15 October 2001 GST/HST Interpretation 36903 - Rebate of the HST on Lease Payments

This is in reply to your letter of July 1, 2001 to Mr. Bob Reade, Director, Strategic Planning and Reporting division wherein you requested assistance in determining the eligibility of a consumer for a rebate of the Harmonized Sales Tax (HST) on lease payments made after the implementation of the HST in New Brunswick. As the Excise and GST/HST Rulings Directorate is responsible for the interpretation of the GST/HST legislation, your query was forwarded to us for a response.

Our understanding of the facts is as follows:

Facts:

1. XXXXX (hereinafter referred to as "the consumer") entered into agreement for the lease of a vehicle in the province of New Brunswick (N.B.) in March 1996.

2. At the time of the transaction, the consumer traded in a used vehicle.

3. The Goods and Services Tax (GST) was applicable to the transaction and the consumer was assessed GST on the total value of the consideration for the supply of the lease vehicle excluding any reductions for the trade-in. Since the supply of the vehicle is by way of lease, the GST was charged on the monthly lease payments.

4. Pursuant to the Social Services and Education Tax Act of New Brunswick (the Act pertaining to the application of the PST in the province) provincial sales tax (PST) was also applicable to the transaction. However, in accordance with subsections 5.1(2) and 5.1(2.1) of that Act, the PST would be calculated on the net of the consideration for the lease and the amount credited for the trade-in. As the value of the trade-in was greater than the consideration for the leased vehicle, no PST was charged on the lease payments.

5. The Harmonized Sales Tax Act of New Brunswick provides that tax imposed under the Social Services and Education Tax Act is not applicable to supplies in that province made after March 31, 1997. The HST was implemented in N.B. on April 1, 1997 and as a result, the payments in respect of the lease of the vehicle were subject to the HST (i.e., in addition to the federal component which had already been charged, the consumer was required to pay the provincial component on the lease payments).

6. In March 1999, the consumer exercised the buyout option in the lease agreement and purchased the lease vehicle from the dealer.

7. Prior to the implementation of the HST, any excess credit in respect of a trade-in that was not used in reducing the amount of the PST payable on a lease could be used in the subsequent purchase of a vehicle from the same dealer, thereby reducing the PST payable on the purchase of the vehicle. The PST in respect of this supply would be computed and collected at the time of, and on the consideration given as payment for the purchase. However, with the implementation of the HST, this is no longer applicable.

8. The consumer was charged the HST (both the federal and provincial components) on the consideration payable for the purchase of the vehicle in 1999.

Issue

1. The consumer claimed that he was subject to double taxation as he was not required to pay PST when he entered into the lease agreement but because of the implementation of the HST, he was required to pay the provincial component of the HST on his lease payment from April 1997. He requests a refund of the HST paid on the lease payments made on and after April 1997.

2. The consumer is also applying for a rebate of the residual PST credit to which he would have been entitled to use, prior to the implementation of the HST, to reduce the amount of the PST that would have been charged on the buyout of the vehicle from the dealer.

Response

1. The consumer has paid tax in error and is therefore eligible for a refund of the provincial component of the HST paid on the lease payments on and after April 1997. He has until October 2002 to file for a refund of the tax paid in error.

2. The consumer is not entitled to a refund of the HST (neither the federal nor the provincial component) that was paid on the purchase of the leased vehicle from the dealer in March 1999.

Explanation

Prior to Bill C-24, subsections 165(2), 354(1) and 136.1(1) applied to ensure that a person who acquired a lease vehicle in a participating province prior to the implementation date for the HST (April 1, 1997) would be required to pay the provincial component of the HST on the lease payments made on or after the April 1, 1997 and that became due after February 1, 1997 for periods after April 1, 1997. (See Appendix)

The ETA was amended by Bill C-24 which received Royal Assent on October 20, 2000. As part of these amendments, section 354.1 of the ETA was added. This section provides that the value of the consideration for determining the provincial component of the HST payable on a lease vehicle, acquired in a participating province, under an agreement entered into prior to implementation is the value on which the PST would have been charged prior to its repeal (Ibid).

With respect to the situation described above, the value of the consideration for the PST was nil and thus the value of the consideration for determining the provincial component of the HST applicable to the lease payments would also be nil. Therefore, the provincial component of the HST that was charged on the purchase of the vehicle was charged in error.

Subsection 104(3) of Bill C-24 is a related provision which provides that where a person is entitled to a rebate under section 261 (as tax paid in error) on account of the application of section 354.1 of the ETA, the person has until the day that is two years after Bill C-24 receives Royal Assent (October 20, 2000) to file an application for rebate under section 261.

With respect to the residual credits that were allowed for the purchase of a vehicle under the provincial sales tax rules prior to the implementation of the HST, there is no provision in the Excise Tax Act (the ETA) that allows us to rebate any amounts in respect of these credits.

In addition, subsection 352(1.1) of the ETA provides that if the PST was payable prior to the implementation date, on the exercise of an option to purchase goods after the implementation date, the provincial component of the HST would not be applicable in respect of that sale.

Pursuant to the Social Services and Education Tax Act of New Brunswick, the PST was applicable in respect of the exercise of the option to purchase the vehicle, on the payment for, and at the time of, the obtaining or exercising of the option, which in this case was after the implementation date. Therefore, the PST was not payable prior to the implementation date (as required by subsection 352(1.1) of the ETA) and consequently, the provincial component of the HST was applicable on the acquisition of the vehicle by the consumer.

If you have any question regarding this matter, please do not hesitate to contact me at (613) 952-8532.

Appendix

1. With the implementation of the HST, a recipient of a taxable supply made in a participating province is required to pay tax on that supply calculated at the tax rate of the province (8% in N.B.), in addition to the 7% GST imposed under subsection 165(1) of the ETA.

Pursuant to the transitional provisions in section 354 of the ETA, where a person makes a taxable supply of property in a participating province by way of lease, and where the consideration for the supply is attributable to periods after the implementation date (April 1, 1997) and was due after the specified pre-implementation date (February 1, 1997), the consideration for that supply is deemed to have become due on the implementation date.

Subsection 136.1(1) of the ETA provides that where a supply is made by way of lease, licence or similar arrangement, each payment in respect of a separate lease interval (i.e., the period which possession or use is provided under the agreement) is considered to be a separate supply of the property made for the lease interval.

2. Section 354.1 of the ETA provides the following:

a. if a motor vehicle is made by way of lease in a participating province before April 1, 1997, and

b. a trade-in is accepted as consideration as full or partial consideration for the supply of the vehicle, and

c. the PST would have applied to the lease intervals except for the trade-in, and

d. the value of the consideration exceeds the "adjusted value" of the supply,

e. the value of the consideration for purposes of determining tax under 165(2) or 218.1(1) on that supply is the "adjusted value."

The adjusted value is the value on which the PST would have been charged except for repeal of the tax.