Loss of Use Charge under a Rental/Lease of a Motor Vehicle

Notice to the reader: For Retail Sales Tax (RST) – On July 1, 2010 the 13 per cent Harmonized Sales Tax (HST) took effect in Ontario replacing the existing provincial Retail Sales Tax (RST) and combining it with the federal Goods and Services Tax (GST). As a result, RST provisions described on this page and in other publications ended on June 30, 2010.

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Interpretation Letter LR-0005, December 2000

Thank you for your facsimile message of November 22, 2000 inquiring about the application of Ontario retail sales tax (RST) on a loss of use charge under a rental/lease of a motor vehicle.

Understanding of Facts

It is our understanding that your company, Company A, would like to know if RST applies to a "loss of use" charge.

Legislation and/or Administrative Policy

Under subsection 2(1) of the Retail Sales Tax Act (Act) every purchaser of tangible personal property (TPP) must pay RST on the consumption or use of that TPP. The general rate of RST is 8% on the fair value.

Charges for the right to use taxable TPP under a lease or license are subject to RST. A licence or lease permits the use of TPP, but never passes title/ownership to the user/customer. The timing of the remittance of RST on leases and licences of taxable TPP differs from that for sales. Under subsections 2(7) and (8) of the Act, RST is remitted by the licensor or lessor on each licence or lease payment as each payment comes due.

Analysis and Conclusion

Charges by a lessor to a lessee at the end of a lease/rental to indemnify the lessor for temporary loss of use of a damaged vehicle do not form part of the "fair value" of lease/rental payments and are not subject to RST.

As a consequence, Company A should not charge their customers RST on loss of use charges.