13 August 2001 GST/HST Interpretation 32930 - Application of GST/HST to Lease Deficiency Amount

Dear XXXXX

Thank you for your electronic mail message of September 20, 2000, to the XXXXX GST/HST Rulings office concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to a lease deficiency that is added to the capital cost of a new leased vehicle.

Your request has been forwarded to our office for response.

Interpretation Requested

An individual leases a vehicle. Under the terms of the lease agreement, the individual is required, at the termination of the lease, to pay an amount to the lessor if the value of the vehicle at the end of the lease is less than a guaranteed value. This amount is referred to as a lease deficiency, and is equal to the difference between the guaranteed value and the actual value of the vehicle at the end of the lease.

The individual enters into a lease agreement for a new vehicle with a dealership or a leasing company. The dealership or leasing company allows the individual to transfer the lease deficiency from the first lease to the new lease, increasing the capital cost of the new leased vehicle by the lease deficiency. The lease deficiency is then included in the monthly lease payments and paid over the course of the new lease.

Does GST/HST apply to the lease deficiency at the termination of the first lease? Does GST/HST apply to the entire monthly lease payment under the new lease, or is the portion that corresponds to the lease deficiency not subject to tax?

Interpretation Given

GST/HST Technical Information Bulletin B-084, Treatment of Used Goods, states: "Where a lessee is obligated under the terms of a lease agreement to pay the lessor for any shortfalls below the guaranteed amount in the vehicle's value at the termination of the lease period, any shortfall in that amount is considered for GST purposes to be additional consideration paid in respect of the vehicle." The lease deficiency amount is part of the consideration for the lease of the first vehicle, which is a taxable supply.

Section 168 of the Excise Tax Act (ETA) outlines when the recipient of a taxable supply is required to pay the GST/HST on that supply. Subsection 168(2) of the ETA applies when multiple payments are made: "Notwithstanding subsection (1), where consideration for a taxable supply is paid or becomes due on more than one day,

(a) tax under this Division in respect of the supply is payable on each day that is the earlier of the day a part of the consideration is paid and the day that part becomes due; and

(b) the tax that is payable on each such day shall be calculated on the value of the part of the consideration that is paid or becomes due, as the case may be, on that day."

The lease of the vehicle involves multiple payments, including the payments made periodically over the course of the lease, and the lease deficiency due at the end of the lease. The lease deficiency is part of the consideration for the supply of the vehicle by way of lease, and the GST/HST calculated on the value of that part of the consideration is due on the earlier of the day the lease deficiency is paid or the day it is due.

Section 152 of the ETA outlines when the consideration for a taxable supply is due. Subsection 152(2) of the ETA applies specifically to the consideration for a taxable supply when the supply is made under a lease agreement: "Notwithstanding subsection (1), where property is supplied by way of lease, licence or similar arrangement under an agreement in writing, the consideration, or any part thereof, for the supply shall, for the purposes of this Part, be deemed to become due on the day the recipient is required to pay the consideration or part to the supplier pursuant to the agreement." The lease deficiency is due on the date that the individual is required to pay the lease deficiency under the lease agreement.

GST/HST on the lease deficiency is payable on the earlier of the day the lease deficiency is paid, or the day the lease deficiency is due. The individual does not pay the lease deficiency at the time it is due, but transfers it to the new lease agreement. The earlier of the two days is the day that the lease deficiency is due under the lease agreement. Therefore, GST/HST on the lease deficiency amount is due at the termination of the first lease, on the day that the lease deficiency amount is due under the lease agreement.

The dealership or leasing company allows the individual to transfer the lease deficiency from the first lease to the new lease. The lease deficiency is then included in the monthly lease payments and paid over the course of the new lease. More information, including copies of the lease agreements, is required to determine how GST/HST applies to the portion of the lease payment that corresponds to the transferred lease deficiency 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) 957-8253.

Yours truly,

Jacqueline Russell
Technical Officer
Goods Unit
General Operations and Border Issues Division
Excise and GST/HST Rulings Directorate