Revenue Canada Policy Statement P-230.

August 20, 1999

On August 20, 1999, Tax Executives Institute submitted comments to Revenue Canada regarding the agency's Policy Statement P-230, relating to the application of the excise tax act to leases, licenses, and similar arrangements of tangible personal property by indians, indian bands, and band empowered entities. TEI's comments were prepared under the aegis of the Institute's Canadian Commodity Tax Committee, whose chair is Glen S. Pye of Nortel Networks Corporation.

On behalf of Tax Executives Institute, I am pleased to respond to your June 4, 1999, request for comments on Revenue Canada Policy Statement P-230, Application of the Excise Tax Act to Leases, Licenses, and Similar Arrangements of Tangible Personal Property By Indians, Indian Bands, and Band Empowered Entities, which was issued on May 13, 1999. Policy P-230 addresses specific issues that arise from the interaction of Technical Interpretation Bulletin B-039R, GST Administrative Policy: Application of GST to Indians, and section 136.1 of the Excise Tax Act. TEI believes that the policy statement has broad ramifications not only for lease-purchase agreements with Indians, but also for lease-purchase agreements where possession of the property is initially given to the lessee outside Canada. Background.

Tax Executives Institute is the preeminent association of business tax executives in North America. The Institute's 5,000 professionals manage the tax affairs of the leading 2,800 companies in Canada and the United States and must contend daily with the planning and compliance aspects of Canada's business tax laws. Canadians make up 10 percent of TEI's membership, with our Canadian members belonging to chapters in Calgary, Montreal, Toronto, and Vancouver, which together make up one of our eight geographic regions. Our non-Canadian members (including those in Europe) work for companies with substantial activities in Canada. In sum, TEI's membership includes representatives from most major industries including manufacturing, distributing, wholesaling, and retailing; real estate; transportation; financial services; telecommunications; and natural resources (including timber and integrated oil companies). The comments in this letter reflect the views of the Institute as a whole, but more particularly those of our Canadian constituency.

TEI is concerned with issues of tax policy and administration and is dedicated to working with government agencies in Ottawa (and Washington), as well as in the provinces (and the states), to reduce the costs and burdens of tax compliance and administration to our common benefit. We are convinced that the administration of the tax laws in accordance with the highest standards of professional competence and integrity, as well as an atmosphere of mutual trust and confidence between business and government, will promote the efficient and equitable operation of the tax system. In furtherance of this principle, TEI supports efforts to improve the tax laws and their administration at all levels of government.

Overview of Section 136.1(1)

Subsection 136.1(1) of the Excise Tax Act was enacted to treat each leasing period as a separate supply to ensure that either Goods and Services Tax (GST) or Harmonized Sales Tax (HST) was imposed, based on the physical location of the leased good at the beginning of the "leasing interval." The subsection not only addressed the movement of leased goods between provinces but also provided for all the Canadian tax changes between harmonized and non-harmonized provinces. For example, if a motor vehicle leased under an annual agreement calling for monthly billings was initially provided to the lessee in Halifax, HST would apply on the monthly lease billings. If the lessee later moved the leased vehicle to Prince Edward Island (PEI) and registered it there, then the GST and PEI Provincial Sales Tax (PST) would apply on any subsequent monthly billings.

Proposed subsection 136.1(1.1) would amend the Excise Tax Act to deem the exercise of an option to purchase tangible personal property under a lease to occur at the time and place at which the person begins to have possession as a purchaser.(1) The exercise of an option to purchase would thus be a separate supply under the Excise Tax Act.

Application of Proposed Subsection 136.1(1.1) to Indians

In general, leases and purchases of tangible personal property to Indians, Indian bands, and band-empowered entities (hereinafter referred to collectively as "Indians") may be made free of GST/HST if certain conditions are met. TIB B-039R summarizes Revenue Canada's general policy that Indians may acquire property off reserve without paying tax if (i) they have the proper documentation and (ii) the property is delivered to a reserve by the vendor or the vendor's agent. Policy P-230 relates to the acquisition of property under a lease-purchase option and provides that the purchase will be relieved of GST/HST if, at the time first possession of the property is given to the Indian under the purchase, (i) the Indian has appropriate documentation and (ii) the property is delivered to the reserve by the lessor or the lessor's agent.

Example No. 2 of Policy P-230 illustrates this rule whereby an Indian leases a motor vehicle off reserve from a registered car dealership. The Indian provides the required documentation and takes possession off reserve. Because the Indian did not meet the requirements for relief outlined in TIB B-039R, the lease is subject to GST/HST. Subsequently, however, the Indian moves the vehicle on reserve and exercises his option to purchase. At that time, the vehicle is reclaimed by the dealership and the dealership delivers the vehicle to the reserve. The example concludes that the purchase of the vehicle is relieved of GST/HST.(2)

TEI submits that this example is unrealistic and unworkable. Most lessors are not cognizant of the geographic location of a leased good at a specific point in time. This is the nature of the leasing business, especially for a highly mobile leased good like a motor vehicle. Even if the lessor knew the exact geographical location of its leased good, it is highly impractical for the lessor to reclaim the good and physically deliver it to a reserve to permit the lessee to qualify under TIB B-039R.

