15 March 2001 GST/HST Interpretation 30853 - Transfer of Vehicle Leases

Dear XXXXX:

Thank you for your letter of March 31, 2000 (with attachments) concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to your operations.

Facts Presented

•   XXXXX (the 'Lessor') is in the business of leasing vehicles.

•   From time to time, the Lessor enters into lease agreements with a lessee, whereby the GST is calculated on an amount that is less than the monthly lease payment. This arises in situations where there is a trade-in with a lien and as part of the lease transaction, the Lessor pays out the lessee's existing lien.

•   On occasion, the lessee may wish to terminate the lease. The Lessor may agree to terminate or assign the existing lease where another lessee is available to fulfill the obligations of the original lessee. You have attached a XXXXX agreement for our reference.

Interpretation Requested

In a situation where there has been an assignment of the original lease to another lessee, will the benefit of calculating the GST on the portion of the lease payment less the lien portion continue, or will the GST need to be calculated on the entire amount?

Interpretation Given

An assignment of a lease does not normally affect the obligations placed upon either party within the framework of the original lease agreement. Where the transfer is an assignment, the assignee assumes the primary liability to perform the obligations of the lessee under the original lease. Therefore, the manner in which the GST is calculated will continue to be the same as prior to the assignment of the lease.

However, if the transfer of the lease creates a novation (i.e. the legal effect is that a new contract is substituted for the existing lease), we will consider the transfer to be a new supply and therefore the GST will be calculated on the entire amount.

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 Canada Customs and Revenue Agency with respect to a particular situation.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 952-9218.

Yours truly,

Kevin W. Smith
Goods Unit
General Operations and Border Issues Division
Excise and GST/HST Rulings Directorate

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