3 May 2000 GST/HST Interpretation 7582/HQR0001188 - The General Imposition Rules under the Excise Tax Act (ETA) and the Replacement of a Destroyed Leased Vehicle

Dear XXXXX

I am in receipt of the facsimiles of April 30, 1998, May 1, 1998, July 2, 1998, and April 6, 1999, concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to your operations. We also received some information from XXXXX regarding your enquiry.

Please note that on November 1, 1999, Revenue Canada became the Canada Customs and Revenue Agency (CCRA).

Background Information

It is our understanding that a registrant, XXXXX (the lessee) entered into an agreement with XXXXX to lease a vehicle. Tax was paid "up-front" by the lessee on one year's worth of lease payments. The vehicle was subsequently destroyed by a fire, and the lessee obtained a replacement vehicle from XXXXX[.] Paragraph 25 of the vehicle lease agreement states in part that unless XXXXX notifies otherwise, the vehicle will be registered in the name of XXXXX is identified on page 1 of the vehicle lease agreement provided as the "Lessor". However, paragraph 29 of the agreement states in part that, "Lessor will assign this lease to XXXXX which may sell or assign all or part of its interests in either or both the Lease and the Vehicle to others without consent."

Paragraph 17 of the lease agreement states in part that if the vehicle is lost, stolen, destroyed or damaged beyond repair, the lessee and XXXXX may agree to continue the lease and the lessee will be provided with a replacement vehicle.

The replacement vehicle provided to the lessee was worth more than the vehicle which was destroyed. The amount of the additional lump sum paid by the lessee to XXXXX to continue the lease was calculated based upon the difference in price between the substituted replacement vehicle and the price of the destroyed vehicle, plus some additional amounts (i.e., other fees, tire tax, federal air conditioning tax), plus GST.

You advised that you were not "acting on behalf of", or as an "agent" of XXXXX XXXXX in invoicing and collecting the additional amount paid (plus tax) by the lessee.

Interpretation Requested

You would like to know whether the lessee is required to pay tax calculated on the difference in value between the destroyed vehicle and the new vehicle, or if the lessee is required to pay tax calculated on the full value of the replacement vehicle.

Interpretation Given

We are unable to issue a ruling where a matter on which a determination is requested is one of fact and all the pertinent facts cannot be determined. Based on the information provided, we are not in a position to issue a ruling on this matter. However, we would be pleased to provide the following interpretation.

Where a lease agreement provides for the continuation of the lease in the event that a vehicle is lost, stolen, or destroyed, a lessee may be required to pay an additional amount for a replacement vehicle of greater value. In this situation, the amount paid by the lessee is viewed as consideration under the agreement. Consequently, the lessee is required to pay tax on that additional amount under section 165 of the Excise Tax Act (ETA).

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 CCRA 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 me at (613) 954-9699.

Yours truly,

Douglas Wood
A/Technical Officer
General Operations Unit
General Operations & Border Issues Division
Excise and GST/HST Rulings Directorate