Please note that the following document, although correct at the time of issue, may not represent the current position of the Canada Revenue Agency. / Veuillez prendre note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'Agence du revenu du Canada.
GST/HST Rulings Directorate
Place de Ville, Tower A, 5th floor
320 Queen St
Ottawa ON K1A 0L5
[Addressee]
Case Number: 167325
Business Number: [...]
Attention: [Client]
November 17, 2022
Dear [Client]:
Subject: GST/HST INTERPRETATION
Sale-leaseback arrangements
Thank you for your letter of [mm/dd/yyyy], concerning the application of the goods and services tax/harmonized sales tax (GST/HST) to sale-leaseback arrangements. We apologize for the delay in responding to your enquiry.
The HST applies in the participating provinces at the following rates: 13% in Ontario; and 15% in New Brunswick, Newfoundland and Labrador, Nova Scotia and Prince Edward Island. The GST applies in the rest of Canada at the rate of 5%.
All legislative references are to the Excise Tax Act (ETA) unless otherwise specified.
We understand, based on the scenario you provided in your fax, that […] (the Lessor) is a vehicle and equipment leasing company. A customer (the Lessee) in Ontario, who is not registered for GST/HST purposes, purchases a vehicle from another supplier and pays 13% HST on the purchase price. There is a resulting lien on the vehicle in the amount of $[X]. The Lessee sells the vehicle to the Lessor for $[X] and the ownership of the vehicle is transferred from the Lessee to the Lessor. The Lessor pays the lien on the vehicle in the amount of $[X]. The Lessor then leases back the same vehicle to the Lessee over a 36 month period, with a guaranteed residual value of $[…]. The Lessee makes a down payment of $[Z] to the Lessor. The resulting monthly lease payments are $[M].
INTERPRETATION REQUESTED
You would like to know whether GST/HST should be charged when the Lessor purchases the vehicle from the Lessee; whether subsection 153(4.1) (sale-leaseback arrangement) or subsection 153(4) (trade-ins) applies in the scenario; and lastly, what amount of GST/HST should be charged on the monthly lease payments in this scenario.
INTERPRETATION GIVEN
Based on the information provided, we provide the following for your reference.
Supply of the vehicle by the Lessee to the Lessor
GST/HST registrants making taxable (other than zero-rated) supplies in the participating provinces collect HST at the applicable rate and collect GST at 5% in the rest of Canada. A registrant is any person who is registered or required to be registered for GST/HST purposes. In the scenario provided, the vehicle is supplied by a non-registrant (the Lessee) to the Lessor. Consequently, the supply of the vehicle made by the Lessee to the Lessor is not subject to GST/HST.
Trade-in or sale-leaseback arrangement
Supplies of tangible personal property made by way of lease, license or similar arrangement are treated as a series of separate supplies for each lease interval to which a particular lease payment is attributable. For GST/HST purposes, a lease interval is the period that is the whole or part of the period during which possession or use of the property is provided under the lease, license or similar arrangement. In general, where property is supplied under a written lease agreement, GST/HST is collectible by a GST/HST registrant supplier and payable by the recipient on the lease payments as they become due under that agreement.
Subsection 153(4) applies where a registrant supplier makes a supply of tangible personal property and accepts as full or partial consideration from a non-registrant used tangible personal property (i.e. the trade-in) for use in the supplier’s commercial activity.
Subsection 153(4.1) applies where a lessor purchases tangible personal property from another person who is not required to collect tax on the sale and immediately leases the property back to that other person (i.e., the sale-leaseback arrangement). Under a sale-leaseback arrangement, GST/HST will be charged only on the difference between the value of the lease payment and the amount credited to the other person in respect of the sale. The amount deducted from the particular lease payment is referred to as the “purchase credit”. The total of the purchase credits are generally spread out evenly over the number of lease payments. Where the aggregate amount of the lease payments equals or exceeds the sale price of the property (referred to as the unused total purchase credit) to the lessor and there is no change in the number of lease payments from the time the lease is entered into, the purchase credit is determined once, at the beginning of the lease. In this case, the purchase credit would be equal to the unused total purchase credit divided by the total number of lease payments. Where the purchase credit is less than the value of the lease payment GST/HST would be applicable on the difference only.
In other situations the aggregate amount of the lease payments might be less than the unused total purchase credit. In that case, the maximum value of the purchase credit is the amount needed to reduce the monthly lease payment to zero. Any unused total purchase credit at the end of the lease may be used to reduce either the amount of any payment that would otherwise be subject to GST/HST to complete the option to purchase, or the lease amount under a new or modified lease agreement.
Down-payment in sale-leaseback arrangement
The unused total purchase credit should first be applied against the amount of the down payment to reduce or eliminate the amount that is subject to GST/HST. Any remaining unused total purchase credit subsequently would be equally applied to each of the lease payments as discussed before. Should the unused total purchase credit be less than the down payment GST/HST would be applicable on the difference only.
The amount of GST/HST that should be charged
GST/HST should be charged only on the down payment that exceeds the unused total purchase credit (i.e., the amount credited to the Lessee for the sale to the Lessor) . The remaining amount of the unused total purchase credit is then divided by the total number of payments in the lease agreement, but only an amount up to the lease payment is applicable. In the scenario provided, GST/HST is not applicable in respect of the down payment and GST/HST is applicable only on a portion of the monthly lease payment as the purchase credit is less than the lease payment. Using the information provided in the scenario results in the following [calculation]:
[Trade-in amount (i.e., unused total purchase credit) $[X]
Down payment $[Z]
Down payment subject to GST/HST $0
GST/HST on down payment $0
[M][Monthly] Lease payment $[M]
Calculation of Value of [monthly] lease payment and applicable GST/HST
[M][Monthly] Lease payment $[M]
Less:
[R][Monthly purchase credit (maximum is $M)] $[R]
Where:
[R]= Unused total purchase credit ÷ # of [monthly] payments=($[X]-$[Z]) ÷ 36)
Equals
Value of [monthly] lease payment subject to GST/HST [M-R=V] $[V]
GST/HST at the applicable rate applies on monthly $[V] lease payments $[T]
In accordance with the qualifications and guidelines set out in GST/HST Memorandum 1.4,
Excise and GST/HST Rulings and Interpretations Service, the interpretations given in this letter,
including any additional information, is not a ruling and does not bind the Canada Revenue
Agency (CRA) with respect to a particular situation. Future changes to the ETA, regulations, or
the CRA’s interpretative policy could affect the interpretations or the additional information
provided herein.
If you require clarification with respect to any of the issues discussed in this letter, please call me
directly at 613-324-7413. Should you have additional questions on the interpretation and
application of GST/HST, please contact a GST/HST Rulings officer at 1-800-959-8287.
Yours truly,
William Parker
General Operations and Border Issues Division
GST/HST Rulings Directorate
Email this Content