6 April 2001 External T.I. 2001-0075605 - EMPLOYEES LOW PURCHASE PRICE

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues: The income tax treatment of vehicle purchases by employees at amounts below fair market value (FMV), where the particular vehicles were previously leased by your company (the "Corporation"),

Position: An employee benefit, equal to the excess of the automobile's fair market value over the purchase price paid by the employee for the automobile, will be considered to have been received by the employee. In this situation, it is also our view that the employer has effectively received a "terminal credit" in respect of a leased automobile equal to the benefit paid to the employee in the form of a low purchase price for a leased automobile.

Reasons: The reference to "other benefits of any kind whatever" in paragraph 6(1)(a) is sufficiently broad to catch these situations.

XXXXXXXXXX 	J. Gibbons, CGA
		2001-007560
April 6, 2001

Dear XXXXXXXXXX:

We are replying to your letter dated March 14, 2001, concerning vehicle purchases by your employees at amounts below fair market value (FMV), where the particular vehicles were previously leased by your company (the "Corporation"). You wish to know whether the purchases result in taxable benefits in the hands of the particular employees.

As requested, we have considered the situation outlined in your letter and have provided some comments below. However, we cannot confirm the tax implications of particular transactions unless the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R4. Thus, our comments are of a general nature only.

Facts

• A leased vehicle with a FMV of $16,000 was sold to an employee for $456.
• A leased vehicle with a FMV of $14,700 was sold to an employee for $1.
• In both cases, the sale price was based on the residual values assigned to the particular vehicles.
• In both cases, the monthly lease payments were arranged at a far higher amount that was required to achieve a residual value equivalent to fair market value at the end of the lease.
• The Corporation calculated standby charges for the personal use of the leased vehicles based on the actual lease payments.

Our Comments

In our view, an employee who purchases an automobile from his employer for an amount below the automobile's fair market value will be considered to have received a benefit pursuant to paragraph 6(1)(a) of the Income Tax Act. The benefit is equal to the excess of the automobile's fair market value over the purchase price paid by the employee for the automobile. In this situation, it is also our view that the employer has effectively received a "terminal credit" in respect of a leased automobile equal to the benefit paid to the employee in the form of a low purchase price for a leased automobile. Accordingly, this amount should be used by the employer in determining the standby charge of the employee who used the leased automobile. See page 6 of the Employer's Guide Taxable Benefits 2000-2001 for an explanation on how an employer should account for a terminal credit in calculating an employee's standby charge for use of the employer's leased automobile. You can obtain a copy of this and other Canada Customs and Revenue Agency publications from our website at www.ccra-adrc.gc.ca.

We trust that these comments will be of assistance.

Yours truly,

John Oulton, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate

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