6 August 1999 GST/HST Interpretation HQR0001779 - Repairs of Leased Vehicles and Insurance Claims

Dear XXXXX

Thank you for your letter of April 27, 1999, regarding the availability of input tax credits (ITCs) for the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) payable in respect of repairs to leased vehicles.

Based on your letter and our telephone conversation of July 5, 1999, our understanding of the facts is follows:

1. The lessor is a GST/HST registrant in the business of leasing vehicles.

2. Under the lease agreement for a vehicle, the lessee is responsible for all repairs and maintenance to the vehicle, at their own expense, during the term of the lease.

3. As the result of an accident, the vehicle requires repairs for which an insurance claim will be filed with the insurer.

4. The lessee, in consultation with the insurer, contacts a supplier of repair services and enters into an agreement with the supplier to have the vehicle repaired.

5. The invoice issued by the supplier identifies the lessor and lessee as the parties which acquired the repairs.

6. The lessor is named as an additional insured or "loss payee" on the insurance policy acquired by the lessee.

7. The lessor is the registered owner of the vehicle and title to the vehicle, as well as any parts replaced during the term of the lease, remain vested with the lessor.

Interpretation Requested

Is the "Net-of-GST/HST" method of settling insurance claims applicable to the settlement of claims in respect of leased vehicles? If so, under what circumstances is the lessor entitled to claim an ITC for the GST/HST payable in respect of repairs to leased vehicles.

In addition, you presented your understanding of the provisions under the Excise Tax Act (the ETA) relating to situations where property, such as a leased vehicle, is transferred to an insurer in the course of settling an insurance claim. In your letter, you indicated that XXXXX insurer) does not claim an ITC for the GST/HST deemed to be paid by an insurer when the property is subsequently sold since it views the insured (the lessor) to be registered for GST/HST purposes and therefore eligible to claim an ITC.

Interpretation Given

The "Net-of-GST/HST" method of settling insurance claims may, in certain circumstances, be applied to the settlement of insurance claims in respect of leased vehicles. As noted in Policy Statement P-091R, entitled "Leased Cars and Net-of-GST/HST Insurance Claims", and in GST Memorandum 700-5-10, entitled "GST Treatment of Insurance Claims", the "Net-of-GST/HST" method will apply where the lessor is entitled to claim an ITC pursuant to section 169 of the ETA. One of the conditions set out in section 169 of the ETA that must be met for the lessor to be entitled to claim an ITC for the GST/HST payable in respect of the repairs to the vehicle is that the GST/HST must be payable by the lessor.

In your scenario described above, subsections 165(1) and (2) of the ETA provide that the GST/HST is payable by the "recipient" of the taxable supply (i.e., the repair services). As you know, for GST/HST purposes, "recipient" is defined in subsection 123(1) of the ETA. In this particular case, the recipient is the person who is liable to pay the consideration for the supply of the repair services. It is a question of fact as to who is liable to pay the consideration for the supply (i.e., the recipient of the supply).

As indicated above, the lessee contacts the supplier and arranges for the repairs to the vehicle. The agreement to perform the repairs is made between the supplier of the repair services and the lessee (albeit, in consultation with the insurer). The lessee's role in arranging for the repairs is consistent with the provision of the lease agreement that stipulates that the lessee is responsible for all expenses relating to the repair and maintenance of the vehicle. The lessee is identified on the invoice as having acquired the repair services. Accordingly, the lessee is liable to pay the supplier for the repairs. As such, the lessee is the recipient of the supply of the repairs for GST/HST purposes and is liable to pay the GST/HST in respect of that supply.

In the above situation, the lessor is not a party to the agreement to have the repairs performed and does not incur a liability to pay the consideration for the repair services to the supplier under the agreement for the supply. As a result, for GST/HST purposes, the lessor is not the recipient of the repair services provided by the supplier. Therefore, the GST/HST in respect of the repair services is not payable by the lessor and, as such, the lessor is not entitled to claim an ITC even though the lessor is, in fact, the owner of the vehicle.

The fact that the supplier of the repair services has included the lessor's name on the invoice is not, by itself, clear evidence that the lessor has incurred a liability to pay the consideration for the repairs. Furthermore, the fact that the lessor is included as an additional insured or "loss payee" under the insurance policy acquired by the lessee is not relevant to the issue of liability for the payment of the repairs to the vehicle.

Even if the lessor were to pay the GST/HST to the supplier of the repair services, the lessor would not be entitled to claim an ITC as the GST/HST was not payable by the lessor (i.e., given that the lessor is not the recipient of the supply, a liability for the GST/HST is not imposed on the lessor under the provisions of subsections 165(1) and 165(2) of the ETA). The act of paying the GST/HST does not make the lessor liable to pay the consideration for the supply.

Where the lessor pays the GST/HST in the above fact situation, the lessee would be entitled to claim an ITC if the lessee is a registrant and the other conditions of 169 of the ETA are met as the GST/HST is payable by the lessee as the recipient of the supply. It should be noted that the "Net-of-GST/HST" method may be applied where the lessee is the insured and is entitled to claim an ITC for the GST/HST payable in respect of the repairs (i.e., the lessee is a registrant who is liable to pay the GST/HST in respect of the repairs and has acquired the repairs for consumption, use or supply in the course of its commercial activities).

In other situations, where the lessor is liable to pay for the repair services under the agreement for the supply, the lessor will be the recipient of the supply for GST/HST purposes and liable to pay the GST/HST in respect of those services. Where all of the other conditions of section 169 of the ETA are also met and the lessor is entitled to claim an ITC in respect of the repairs, the "Net-of-GST/HST" method may be applied in settling the insurance claim. This is consistent with our position outlined in Policy Statement P-091R. For example, the lessor may incur a liability for the payment of the repairs when the lessor enters into an agreement for the performance of the repairs with the supplier and is subsequently invoiced by the supplier for those services. If all the other conditions of section 169 of the ETA are met, the lessor may claim an ITC for the GST/HST payable in respect of the repairs. In turn, the insurer indemnifies the lessor for its loss as the insured (less any applicable deductible payable by the lessor) and applies the "Net-of-GST/HST" method in settling the claim. Where the lease agreement provides that the lessee is responsible for repairs and maintenance to the property, the lessor may seek reimbursement for any costs that may have been incurred that were not covered under the insurance policy (e.g., any deductible that may have been paid by the lessor or costs relating to the maintenance of the property).

With respect to the application of section 184 of the ETA, the provisions address the situation where a person transfers property to an insurer in the course of settling an insurance claim. The provisions only refer to the "... property of a person ..." and do not refer specifically to the insured, a lessor or a lessee. In the particular case, the lessor is the owner of the property and where the lessor transfers the property to the insurer in settling an insurance claim, the provisions of section 184 of the ETA will apply. Where the lessor is a GST/HST registrant, GST/HST will not be deemed to have been paid by the insurer when the insurer subsequently sells the property. Hence, the insurer will not be entitled to claim an ITC. The ITCs available to the insurer are limited to the GST/HST paid or payable in respect of supplies acquired by the insurer in the course of making the supply of the property.

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/HST Memoranda Series, do not bind the Department with respect to a particular situation.

I trust that the above information will be of assistance to you. Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 954-2488.

Marcel R. Boivin
General Operation Unit
General Operations and Border Issues Division
GST/HST Rulings and Interpretations Directorate