7 October 2016 APFF Roundtable Q. 11, 2016-0652941C6 F - Contrat de location / Capital lease -- translation

Principal Issues: Is the asset recorded as a capital property as a result of a lease of an asset considered used principally in an active business carried on in Canada for the purpose of the definitions of « qualified small business corporation share » (« QSBCS ») in subsection 110.6(1) and of « small business corporation » (« SBC ») in subsection 248(1)?

Position: No

Reasons: Any amount recorded under the Accounting standards for private enterprises («ASPE») or the International Financial Reporting Standards («IFRS») as a lease represents only accounting entries for financial statements purposes. Such accounting entries are not an asset for the purpose of the definition of SBC in subsection 110.6(1) and QSBCS in subsection 248(1). However, the CRA is of the opinion that the rights under the lease are an asset for the purpose of the definitions of SBC and QSBCS.

11) EFFECT OF A CAPITAL LEASE ON THE QUALIFICATION OF A "QUALIFIED SMALL BUSINESS CORPORATION SHARE" AND OF A "SMALL BUSINESS CORPORATION"

In analyzing the qualification of shares as "qualified small business corporation shares" ("QSBCS ") and as SBC, account must be taken of, inter alia, the FMV of assets attributable to assets used principally in an active business carried on by the corporation.

In Technical Interpretation 2013-0499671C6, the CRA stated that a future income tax asset is not an asset in the context of valuing the FMV of assets for the purpose of the qualification of shares as QSBCS and SBC, despite the fact that ASPE allows the recognition of such an asset and this is required by IFRS.

In the case of a capital lease, these same accounting principles require the recognition of an asset in the financial statements even though the property is not a legal property of the corporation.

Questions to the CRA

(a) Can the CRA confirm that the asset recognized as a capital asset under a capital lease is an asset used in the active business of a corporation for the purposes of the definition of QSBCS and the definition of SBC if the property is used primarily in an active business carried on in Canada?

(b) Similarly, assuming that a corporation accounts for the capital lease of a vehicle used by its principal shareholder as a capital asset, should the value of the vehicle be included in total assets and excluded from the total of qualifying assets if the vehicle is used principally for personal use?

CRA response

Any amount recorded under Accounting Standards for Private Enterprises ("ASPE") or International Financial Reporting Standards ("IFRS") as an asset under a lease merely represents an accounting entry in the financial statements. The CRA is of the opinion that such accounting entries are not assets for the purposes of the definition of a QSBCS in subsection 110.6(1) and of SBC in subsection 248(1). Consequently, these accounting entries should not be taken into account in determining whether a share is a QSBCS or whether a corporation is an SBC.

However, the CRA is of the view that the rights in a lease are an asset for the purposes of the definitions of QSBCS and of SBC. Consequently, account must be taken of the FMV of the rights in the lease in determining whether a share is a QSBCS or whether a corporation is an SBC.

To determine whether or not the rights in a lease are an asset used principally in an active business carried on by the corporation, the use of the property which is the subject of the lease must be considered.

Anne Dagenais
(613) 670-9050
October 7, 2016
2016-065294