Sales Tax Implications of Leases - cfla-acfl.ca

1 Canadian Finance & Leasing Association October 2008 Sales Tax Implications of Leases Introduction Canadian Sales taxes are imposed at both the federal level, goods and services tax ( GST ) and Harmonized Sales Tax ( HST ), and at the provincial level, Quebec Sales Tax ( QST ) and Provincial Sales Tax in various provinces (collectively referred to as PST ). GST/HST and QST applies to supplies of most property (including property supplied by way of lease ) and services . Similarly, PST applies to Sales of most tangible personal property (including property supplied by way of lease ) and certain services . The rate of tax payable on a supply/sale of property or service varies by province. The following table is a summary of the rate of Sales tax in each Canadian province, as well as some of the exemptions that apply for PST purposes.

2 Province GST HST PST Total PST Exemptions Alberta 5% - - 5% - British Columbia - 12% - 12% - Manitoba 5% - 7% 12% Used production machinery affixed in a manufacturing plant that is purchased or leased Property purchased for the purpose of re-sale New Brunswick - 13% - 13% - Newfoundland and Labrador - 13% - 13% - Northwest Territories 5% - - 5% - Nova Scotia - 15% - 15% - Nunavut 5% - - 5% - Ontario - 13% - 13% - Prince Edward

3 Island 5% - 10%1 Certain machinery, apparatus and parts used directly in the manufacture or production of goods for sale Property purchased for the purpose of re-sale Quebec 5% Certain motor vehicles purchased for the purpose of re-sale or lease for a period of at least one year. Saskatchewan 5% - 5% 10% Property purchased for the purpose of re-sale Yukon Territory 5% - - 5% - 1. PST or QST is calculated on the GST inclusive price Sales Tax Implications of Leases 2 Canadian Finance & Leasing Association March 2011 For Sales tax purposes, there is no distinction between capital/financing and operating Leases .

4 As opposed to the accounting treatment, where each category of lease is treated differently, Leases are treated consistently for Sales tax purposes regardless of whether they are a capital or an operating lease . Broadly, Sales taxes apply to taxable supplies (for GST/HST and QST purposes) or consumption (for PST purposes) of goods and services , including goods supplied by way of lease . GST/HST Every recipient of a taxable supply made in Canada is required to pay GST in respect of the supply calculated at the rate of 5%. An exception to payment of GST exists for supplies that are made in a participating province . Currently, the participating provinces for HST purposes are British Columbia, Ontario, New Brunswick, Nova Scotia, or Newfoundland and Labrador.

5 The recipient of a taxable supply made in a participating province is required to pay HST rather than GST on the value of the consideration for the supply. HST is imposed at the rate of 12% in British Columbia, 13% in Ontario, New Brunswick and Newfoundland and Labrador, and 15% in Nova Scotia. GST/HST is a multi-level transaction based tax that applies to every transaction throughout the distribution chain. It is a broad based tax applicable to supplies all property and services , other than goods and services that are specified to be tax-free or tax-exempt. A supply for GST/HST purposes is the provision of property or a service in any manner , and includes the provision of property by way of lease . GST/HST is a value added tax that attempts to tax the value added at each stage in the chain of production through to distribution and ultimate sale.

6 As a value added tax, GST/HST removes tax from business inputs for certain businesses. Taxation of the value added at each stage of production is achieved by requiring persons making supplies in the course of a commercial activity to charge GST/HST on the full selling price and allowing recovery, in the form of input tax credits , of tax paid on inputs. A lessor who Leases an asset is required to collect applicable amount of GST/HST payable by the lessee, as agent for the Crown. GST/HST is thereby imposed on the lessee and collected by the lessor. Place of Supply GST/HST applies to supplies made or deemed to be made in Canada. There are specific place of supply rules for GST/HST purposes that determine whether a supply is made either in Canada or outside Canada.

7 In the case of Leases of tangible personal property, the supply is made in Canada if the property is delivered or made available in Canada to the lessee. Where the supply is made, or deemed to be made. outside Canada, it is not subject to GST/HST. Specific place of supply rules also exist for HST purposes, which determine whether a supply is made in a participating province. These rules must be considered in every leasing transaction to determine whether the lease is subject to GST at the rate of 5% or HST at the rate applicable for the particular participating province. The HST place of supply rules for tangible personal property supplied by way of lease depend on the type of property supplied and the duration of continuous possession or use under the particular arrangement.

8 In the case of a specified motor vehicle supplied under an arrangement under which continuous possession or use of the property is provided for more than three months, the supply is deemed to be made in a province where the motor vehicle is to be registered. A specified motor vehicle includes almost all motor vehicles other than certain racing cars and prescribed motor vehicles. Sales Tax Implications of Leases 3 Canadian Finance & Leasing Association March 2011 A supply by way of lease of all tangible personal property other than specified motor vehicles for a period of more than three months is made in a participating province if the ordinary location of the property, as determined at the time the supply is made, is in the province.

9 For the purpose of these rules, the ordinary location of property is deemed to be the location where the supplier and the recipient mutually agree that the ordinary location of the property is to be at a particular point in time. A supply of tangible personal property by way of lease for a period of less than three months is deemed to be made in a province if the lessor delivers or makes available the property in the province to the lessee. For example, if a lessor located in Ontario supplies tangible personal property (other than a specified motor vehicle ) by way of lease to a lessee located in Nova Scotia, the supply is deemed to be made in Nova Scotia if the lessor and lessee agree that the ordinary location of the property is to be in Nova Scotia.

10 As such, Nova Scotia HST at the rate of 15%, rather than Ontario HST at the rate of 13%, will apply to payments made under this lease . However, if the property is a specified motor vehicle supplied by way of lease for a period of more than three months, and the motor vehicle is to be registered in the province of Ontario, Ontario HST will apply at the rate of 13% to payments made under the lease . Administration GST/HST is administered by the Canada Revenue Agency (CRA). Every person who makes a taxable supply in Canada in the course of commercial activities is required to be registered for GST/HST, subject to certain exceptions. Registration is also permitted on a voluntary basis if certain conditions are met. Registrants are required to complete a GST/HST return on a periodic basis, the frequency of which may be monthly, quarterly or annually depending on the value of supplies made in a given period.