Q regarding taxes: Early lease termination (Dealership buying car out)
 

I'm doing an early lease termination where the dealership will purchase the vehicle (And I will pay for the difference on the agreed price).

Per my understanding, if a dealership is purchasing a vehicle for the purpose of resale, the tax can be excluded from the purchase price- But is this only applicable on the residual value, or on the "monthly" payments as well.

For eg.

Car $20k
Residual $10k
Monthly payments $208 (10k/48, assuming 0% interest).
Monthly payments with tax: (208 * 1.12) = ~$233

Say I'm a year in, and have 36 months left. If the dealer purchases the vehicle, does he save on the tax on both the residual and monthly payments (Scenario 1), or only residual (Scenario 2)?

Scenario 1: 10,000 + (208 * 36) = $17,488
Scenario 2: 10,000 + (233 * 36) = $18,388

This is interesting. Wouldn't mind hearing an answer.

From my understanding, dealer does not purchase the vehicle from you. The leasing company aka the lessor owns the title of vehicle.

Say if the dealer is willing to purchase the vehicle at $15,000 and the amount owing to the lessor is $10000 + ($208*36) = $17,488. You will be paying the difference plus tax which is $2,488 + PST + GST = $2,786.56 to the dealer in order to do an early lease termination. Then the dealer will pay $15,000+GST (no PST due to it's company to company transaction) to the leasing company to buy back the vehicle and transfer the title from lessor to the dealership.

Interesting; this differs from my understanding, and I guess we're all looking for some clarification =)

Using the the scenario you mentioned, if the dealer is willing to purchase the vehicle at $15,000, then the outstanding balance owing to the lessor is $2,488, which I will be responsible for. However, the outstanding balance is owed to the dealership, and not the lessor, which the dealership will in-turn use to purchase the vehicle from the lessor. In this scenario, the dealership will be paying $17,488 to the leasing company, and is not subjected to tax (I'm not sure if it's no tax at all, or just GST).

I'm not sure if I can just "lump" the $17,488 together, and have the total amount of the vehicle excluded from tax, or if the tax must be paid out for the monthly payments, as it was a pre-arranged commitment to the purchase of the vehicle.

I think, The leftover of $2,488 is not owed to dealership. you are actually paying it to the lessor, so it is subject to both GST and PST. The reason is to the dealership, cost of your leased vehicle is $15,000 + GST which they can get the GST back when they sell the vehicle. So on paper, it is not the dealership paying $17,488+GST because dealership will not be able to claim the extra GST back, hence you are the one responsible for the applicable tax on the leftover balance.

I am not the tax accountant so if anyone knows the correct answer please feel free to share.

Update:

This situation actually occured in Ontario, so I'm not sure if the same tax rules apply to BC:

So using the scenario posted above, as the dealership was the party purchasing the vehicle from the lessor, they paid $17,488 with no tax. I contributed the $2,488 (towards the total of $17,488) and was not subject to HST.