HST - Leasing Companies
- (May 25, 2010)
This bulletin will address some Ontario Harmonized Sales Tax (HST) issues associated with the leasing of property by lessors. For a more general discussion on the proposed elimination of the Ontario Retail Sales Tax (RST) and the introduction of the HST, we refer you to our bulletin entitled Ontario Sales Tax Harmonization Basics
This bulletin provides an overview based on information released by the Ministry of Revenue and the Canada Revenue Agency to May 1, 2010. Please contact your Millard’s advisor should you need any additional information or explanation.
Following is a summary of the current situation for leases in Ontario.
- The leasing of most tangible personal property (TPP) and real estate in Ontario (and in all of Canada for that matter) is subject to GST. An exception applies for leases of residential real property. GST is not applicable on most residential leases that run for greater than 30 days.
- Licences of TPP and real property are generally subject to GST. The distinction between a lease and a licence is a legal one. For the most part, leases give the lessee unrestricted access to the property, whereas a licence only gives a lessee the right to use property without actually having all the benefits of possession.
- Leases and licences of real property are exempt from RST.
- Lessors are generally permitted to acquire TPP exempt from RST by using a purchase exemption certificate. The acquisition of real property by lessors is generally exempt from RST, however, real property has RST imbedded in the construction costs.
After June 30, 2010, virtually all leases of TPP and leases of non-residential real property will be subject to both GST and the provincial component of HST (total rate of 13% in Ontario). In addition, the lessor will be entitled to recover any HST paid on its costs by claiming an input tax credit (ITC).
In many cases, the lessee will also be able to recover the HST paid on lease payments, however, the ability to recover HST will be a function of the lessee’s activities. Lessees who are fully engaged in commercial activities will normally get their HST back as ITCs. Those engaged in non-commercial activities (these would include medical practitioners, government agencies, insurance companies, financial institutions and some others), will not be entitled to an ITC. In these instances, a lease that was exempt from RST and is now subject to HST will end up costing the lessee more money.
General Transitional Rules
The HST will generally apply to a supply of property by way of a lease or licence for the part of a lease interval that occurs after June 30, 2010. There are transitional rules that may affect your leasing arrangements. These are as follows:
Place of Supply Rules
- If a lease interval begins before July 1, 2010 and ends before August 1, 2010, the HST would not apply to the post-June 30th period. An example would be in the case of a car lease where the lease interval period is from June 15 to July 14, 2010. There would be no HST on this lease payment because the interval began prior to July 1, and ended prior to August 1, 2010.
- If a lease payment is due and payable after April 30, 2010 for a supply of property by way of a lease or licence after June 30, 2010, then the amount payable is subject to HST. This will mean that any invoices after April 30, 2010 will have to include HST if the invoice is for a period that includes a lease period after June 30, 2010. This HST will be collected by the lessor and held until the first reporting period that includes July 1, 2010.
- If a customer is invoiced before May 1, 2010 or makes a lease payment before this date, then no HST needs to be collected by the lessor. In such circumstances, the customer may be required to self-assess the HST in certain circumstances. The self-assessment is required if the customer is not a consumer and is not using the leased asset 100% in commercial activities or is subject to the restricted ITCs for large businesses.
The HST legislation that is currently in place (this would generally apply for New Brunswick, Nova Scotia, and Newfoundland) have a series of “Place of Supply” rules that determine whether the GST or HST applies to the particular lease. Currently, the rules provide that if a lease is supplied in a “harmonized” province, then the HST rate applies. If a lease is supplied outside of a harmonized province, then the 5% GST rate applies. Under the current rules, if a lease has a term of three months or less then it will be considered to have been supplied in the province where it is delivered or made available. In this case, the relevant GST/HST rate would apply for the full three months based on the initial delivery place. There is no change to this rule under the new proposed HST provisions.
Currently, in the case of a long term lease (ie: over 3 months in term) the place of supply is determined based on the “Ordinary Location” of the TPP. The ordinary location can be mutually agreed upon between the lessor and the lessee acting reasonably. (An exception exists for specified motor vehicles.) There are no changes to this rule.
The main area where the new proposed place of supply rules may affect leasing transactions is that the lessee will now have to self-assess the HST if he moves leased property from one province to another and a higher rate of HST applies. This is not really an issue for the lessor, but may impact the lessee.
The main message with respect to the “place of supply” rules is that if you were an Ontario lessor, you may not have given much thought to the place of supply rules. They are now more relevant to you given the disparity in tax rates between Ontario and some other neighbouring provinces.
Once HST has been fully phased in, then you will need to collect the HST in all cases where you previously collected GST for any leases in the “harmonized provinces”. From a long term perspective, this does not really open up any planning opportunities. Most of the planning revolves around the transitional rules. Following are areas that you may wish to consider:
- If you are acquiring leasing property that has RST included (for example real estate), then you may wish to consider delaying any acquisition of this property until after June 30, 2010. After that date, the RST that is included in the real property may diminish, however, this is a function of when the property was constructed.
- If your leasing activities involve the acquisition of supplies and materials that are subject to RST, then you may wish to delay the acquisition of these items until after June 30 to avoid paying RST. In these instances you would pay HST which would be fully recoverable as an Input Tax Credit. Examples would include tangible personal property such as computers, office furniture, maintenance equipment, etc.
- You need to ensure that leases that straddle June 30, 2010 are properly dealt with and the appropriate amount of HST is collected. In conjunction with this, you would need to ensure that RST is not collected for post-June 30 2010 lease intervals.
- If you are a big business (see our bulletin on restricted input tax credits for large businesses) then you need to track the ITCs that you claim on certain acquisitions in order that you can properly account for the restricted ITCs.
The introduction of the HST should not create a significant burden to lessors of tangible property, since they were generally collecting RST on this property and will now collect HST. In the case where tangible personal property is leased out to businesses and other entities that are entitled to ITCs, the leasing cost will drop and this should be favourable to the leasing business. In the case of real property leases, the HST could add a burden if the lessee is not entitled to full ITC.
While the introduction of HST and the related transitional rules are not particularly complicated for the leasing industry, we suggest that you review your situation to ensure that all of the specific issues have been addressed. Your Millard’s advisor would be pleased to discuss your specific situation in more detail.