16 April 1998 GST/HST Interpretation HQR0000304 - Trade-in of Used Vehicles

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

Dear XXXXX

Thank you for your facsimile of September 25, 1996 (with attachments) concerning the application of the amended section 153 of the Excise Tax Act ("ETA") to the trade-in of leased vehicles. I apologize for the delay in answering your facsimile.

You have provided us with a copy of a notice that XXXXX sent to their auto dealers concerning the application of the Goods and Services Tax (GST) in situations where customers trade-in their leased vehicles when purchasing or leasing new vehicles.

In the notice, XXXXX informed their dealers that in order for the new rules on trade-ins to apply:

1. The customers are required to own the vehicle they are trading in, for the customer to take advantage of the new trade-in approach.

2. If the leased vehicle is traded in and the dealer pays out the lease, the amount of GST payable on the new vehicle may not be reduced by the gross amount of the value of the trade. (Note: in our response we have assumed that XXXXX is describing a supply of a leasehold interest.)

Interpretation Requested

You are asking us to review and comment on whether XXXXX notice reflects the correct application of GST to leased vehicles traded in.

Interpretation Given

Effective April 24, 1996, the new subsections 153(4) and (5) of the ETA provide for the use of the "trade-in approach" in certain circumstances. Subsection 153(4) provides the rules in respect of calculating the value of the consideration for a supply of tangible personal property made by a supplier.

More specifically, in an arm's length transaction, subsection 153(4) requires that the supply be made by a supplier who is a registrant, be a supply of tangible personal property (such as a vehicle), and the supplier must accept as full or partial consideration for the supply other property known as the "trade-in" that

1. is used tangible personal property or a leasehold interest therein, and

2. is acquired for consumption, use or supply in the course of a commercial activity of the supplier and the customer is not required to collect tax in respect of the supply of the trade-in (for example, the customer is not a registrant).

The value of the consideration for the supply is deemed to be equal to the amount, if any, of the value of the consideration for that supply by the supplier that exceeds the amount credited to the customer for the value of the trade in.

Accordingly, it is important to first determine the nature of the property the customer supplied as a trade-in to properly apply subsection 153(4). We have provided you with two examples that illustrate the application of subsection 153(4) in situations where the customer trades in a leasehold interest in a leased vehicle (Scenario 1) and where the customer trades in a used vehicle (Scenario 2). For example, a customer currently leasing a vehicle enters into an agreement to purchase another vehicle valued at $25,000. The value of the leased vehicle is $10,000 while the payment required by the customer to discharge the leased vehicle is $8,000 (therefore, the leasehold interest therein equals $2,000).

Scenario 1

1. Under this scenario, the customer trades in the leasehold interest in the leased vehicle valued at $2,000. When all the conditions under subsection 153(4) are met, the value of the consideration for the supply of the new vehicle is reduced by $2,000 (the value of the leasehold interest therein). Therefore, in this particular case, the GST payable would amount to $1,610 ($25,000 - $2,000 = $23,000 x 7%).

Scenario 2

1. Under this scenario, the customer trade-in the used vehicle (not the leasehold interest therein). Before the customer can trade in the leased vehicle, the customer must first take legal title to the vehicle and pay GST on the amount of the consideration paid to discharge the leased vehicle ($8,000 x 7% = $560). When the customer trades in the used vehicle and all the conditions under subsection 153(4) are met, the GST payable is calculated on the value of the consideration for the supply of the new vehicle that exceeds the amount agreed upon for the trade in allowance for the used vehicle supplied by the customer (($25,000 - $10,000) x 7%), which equals to $1,050. Note that the total GST payable by the customer equals $1,610 ($560 + $1,050).

As demonstrated above, the customer's net GST liability is the same under both scenarios. However, under Scenario 2, the customer has to pay the GST on two separate supplies (when the customer acquires the used vehicle and when the customer acquires the new vehicle).

In conclusion, in their notice XXXXX indicated that "Federal government requirements are clear that the lessee must own the vehicle before they can take advantage of the tax credits. As a result, a lessee must issue the payout cheques and have a bill of sale completed in their name". As demonstrated above, this statement is too restrictive since it would deny the application of subsection 153(4) to situations where the customer currently leasing a vehicle wishes to trade in the leasehold interest therein when purchasing or leasing another vehicle.

Finally, I have enclosed, for your information, a copy of the new GST/HST Technical Information Bulletin B-084 dated July 29, 1997 that deals with the treatment of used goods.

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 952-8812.

Yours truly,

Mariette Leblanc
Acting Rulings Officer
Industries Unit
General Operations and Border Issues Division
GST/HST Rulings and Interpretations Directorate

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