18 April 2000 GST/HST Interpretation 8388 - Lease vs. Conditional Sales

Dear XXXXX

This letter is in response to a fax received from XXXXX dated August 19, 1999 (with attachments) concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to various agreements. The main question is whether the agreements should be treated as leases or sales for the purposes of the Excise Tax Act (Act).

Interpretation Requested

Rent-to-Own Agreements

"Rent-to-own" agreements, which provide for the use of household furniture, appliances, and consumer electronic equipment, contain a wide range of terms and conditions. Generally speaking, the agreements provide that the consumer has possession of the goods for a certain term, with the possibility for a transfer of ownership of the goods at some point in the future.

In the rent-to-own agreements provided for our review, the transactions have the following characteristics:

•   rentals are normally for either one week or one month at a time;

•   at the end of the term, the customer can either terminate the agreement without any cost or obligation, or renew the contract by making another rental payment;

•   if the contract is renewed for a prescribed number of terms, the customer will obtain ownership of the goods, at either no charge or a nominal fee.

Issue

Whether these agreements should be treated as leases or sales for the purposes of the Act.

Interpretation Given

Based on the information provided, it is our opinion that the agreements should be characterized as leases for the purposes of the Act.

Explanation

A sale in respect of property is defined in section 123 of the Act to include:

any transfer of the ownership of the property and a transfer of the possession of the property under an agreement to transfer ownership of the property.

A sale of personal property will generally be considered to occur where possession of the property is transferred pursuant to an agreement to transfer ownership of the property. In this instance, the agreement between the parties is the basis on which the ownership of the property is intended to be subsequently transferred. Alternatively, if possession of the property is given under an agreement which does not directly result in the current or intended transfer of ownership of the property, the agreement should be considered to be a lease, license or similar arrangement.

The determination that an agreement is a sale or a lease is made by assessing the common intent of the parties. The intention of the parties is determined by analyzing the agreement itself, the language used therein, the purpose and the circumstances surrounding the transaction in their entirety. In making that determination, the following considerations will apply:

•   an agreement that contemplates at the outset and provides for the transfer of ownership at the end of a fixed term should be considered a "sale";

•   the form of the agreement and the stated intention of the parties is not, on its own, determinative of the appropriate categorization of the agreement;

•   the fact that the lessee has substantially all of the benefits and risks of ownership of the goods will be indicative, although not solely determinative, of a "sale";

•   a lease agreement containing a purchase option at the end of the term will not automatically be considered a "sale" simply because of the presence of the purchase option. The agreement should be considered a sale if it is reasonable to conclude that it was the intention of the parties from the outset to transfer ownership of the property; and

•   options to purchase that are available only after a number of renewals of the agreement are not indicative of a "sale" as the agreement should be examined in the context of its initial term. Therefore, a one month lease which provides for a purchase option following 12 consecutive renewals should be seen as a lease due to the fact that the lessee may choose not to renew the agreement well before any purchase option would be available.

In the agreements under consideration, possession of the goods is given pursuant to an agreement which does not directly result in the current or intended transfer of ownership of the goods, and as such, should be considered a "lease, licence or similar arrangement" for the purposes of the Act. There is no clear intention on the part of the parties that the ownership of the goods will transfer from the lessor to the lessee as the lessee may choose not to renew the agreement at the end of the term, or alternatively, may choose not to exercise the option to purchase when that option becomes available.

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,

David Liston
Border Issues Unit
General Operation and Border Issues Division
GST/HST Rulings and Interpretations Directorate