The appellant, which had been leasing computer equipment, notified the lessor that it would no longer be making the agreed monthly payments nor using the equipment. Following negotiations, the lessor agreed to release the appellant from any further obligation to make monthly lease payments upon payment of a fixed amount of compensation. At issue was whether such payments were subject to Ontario retail sales tax, which turned on whether such payments were for the consumption or use of the equipment.
In finding that no retail sales tax was applicable, Macpherson J.A. stated (at para. 57):
The appellant defaulted under the lease. After the appellant breached and repudiated the lease, C Ltd. could have terminated it immediately and repossessed the leased computer equipment. In addition, or in the alternative, it could have commenced an action against the appellant for damages. The appellant and C Ltd. entered into negotiations against the backdrop of those two options, not against a backdrop of the continuation of the operation of the lease. The compensation payments constituted settlement payments, not payments made under the lease. The effect of s. 2(1) and (6) of the Retail Sales Tax Act is that sales tax must be paid only with respect to each rental payment while the lease is still in operation. Sales tax was not payable on the compensation payments.