It is common for commercial trucking businesses to have trucks and equipment owned by one holding corporation that is leased to a different but related operating corporation.

This structure may have a variety of benefits, such as asset protection. However, it is important not to overlook the sales tax implications of these types of arrangements. If sales tax is not collected and remitted to the appropriate authorities where required, trucking businesses may face an unanticipated tax bill.

Federal GST/HST

Generally, when a holding corporation (the lessor) registered for GST/HST leases trucks and equipment to an operating corporation (the lessee), the lessee must pay GST/HST on the lease payments.
The applicable rate of tax — between 5-15% — will depend on the “place of supply.” The province in which a lease is “supplied” is outside the scope of this article but may vary throughout the term of the lease agreement.

If the lessee uses the leased trucks and equipment in its business, it will generally be able to fully recover the GST/HST paid on the lease payments by claiming input tax credits (ITCs).

Paying GST/HST on an intercompany lease, reporting and remitting the tax, and then claiming an ITC can be a compliance burden on the overall business and could lead to cash flow issues.

Instead, if the lessor and the lessee are “closely related,” the lessor and the lessee can consider filing a joint election with the Canada Revenue Agency. A parent corporation and its wholly-owned subsidiary, or two wholly-owned subsidiaries of the same parent corporation, are generally considered to be closely related.

If all the requirements for making the election are satisfied, the intercompany leases are deemed to be made for no consideration. The result is that no GST/HST needs to be paid by the lessee, the lessor does not need to report and remit tax, and the lessee does not need to claim ITCs.

This election can be beneficial because it avoids potential cash flow problems associated with claiming ITCs and reduces the tax compliance burden otherwise associated with intercompany leases.

PST in B.C., Saskatchewan and Manitoba

Unless a specific exemption applies, B.C. provincial sales tax (7%), Saskatchewan PST (6%), and Manitoba RST (7%) apply to intercompany leases of trucks and equipment in each province.

Unlike with the GST/HST, the lessee cannot recover the PST/RST paid by claiming a credit. These taxes represent an absolute cost to the lessee and overall business. However, in these circumstances, no PST/RST should be payable by the holding corporation on purchasing such property.

If the leased property is a multijurisdictional vehicle registered under the International Registration Plan (IRP), different rules apply in each province.

These rules are complex and a detailed discussion on these rules is beyond the scope of this article. If your business has trucks or other vehicles registered under the International Registration Plan, the specific rules applicable in each of these provinces should be reviewed.

Quebec QST

The QST in Quebec generally operates in a similar manner to the GST/HST. Like the GST/HST, an election may be available.

In addition to ensuring that tax returns are prepared and filed, the books and records of the lessor and lessee should properly reflect the lease arrangement. Having an intercompany agreement that documents the arrangement should also be in place.

This blog was co-written with Thomas Ghag, a member of Miller Thomson’s tax group.