as

7% tax on the GST base; and

8% tax on the PST base.

2. For lease contracts entered into between April 24, 1996 and March 31, 1997 inclusive, HST is calculated at 15% of the GST base.

The foregoing comments represent our general views with respect to the proposed amendment to the Excise Tax Act as it relates to the subject matter of your letter. Any change to the wording of the proposed amendment or any future 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/HST Memoranda Series, do not bind the Department with respect to a particular situation.

For your convenience, find enclosed a copy of section 1.4 of Chapter 1 of the GST/HST Memoranda Series.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact Robert Smith at 613-3971.

Yours truly,

Angela Henry
Industries Unit
General Operations and Border Issues Division
GST/HST Rulings and Interpretations Directorate

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