CRA indicates that an early lease termination fee might potentially be an “actual lease charge” for purposes of the s. 67.3 lease-payment deductibility limit

In 2023, a self-employed individual leased an automobile, which he used in the course of his business, but several months later, terminated the lease and paid a lease termination fee of $10,000, in order to lease a different make of car.

2008-0285361C6 dealt with a car lease early termination payment by an employee (claiming employment expenses therefor) and stated that if the termination fee represented “actual lease charges” under the automobile lease, it could be deducted pursuant to s. 8(1)(h.1) subject to the limitations in s. 67.3, i.e., the termination fee was to be added to the other lease costs that were subject to the s. 67.3 numerical limit (of generally close to $13,000 per year).

CRA confirmed that a generally similar approach applied if the individual was self-employed, i.e., again, it would be a question of fact as to whether the lease termination fee constituted an “actual lease charge” and, if it did, it would be added to the more usual lease charges – and if the taxpayer's total annual lease charges exceeded the limit allowed under s. 67.3 including this addition, he would not be able to deduct the excess amount in computing his income under s. 9.

Neal Armstrong. Summary of 10 October 2024 APFF Roundtable, Q.10 under s. 67.3.