Information and Disclaimer
This interpretation letter was issued based on the specific circumstances or situation of a taxpayer or vendor and the law and tax policy in effect at the time the ruling was issued. Specific facts relevant to your situation may change the application of the tax. In accordance with the Freedom of Information and Protection of Privacy Act, all confidential and identifying information has been removed from this interpretation letter. Please be aware that any statute or policy referred to in this letter may have been superseded. Where a letter contains links to a publication, the link is to our current publication on that subject, regardless of the date that the ruling was originally issued, and the current publication may not be reflective of the information originally provided. In no event shall the Government of Ontario be liable for any damages whatsoever arising out of, or in connection with, the use of the information contained herein.
Interpretation Letter LR-0008, April 2003
Thank you for your facsimile of March 19, 2003 regarding the application of Ontario Retail Sales Tax
(RST) to lease termination charges and consignment fees.
This interpretation is based on the information provided and which is conveyed in the "Understanding of
Facts" portion of this ruling. Please review the information for its completeness and accuracy. If it is
determined that the information is incomplete or inaccurate, this interpretation will not be binding. In the
event that our understanding of the facts is inaccurate or incomplete, please notify the undersigned, in
writing, so that we may reconsider our opinion.
Understanding of Facts
It is our understanding that Company A is an automobile dealership. Company A plans to buy-out a
vehicle lease from a leasing company on behalf of a customer. The buy-out value is $23,000 and the
leasing company will credit Company A with the customers security deposit of $5,000. Company A plans
to keep the security deposit and wishes to know if RST is to be charged on the amount.
We also understand that Company A sells vehicles on consignment for customers. A fee is charged for
this service and you wish to know if RST is to be applied to this fee.
Legislation and/or Administrative Policy
Under section 2 of the Ontario Retail Sales Tax Act (Act), every purchaser of tangible personal property
(TPP) and taxable service shall pay RST at the rate of 8 per cent of the fair value.
Under subsection 2(7) of the Act, where the TPP is acquired by a rental or lease, the tax must "be
computed, paid and collected on the due date of, and on the fair value of, each rental payment."
Section 1 of the Act defines sale to include any transfer of title or possession, exchange, barter, lease or
rental, conditional or otherwise, including a sale on credit or where the price is payable by instalments, or
any other contract whereby at a price or other consideration a person delivers to another person TPP.
Deposits paid as security for possession of TPP do not form part of a taxable sale if the TPP is not
returned by the customer and the vendor retains the deposit. This is not considered to be the sale of TPP.
Analysis
Where a lessee exercises a lease buy-out option, the lessee is liable to pay RST on the total buy-out
amount, regardless of whether the lessee intends to resell the vehicle. The buy-out amount is considered
part of the original leasing arrangement and is not a separate "purchase for resale" transaction.
If a car dealership issues a cheque to pay out the customer's lease, the dealership must pay RST on the
buy-out price, regardless that the customer will use the leased vehicle as a trade-in on the purchase or
lease of a new vehicle from the dealer. The dealer is not buying the vehicle for resale but, rather, is acting
as an agent of the lessee. The vehicle ownership should be transferred from the lessor to the customer
and then to the new dealer.
When a vehicle is tendered in trade as part payment against the purchase or lease of a new vehicle, RST
normally applies to the net purchase price/lease after allowance for the credit relating to the traded-in
vehicle. The actual value of the trade-in vehicle may be used to off-set the RST payable on the value of
the new lease provided RST was paid on the buy-out. In effect, the customer does not pay RST on
his/her leasehold interest in the trade-in vehicle.
Conclusion
Lease Buy-out
Based on the facts provided, the lessee has exercised the buy-out option on the lease and purchased the
vehicle for $23,000. Despite the fact that Company A paid the amount to the leasing company it is not the
purchaser of the vehicle but is acting as an agent for the lessee. The dealership must pay RST to the
lessor on $23,000.
Ownership of the vehicle should then be in the name of the lessee who may choose to tender the vehicle
as a trade against the purchase or lease of a new vehicle. If the vehicle owner chooses to trade-in the
vehicle he will only be required to pay RST on the excess of the value of the new vehicle over the traded-in
vehicle.
No RST is due on the security deposit as it is not part of the fair value of the vehicle. Company A must not
charge tax to the lessee on the security deposit of $5,000.
Consignment Fee
When Company A charges a fee for selling vehicles on consignment for its customers, it is acting as an
agent of the vehicle owner and as such is providing a non-taxable service. No RST should be charged to
the customer on this fee.
