22 March 2006 GST/HST Interpretation 57964 - Application of the GST/HST to ABM Services

Please note that the following document, although correct at the time of issue, may not represent the current position of the Agency. / Veuillez prendre note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'Agence.

Dear XXXXX:

Thank you for your fax XXXXX concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to the situation where a vehicle lease is terminated prior to running its full term. Your request has been transferred from the XXXXX GST/HST Rulings Centre for our response. We apologize for the delay in responding to your request.

All legislative references are to the Excise Tax Act (ETA) and the regulations therein, unless otherwise specified.

Statement of Facts

Our understanding of the facts is as follows:

1. You entered into a lease agreement (XXXXX, the "Lease") for XXXXX (the "Vehicle") on XXXXX for a 48-month term at an annual lease rate of XXXXX%.

2. Your XXXXX (the "trade-in") was accepted by XXXXX (the "Dealer") as a trade-in against the lease of the Vehicle. You were not required to collect tax in respect of the supply of the trade-in.

3. As part of the Lease, the Dealer allowed $XXXXX for the trade-in. The amount allowed for the trade-in was to be used to reduce the monthly lease payments over the term of the lease.

4. The Lease was terminated prior to coming to term when you purchased the Vehicle by buying out the remaining value of the Lease at an amount agreed upon by the parties to the Lease (the "buyout"). The buyout was completed on XXXXX.

Ruling Requested

You would like to know if you are entitled to a rebate of GST/HST paid as a result of the buyout of the Vehicle, which initially included a trade-in since, in your view, the benefit of the trade-in was not fully received with the early termination of the Lease.

Ruling Given

Based on the facts set out above, we rule that no rebate is available to you. There is no legislative provision under the ETA that would provide for such a rebate.

This ruling is subject to the qualifications in GST/HST Memorandum 1.4, Goods and Services Tax Rulings. We are bound by this ruling provided that none of the above issues is currently under audit, objection, or appeal, that no future changes to the ETA, regulations or our interpretative policy affect its validity, and all relevant facts and transactions have been fully disclosed.

Explanation

Pursuant to section 165 of the ETA, every recipient of a taxable supply (other than a zero-rated supply), made in Canada, is required to pay GST calculated at the rate of 7% or HST at the rate of 15% for a supply made in a participating province (i.e., Nova Scotia, New Brunswick, and Newfoundland and Labrador) on the value of the consideration for the supply.

Generally, where a supplier accepts goods in trade from a customer who is not a GST/HST registrant as full or partial consideration for the supply of other goods (e.g., the Vehicle), subsection 153(4) of the ETA allows the supplier to calculate GST/HST on the difference between the selling price of the property and the value of the property traded in. It is your understanding that if you purchased a new vehicle and there was a trade-in credit applied to the purchase price, GST/HST would be charged only on the difference between the purchase price and the amount of the trade-in.

GST/HST Technical Information Bulletin, B-084, Treatment of Used Goods (copy enclosed) provides information on the conditions that must be met for the "trade-in rules" to apply.

A typical lease agreement includes various charges. In addition to the monthly lease payment, there is often a required down payment, a lease acquisition fee, and other charges that are due upon possession. Interest is also an element in the monthly payment required under a lease agreement. Where the supply is tangible personal property, the interest amount included in the lease payment is considered part of the taxable lease payments and GST/HST will apply. As these amounts are all consideration for the supply by way of lease, the Lessor and the Lessee may agree to apply the trade-in credit to all, or a portion of these amounts. The application of subsection 153(4) provides that the consideration for the supply of tangible personal property (e.g., the Vehicle) by way of lease is reduced on the specific charges agreed to by the Lessor and Lessee.

Generally, in a leasing situation a Lessee can receive a credit for the value of the trade-in, and the GST/HST applicable to each lease payment is reduced over the term of the lease. Should the Lessee exercise his/her option to purchase the vehicle at the end of the lease period, the buyout is treated as a separate supply from the supply pursuant to the lease. The amount of the buyout is subject to GST/HST since the trade-in credit had been fully utilized during the term of the lease.

The application of GST/HST to a supply made pursuant to an early termination of a lease by a customer is identical to the application of GST/HST to a supply made pursuant to a customer exercising an option to purchase a leased vehicle. Where a Lessor and Lessee originally agreed to apply the trade-in credit to reduce the lease payments at the time when the lease agreement was first made, and the lease is terminated early, there is no legislative provision under the ETA that requires the Lessor to pay, or credit an amount to the Lessee that represents that portion of the trade-in credit that was used to reduce the lease payments that were never made. This is a matter that may be resolved under the terms of the lease and buyout agreement or by the parties to the agreement. Generally, the parties involved in a transaction reach an agreement as to the amount of consideration that is payable for a particular supply. It is only after the amount of consideration for a supply is determined that GST/HST is calculated on the value of that consideration.

If you require clarification with respect to any of the issues discussed in this letter, please call me directly at (613) 952-8814.

Yours truly,

Robert Douthwright, CGA
Goods Unit
General Operations and Border Issues Division
Excise and GST/HST Rulings Directorate

2006/03/30 — RITS 59018 — Application of GST/HST to Memberships Supplied on the Internet