27 February 2001 GST/HST Interpretation 33200 - GST on the Assignment of a Lease

Dear XXXXX:

Thank you for your letter of October 13, 2000 (with attachments) concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to your operations.

Interpretation Requested

Facts as presented:

•   XXXXX (LeaseCo.) is in the business of leasing cars;

•   From time to time LeaseCo. enters into lease agreements with a lessee, whereby 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, LeaseCo. pays out the customer's existing lien;

•   In certain situations the lessee may wish to terminate the lease. Normally LeaseCo. lease agreements are non-cancelable. However, LeaseCo. 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 Lease agreement and Assignment and Assumption agreement for our reference.

Your question:

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

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) 952-0419.

Yours truly,

Catherine Séguin-Ouimet
General Operations Unit
General Operations & Border Issues Division
Excise and GST/HST Rulings Directorate