Lease Termination Payments

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.

Effective July 1, 2010 this publication was archived for RST purposes only. Use caution when you refer to it, since it reflects the law in force for RST at the time it was released and may no longer apply.

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 Please be aware that any statute or policy referred to in this letter may have been superseded.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-0009, April 2003

Thank you for your facsimile letter dated March 31, 2003 regarding the application of Ontario retail sales tax (RST) to lease termination payments.

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

You have requested a ruling confirming that lease cancellation payments are exempt from RST and the conditions that must be met for this to be true.

Legislation and/or Administrative Policy

Subsection 2(1) of the Ontario Retail Sales Tax Act (Act) states:

Every purchaser of tangible personal property, except the classes thereof referred to in subsection (2), shall pay to Her Majesty in right of Ontario a tax in respect of the consumption or use thereof, computed at the rate of 8 per cent of the fair value thereof.

Subsection 2(7) of the Act states:

Despite subsection (6) and section 12, where a purchaser,

rents or leases from any person any taxable service at a sale in Ontario; or
acquires tangible personal property at a sale that is the lease or rental to the purchaser of such tangible personal property without provision for the transfer to the purchaser of title thereto, or with the provision of such transfer only upon the exercise of an option or similar right to acquire such tangible personal property,

the tax imposed by this section shall be computed, paid and collected on the due date of, and on the fair value of, each rental payment by or on behalf of the purchaser in respect of the lease or rental of such taxable service or tangible personal property, and tax shall, in addition, be computed, paid and collected at the time of, and on the fair value for, each of the obtaining of any option or similar right to purchase the tangible personal property leased or rented or the exercising of any such option or similar right.

Lease termination charges are not subject to RST, provided:

the lease has been breached, repudiated and is terminated,
there is no further consumption or use of the leased tangible personal property (TPP),
the leased TPP is returned to the original lessor,
the termination charges are made in compensation for breaching the lease, and not for the past (i.e. lease payments in arrears), present or future use or consumption of the leased TPP,
the termination charges are a one time payment to purchase the lessor's acceptance of the termination of the lease, and to terminate and settle all leases/contracts/litigation between the lessor and lessee.

Where RST has been paid in error, taxpayers may apply for a refund of the tax. Refund claims must be received within four years of the date tax was paid.

Analysis and Conclusion

Lease termination payments are not taxable when the five conditions summarized in the "Legislation and/or Administrative Policy" section of this letter have been met.

End of lease charges such as past due rentals, retaking and/or storing and/or selling the vehicle charges, excess odometer and wear charges, etc. are subject to RST. These are not considered to be non-taxable lease termination charges.