CRA confirms the conversion of vehicle lease payments into recapture on option exercise and vehicle sale

An individual, after having paid $12,500 in lease expenses during the first 48 months of an automobile lease, exercises the option under the lease to acquire the automobile for $15,000, at a time that its FMV is $20,000, then immediately sells it for $20,000.

CRA confirmed that if the individual had been using the vehicle in the course of carrying on a business then, by virtue of s. 13(5.2), the capital cost would be deemed to be $20,000 (i.e., the lesser of the vehicle’s FMV, and the sum of the actual cost of $15,000 and the lease expenses), and the individual would be deemed to realize recapture of depreciation of $5,000 on the sale, rather than a capital gain.

On the other hand, if there was no business use of the automobile, s. 13(5.2) would not apply. Assuming that the relationship between the parties was legally that for a vehicle lease and that no part of the leasing costs was reasonably attributable to the acquisition of the purchase option, the ACB of the purchase option under the s. 49 rules would be nil. If so, the ACB of the vehicle was equal to the exercise price of $15,000 plus the nil ACB of the option, for a total of $15,000, so that there would be a $5,000 capital gain on the sale.

Neal Armstrong. Summaries of 10 October 2024 APFF Roundtable, Q.9 under s. 13(5.2) and s. 49(3).