Consider, for example, the following situation:

   1. An Indian leases a motor vehicle, located off reserve, from a registered
   car dealership.

   2. At the time that the lease agreement is entered into, the Indian
   provides the dealership with the appropriate documentation as described in
   TIB B-039R.

   3. The motor vehicle is delivered to a reserve where the Indian obtains
   first possession of it.

   4. Subsequently, the use of the motor vehicle by the Indian is off reserve.

   5. One year into the lease, the Indian exercises an option to buy the
   vehicle.

   6. At the time the option to purchase the motor vehicle is exercised, the
   lessor does not know the exact geographical location of the leased motor
   vehicle and cannot definitely state that the leased motor vehicle is
   geographically located on an Indian reserve for purpose of passing "first
   possession to the new purchaser (the former lessee)" under the lease's
   option to purchase clause.

TEI believes that no GST/HST should apply in the above circumstances. From the lessor's viewpoint, the exact geographical location of the "highly mobile" leased motor vehicle is unknown. As a practical matter, the lessor does not retake "physical" possession of the leased motor vehicle when the option is exercised. The ownership is usually transferred at the provincial licensing bureau, irrespective where the leased motor vehicle is geographically located. Most paperwork is handled by phone, fax, and mail. Endeavoring to take back possession of the highly mobile leased goods, only to have them delivered to an Indian reserve just to have possession pass there from one party to another is unrealistic.

Moreover, the proposed change will create confusion and the tax will be difficult to collect. Prior to the enactment of subsections 136.1(1) and 136.1(1.1), no GST/HST would have been due on the exercise of a purchase option, regardless where the leased goods were at time of purchase. The way the leasing business works has not changed.

Proposed Policy Statement P193R, Supplies of tangible personal property otherwise by way of sale, was issued on February 10, 1999, and refers to subsection 136.1(1) in its legislative references. The statement provides:

   The Department's position is that for purposes of paragraphs 142(1)(b) and
   142(2)(b), possession or use of the [tangible personal property] is given
   or made available only once under the lease agreement. This point in time
   is at the beginning of the lease. Therefore, for purposes of section 142 of
   the Act, it is only necessary to determine the place of supply once.
   (Emphasis added.)

TEI believes that Policy P-193R represents a more practical approach to the administration of the statute. We therefore recommend that, if proposed subsection 136.1(1.1) is ultimately adopted, it should be amended to provide that the place of supply is determined at the time the lease is initiated. Thus, the lessor may look to the initial delivery of the property in determining whether GST/HST is due upon the exercise of a purchase option. If no GST/HST were due under the Indian Act at the time the lease was initiated, no tax should be due when the purchase option is exercised, and vice versa. Alternatively, Revenue Canada could simply administer the subsection in this manner.

Application of Subsection 136.1(1.1) to Leased Goods Made Available Outside Canada

Although the Institute's comments were requested in respect of Policy P-230, TEI notes that proposed subsection 136.1(1.1) has ramifications for leased goods that were initially made available outside Canada for which an option to purchase is exercised when the goods are in the possession of a lessee in Canada.

It is highly impractical for registered resident or non-resident lessors -- who initially made available leased goods outside Canada and therefore were not required to invoice Division II tax -- to either export the leased goods out of Canada or have the lessee export the goods for tax-free sale back to the lessee. (Division III tax would normally apply on re-importation of the goods into Canada.) Again, the requirement would generate confusion among consumers of leased goods with purchase options.

Subsection 136.1(1.1) clearly adds another determination of a "place of supply" in respect of a leasing transaction. For mobile goods like vehicles, railcars, trucks, etc., it will be extremely difficult to identify where these goods are geographically located if and when a purchase option is exercised. If the subsection is not modified, registered residents or non-residents who initially supplied leased goods outside Canada will be required to invoice Division II tax when purchase option clauses are exercised. Consistent with Policy P193R (quoted above), the proposed subsection should be revised to refer only to those leases initially made in Canada, thereby excluding leases initially made outside Canada.

Conclusion

TEI's comments were prepared under the aegis of the Institute's Canadian Commodity Tax Committee, whose chair is Glen S. Pye. If you should have any questions about the submission, please do not hesitate to call Mr. Pye at [phone], or Marlie R.M. Burtt, TEI's Vice President for Canadian Affairs, at [phone].

(1) The provision is potentially effective April 1, 1997 -- the date of the introduction of the HST.

(2) There is a typographical error in the seventh condition outlined in the statement of facts in Example No. 2. The word "band" should be deleted because the example refers to an Indian who has a lease and exercises the buy-out option -- not an Indian band.

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