19 March 2003 GST/HST Ruling 41838 - Application of GST to Lease / Sale of

Dear XXXXX:

Thank you for your letter XXXXX (with attachments), concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to the transactions described below.

Statement of Facts

Our understanding of the facts, the transactions, and the purpose of the transactions is as follows:

1. XXXXX ("the lessee") agrees to pay $XXXXX per month to XXXXX ("the lessor") for a period of XXXXX consecutive months for the lease of the XXXXX, plus a $XXXXX buy-out for the inventory.

2. If after XXXXX months the lessee wishes to terminate this contract he will lose any and all equity up to that point and the lessor will retake possession of the said property and business, with no obligation from the lessee to pay anything further. Alternatively if after the XXXXX months period, the lessee wishes to continue with the business and property with the option to purchase, the lessee agrees to pay $XXXXX per month to the lessor for a period of XXXXX consecutive months, plus a $XXXXX buy-out, at which time titles would change hands.

3. Under the lease/sale agreement, the lessee is acquiring the ownership, possession or use of all of the land, building, equipment and supplies used in the operation of the XXXXX.

4. The lessee is responsible for all utility bills, inventory, insurance, staff wages, advertising, taxes, etc[.]

5. The supplier (lessor) and the recipient (lessee) are both registrants.

Ruling Requested

You requested a ruling as to whether or not GST should be remitted by the lessor/seller on the XXXXX months lease agreement or if a GST 44 form would be sufficient and if so should the GST 44 be filed with the first payment or at the end of the XXXXX months when the inventory will be paid for.

Ruling Given

Based on the facts set out above, we rule that the election under subsection 167(1) of the Excise Tax Act (ETA) applies to the $XXXXX buy-out for the inventory and the final $XXXXX buy-out if it occurs. The supplier and the recipient can make a joint election to have no GST applied to these amounts. The election must be filed by the recipient with the Minister no later than the day on or before which the return is required to be filed for the recipient's first reporting period in which tax would, but for this subsection, have become payable in respect of the supply of any property or service made under the agreement for the supply of the business, or on such later day as the Minister may determine on application of the recipient.

The monthly lease payments of $XXXXX are excluded from the election under subparagraph 167(1.1)(a)(ii) of the ETA and are subject to GST under the general provisions of the ETA. Note that under paragraph 167(1)(a) the supplier is deemed to have made a separate supply of each property supplied under the agreement for that part of the consideration that can reasonably be attributed to each property. This ruling does not address whether the consideration for the lease would be considered reasonable.

This ruling is subject to the general limitations and qualifications outlined in section 1.4 of Chapter 1 of the GST/HST Memoranda Series. We are bound by this ruling provided that none of the above issues is currently under audit, objection, or appeal; that there are no relevant changes in the future to the Excise Tax Act, or to our interpretative policy; and that you have fully described all necessary facts and transaction(s) for which you requested a ruling.

Explanation

Based on the facts provided the supply meets the conditions for the election under subsection 167(1) of the ETA. However subparagraph 167(1.1)(a)(ii) of the ETA excludes from the election a taxable supply of property by way of lease, licence or similar arrangement. Where under an agreement for the supply of a business, a recipient is required to pay monthly lease payments, these amounts would generally not be covered by the election in subsection 167(1) of the ETA.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 957-8221.

Yours truly,

Denise Villeneuve
Corporate Reorganizations Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate