12 February 1999 GST/HST Interpretation HQR0001399 - Entitlements to Notional ITCs on Customer Equity From Trade-in Allowance

Thank you for your e-mail of October 22, 1998 concerning the application of the Goods and Services Tax to the customer's equity portion arising from an option to purchase clause under a vehicle lease agreement, and whether this transaction related to TPP, for which a notional input tax credit under ss 176(1) ETA may be claimed.

In your e-mail, you referred to a ruling given by the XXXXX XXXXX[.] Our understanding is that, in that case:

1. A customer was leasing a 1993 vehicle;

2. XXXXX credited the customer with a trade-in allowance of $XXXXX against the lease of a 1995 vehicle;

3. The trade-in consisted of the leasehold interest and an option to purchase the 1993 vehicle;

4. XXXXX purchased the 1993 vehicle from XXXXX and was charged GST of XXXXX[;]

5. A ruling to the effect that XXXXX was entitled to claim an NITC of $XXXXX (the difference between the GST of $XXXXX aid on the purchase of the vehicle and XXXXX was provided.

You want to know if the dealership is entitled to claim a notional input tax credit on the equity portion under subsection 176 ETA (prior to the April 23, 1996 amendments).

With respect to the trade-in situation described in this case, there are two different supplies:

•   The first supply is from the customer to the dealer and consists of the sale (or transfer) of the option to purchase. The consideration for that supply would be the value of the option i.e. the difference between the value of the vehicle and the cost of the buy out option .

Note that in this scenario, the leased vehicle is not purchased by the lessee at the end of the lease contract. Since the vehicle is never owned by the lessee, the lessee cannot sell the vehicle to the dealer. Consequently, the dealer is buying the option to purchase which is not tangible personal property, but rather intangible personal property.

Thus, there can be no notional ITC allowed on this supply because this supply is not tangible personal property.

•   The second supply is between the dealership and the lessor when the dealer exercises the buy-out option and purchases the car from the lessor. The consideration for this supply would be the buy-out amount. ($XXXXX[)] We have requested that the XXXXX ruling be revoked.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at 613-957-8253.