Please note that the following Policy Statement, although correct at the time of issue, may not have been updated to reflect any subsequent legislative changes.

GST/HST Policy Statement P-225

DATE OF ISSUE

January 4, 1999

SUBJECT

Payments for vehicle loss or damage under rental agreements

LEGISLATIVE REFERENCE(S)

Sections 165, 169 and subsection 123(1) (definitions of "financial service", "service" and "property") of the Excise Tax Act

NATIONAL CODING SYSTEM FILE NUMBER(S)

11585-0, 11585-21

EFFECTIVE DATE

January 1, 1991 for the GST
April 1,1997 for the HST

TEXT
Issue and Decision:

This policy statement outlines the application of GST/HST to payments of money under a vehicle rental agreement by a customer of a vehicle rental company in respect of loss or damage caused to the vehicle during the rental period. The GST/HST applies to the consideration in respect of the supply of the rented vehicle as well as the consideration applicable to the loss or collision damage waiver (LDW) when accepted by the customer. However, the tax status of a payment for loss or damage can only be determined after reviewing the terms and conditions of the rental agreement to determine if such a payment represents "consideration" for a taxable supply made to the customer, and, hence, is subject to tax.

A vehicle rental agreement generally includes the following terms and conditions:

• the customer agrees to rent the vehicle for a consideration which may be calculated as a specific charge, distance driven or combination thereof;
• the customer may purchase a loss or collision damage waiver (LDW) for an additional amount which limits the customer's liability for vehicle damage or loss to a pre-determined amount;
• in the case of vehicle damage or loss, the customer will owe the rental company for any loss or damage regardless of fault whether due to theft , collision, vandalism or any other cause up to the limited amount set out in the agreement where the LDW is accepted by the customer; or where LDW is not accepted, the customer will owe the rental company for any loss or damage to the vehicle up to the fair market value of the rented vehicle; and,
• in the case of vehicle damage or loss, the customer is also responsible to pay the rental company an amount for "loss of use". This amount is determined under terms of the rental agreement by multiplying the number of days required to repair or replace the vehicle by the daily rental rate.

It is the Department's position that where the vehicle rental agreement states that the customer is required to compensate or reimburse the rental company for loss or damage caused to the vehicle while under rental including loss of use, the amounts paid by the customer do not represent consideration for a taxable supply. This position applies to both situations where the customer decides to accept or decline the purchase of the loss or collision damage waiver set out under the rental agreement. Accordingly, these payments are not subject to GST/HST.

It should also be noted that a payment made by an insurer to the rental company would also not be subject to tax where the customer has insurance coverage and the payment is made on the customer's behalf under the terms of the customer's insurance policy.

SAMPLE RULINGS

Sample Ruling 1

Statement of facts

1. ABC Rentacar Inc. is a registrant in the Province of Ontario that rents automobiles to individual customers.

2. Under the terms and conditions set out in the vehicle rental agreement:

• the customer is responsible for and agrees to pay the rental company for any loss or damage to the rented vehicle during the rental period;
• at the time of vehicle rental, the customer also has the option to purchase a loss damage waiver ("LDW") for a daily fee of $13.95 which limits the customer's liability for damage or loss to a maximum payment of $250;
• even if LDW has been accepted the customer is responsible for reasonable loss of use as result of vehicle loss or damage.

3. On November 14, 1997 Mrs. George rented a vehicle for a three day period in Sudbury. The amount charged to Mrs. George for the daily rental was $25 per day plus applicable taxes. Mrs. George declined to purchase the loss damage waiver. On November 17, 1997 Mrs. George paid for the three day period of the rental plus applicable taxes.

4. During the rental period Mrs. George was involved in an accident which resulted in damage to the vehicle. Mrs. George was aware that she would be financially responsible for the vehicle damage and that ABC Rentacar would in due course send an invoice or statement for damages.

5. The vehicle belonging to ABC Rentacar was promptly repaired by a body shop who invoiced ABC Rentacar $4000 plus $280 GST. On December 23, 1997 ABC Rentacar invoiced Mrs. George in the amount of the repair plus an additional amount of $500 in respect of the loss of rental income. The rental company did not apply the GST to the amount invoiced to Mrs. George.

Ruling Given:

The payment by the customer to the car rental agency for the cost of the repairs made to the damaged vehicle and the recovery of the loss of rental income in accordance with the rental contract is not subject to GST.

Rationale:

The payment by the customer does not represent consideration for a supply of property or services made by the car rental agency to the customer as no supply takes place in respect of the payment. The payment of money made by the customer to the car rental agency is an indemnification under the terms of the rental agreement of the cost incurred by the company to repair the vehicle and loss of rental income. It should be noted that the decision would be the same where the customer had accepted the LDW and the indemnification was in respect of a loss, e.g. stolen vehicle or destroyed vehicle.

Sample Ruling 2

Statement of Facts

1. Dependable Car Rentals Inc. is a registrant in the Province of Nova Scotia that rents late model year automobiles to individual customers.

2. During the rental period the customer is responsible and agrees to pay the rental company for any loss or damage to the rented vehicle. At the time of vehicle rental, the customer also has the option to purchase a loss or collision damage waiver (LDW) for a daily fee of $9.95 which limits the customer's liability for damage or loss to a maximum payment of $250.

3. On November 14, 1997 Mr. Hicks rented a vehicle for a three day period in Halifax. The amount charged to Mr. Hicks for the daily rental was $15 per day plus applicable taxes. Mr. Hicks also purchased the loss damage waiver which limited his liability for loss or damage to a maximum of $250. On November 17, 1997 Mr. Hicks paid for the three day period of the rental including LDW

[3 days x ($15.00 + 9.95) = $74.85]plus applicable HST.

4. During the rental period Mr. Hicks was involved in an accident which resulted in the vehicle being totally destroyed and the cost of replacing the vehicle was estimated to be $15,200. Mr. Hicks was immediately invoiced $250 for the loss on November 21, 1997 because of his acceptance and purchase of the LDW. No HST was applied to the amount invoiced in respect of the loss by the car rental company to the customer.

Ruling Given:

The payment by the customer to the car rental agency under the vehicle rental agreement in the amount of $250 is not subject to HST as it does not represent consideration for a taxable supply.

Rationale:

The payment of the $250 does not represent consideration for a supply of property or services made by the car rental agency to the customer as no supply takes place in respect of the payment. The payment is an indemnification of the customer's liability for loss or damage to a maximum of $250 under the terms of the rental agreement.