As with other value-added taxes, the GST/HST is an invoice-driven tax. Subsection 168(1)[1], for example, states that tax is generally payable on the earlier of when the consideration for the supply is paid and when it becomes due, the latter of which generally falls on the invoice date. However, in a well-reasoned decision the Tax Court of Canada (the “Court”) in CFI Funding Trust v. The Queen[2] (“CFI Funding Trust”) held that an invoice issued by the supplier is not necessary to claim an input tax credit (“ITC”) and to satisfy the requirements of subsection 169(4) of the Excise Tax Act (Canada) (the “ETA”)[3] and the Input Tax Credit Information (GST/HST) Regulations (collectively, the “ITC Support Rules”). Rather, in reaching its decision in CFI Funding Trust, the Court was satisfied by the fact that the registrant was able to provide all of the prescribed information required by the ITC Support Rules.
CFI’s Business
The Appellant (“CFI”) is in the business of securitizing automobile dealer leases. During the relevant period, CFI entered into several Master Concurrent Lease Agreements (“MCLAs”) with 15 different automobile dealers, who were also called “Lease Originators”. Under the arrangement, each Lease Originator first entered into a motor vehicle lease (the “Initial Lease”) with a customer and then, under the MCLA, the Lease Originator granted a concurrent lease (the “Concurrent Lease”) to CFI, which transferred to CFI the Lease Originator’s right of possession of the leased motor vehicle. In general terms, a concurrent lease effectively “interpose[s] a head lease arrangement and make[s] the existing lease a sub-lease”, as a result of which the concurrent lessee (in this case, CFI) receives the rent payable under the existing lease.[4]
In exchange for the rights CFI received as concurrent lessee, CFI paid a lump sum amount as “prepaid rent” to the Lease Originators, thereby financing the operations of the Lease Originators (who otherwise would have had to wait to collect the lease payments from the customers as the payments became due). The amount of prepaid rent was calculated to incorporate discounts to, among other things, reflect the present value of the future rent payments and the residual purchase price for the vehicles.
In order to obtain the financing (the prepaid rent), the Lease Originators sent a package of information to CFI, including a copy of the Initial Lease with the customer. The Initial Lease contained the name of the Lease Originator, the name of the customer (the lessee), and the Lease Originator’s GST/HST registration number. Each MCLA also referenced a series of schedules which included schedules of the leases and identified (i) the vehicles to be concurrently leased, (ii) the amounts on which the prepaid rent was calculated, and (iii) the dates when rents were payable.
Seeing as it was for the concurrent lease of tangible personal property, the prepaid rent was subject to GST/HST. On assessment, the CRA initially took the position that the supply between CFI and the Lease Originators was an exempt supply of a “financial service” and that no tax was payable on the prepaid rent, and disallowed CFI’s ITC claims on this basis. However, the CRA abandoned this position on objection and there was no dispute before the court that CFI carried on a commercial activity. This was undoubtedly the correct conclusion since it was the business of CFI to acquire property rights in vehicles to be concurrently leased to consumers, and there was no exemption listed in Schedule V that could apply to this activity.[5] However, on appeal before the Court the Crown continued to dispute whether CFI’s documentation satisfied the ITC Support Rules.
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