18 April 2000 GST/HST Interpretation 6302 - Lease vs. Purchase

Dear XXXXX

Thank you for your letter of November 4, 1990 (with attachments) concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to the operations of XXXXX[.]

Interpretation Requested

Background

XXXXX corporation which carries on business in XXXXX finances the sale of goods between various customers and vendors. The Customer, having agreed to acquire the goods from a vendor, applies for credit from XXXXX for that part of the purchase price which they are not able to make at the time of the transaction.

Once XXXXX approves the credit application, a sales invoice is drawn up between the vendor and XXXXX, as purchaser of the goods. This invoice only makes reference to the amount being financed, as opposed to the full value of the purchase price of the goods between the vendor and the original purchaser.

XXXXX then enters into a "Lease Agreement" with the customer which vary in length, some as short as 5 months and others as long as 5 years. The length of the term is negotiated between XXXXX and the Customer. After the Agreement is signed, XXXXX (the Lessor) advises the vendor to release the goods to the Customer and registers the agreement under the XXXXX[.] Warranties are provided on the majority of the goods directly to the Customer in which case the goods are returned to the original vendor for repair or replacement.

Elements of the Agreements

The relevant terms of the agreements are as follows:

•   equipment remains the property of the Lessor at all times and the Customer has no right, title or interest in the equipment otherwise than as provided for in the Lease Agreement;

•   Equipment shall not become a fixture at anytime and shall remain at a location specified by the Lessor;

•   Customer may not sublease the equipment or allow it to become subject to any claim, lien, encumbrance, etc. Lessor may assign its rights under the Lease Agreement at anytime;

•   Customer to pay all taxes relating to the equipment;

•   Lessor, as legal and beneficial owner of the equipment is entitled to claim CCA or any tax credits available and Customer must not make any such claims;

•   Customer responsible for all costs relating to the installation, delivery, maintenance, and removal of the equipment. No alterations, additions or improvements (which shall become part of the equipment) to be made without the consent of the Lessor;

•   Customer may exercise a purchase option at the expiration of the term. Where the purchase option is not exercised, the equipment is returned to the Lessor;

•   Customer assumes the entire risk of loss or damage to the equipment. Customer to maintain insurance on the goods during the term of the Lease Agreement;

•   At the termination of the Lease, if Customer has not exercised the purchase option, Customer shall at its own expense either return the equipment to the Lessor or, where directed by the Lessor, dispose of the equipment.

Issue

Whether the agreements should be seen as sales or leases for the purposes of the Excise Tax Act (Act).

Interpretation Given

The Canada Customs and Revenue Agency has indicated that virtually all transactions structured as leases will be treated as such for GST/HST purposes, regardless of their accounting for financial statement and income tax purposes. A financing lease (such as a bargain option purchase lease), where the agreement is considered to be a lease at law (i[.]e., the agreement is in form and substance a lease), will be treated the same as an operating lease for GST/HST purposes.

On the basis of our examination of the terms and conditions of the Lease Agreement, as well as the surrounding circumstances, it is our opinion that the Agreement should be categorized as a lease for the purposes of the Act. The circumstances are such that it does not meet the definition of "sale" in section 123 of the Act. It is not a transfer of the ownership of the property, nor is it a transfer of possession of the equipment under an agreement to transfer ownership of the equipment (the second component of the definition of "sale").

A financing lease which is considered to be a lease at law in terms of its form and substance will receive the same GST treatment as an operating lease. These agreements should not be seen as a conditional sales contract, which provide for the automatic transfer of ownership upon fulfillment of the terms of the agreement.

Based on the definition of "sale" under section 123 of the Act, a sale of personal property will generally be considered to occur where ownership of the property is transferred or possession of the property is transferred pursuant to an agreement to transfer ownership of the property. In the second instance, the agreement between the parties is the basis on which 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 Lease Agreement does contain an option to purchase and there is evidence that in some instances, at the conclusion of the term, customers have exercised the purchase option. This, on its own, should not be taken as clear evidence that the parties intended that ownership of the goods would eventually be transferred at the time that the agreement was entered into. There is no obligation on the part of the Customer to assume ownership of the equipment at the expiration of the Lease Agreement.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact the undersigned at (613) 952-8812.

Yours truly,

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