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:
1 ) did the company receive a terminal credit
2 ) can a terminal credit be deducted dollar for dollar from the automobile standby charge.
3 ) in the situation, is the credit a gain on disposition of an automobile or a reduction in automobile leasing costs.
Position:
1 ) Yes, 2 ) No 3 ) reduction in leasing costs
Reasons:
1 ) In a series of transactions where a lessee purchases a leased vehicle at the NBV of the lease and then immediately sells it to an employee for FMV, a lessee can be considered to have received a terminal credit.
2 ) as per the employer's guide: taxable benefits, employer can either deduct the terminal credit from the lease costs in the year the lease is terminated or amend the T4 slips of the individual who used the automobile.
3 ) Since it's a terminal credit, it is a reduction in the current year's vehicle leasing costs.
December 6, 2000
XXXXXXXXXX TSO HEADQUARTERS
Cornelis Rystenbil, CGA
Attention: XXXXXXXXXX (613) 941-6547
2000-002004
Terminal Credit - Vehicle Lease
This is in response to your request of April 7, 2000. You have requested our comments on whether an employer can use the proceeds from the sale of a leased automobile to offset an employee's standby charge.
The employer leases automobiles for the use of its employees from an arm's length leasing company. The capital cost of the vehicle is depreciated at 2% per month and the remaining obligation is adjusted. As a result, the lease obligation is greater in the first year and is reduced in each subsequent year. The employees are subject to standby benefits pursuant to paragraph 6(1)(e) of the Income Tax Act on the basis of the somewhat large monthly payments. The employer frequently sells these vehicles to employees at fair market value. To simplify the administrative end of such a transaction, the leasing company prepares all the paper work to facilitate both sales. Any gain realized on the sale of the vehicle is applied, dollar for dollar, against the employee's standby charge reducing it to zero or creating a negative balance to be carried forward to a subsequent year.
It is the employer's view that the practice is allowed by pointing out instructions written in the Employer's Guide: Taxable Benefits 1999-2000 (the "Guide") under the heading "automobiles you lease":
"a lump sum payment you receive at the end of a lease is considered to be a terminal credit. When this occurs, the standby charge for the automobile has been overstated since the lease costs should have been lower. In this situation you can ... deduct the terminal credit from the lease cost in the year you terminate the lease...".
It is the auditor's view that the employer cannot use the proceeds from the sale of the vehicle to offset an employee's standby charge and that the employer must report a gain on the sale of the vehicle to the employee.
The Guide states the following:
"A lump-sum payment you receive from the lessor at the end of a lease is considered to be a terminal credit. When this occurs, the standby charge for the automobile has been overstated since the lease costs should have been lower. In this situation, you can use one of the following methods:
- Deduct the terminal credit from the lease costs in the year you terminate the lease; or
- Amend the T4 or T4A slips of the individuals who used the automobile and give them a letter explaining the reduction, provided that:
- the employees agree; and
- none of the relevant years are statute-barred (which means that the employee can still request an income tax adjustment for the years in question).
These individuals can then write to any tax services office or tax centre and ask us to adjust their returns for those years.
Generally, in order to have received a terminal credit, a lessee must receive a lump-sum payment from the lessor. However, where in a series of transactions, a lessee purchases the leased vehicle from the lessor at the net book value of the lease and then immediately sells this vehicle to an employee at fair market value, the lessee, in our view, can be considered to have received a terminal credit. As a result, the lessee's current automobile leasing expenses would be reduced by the amount of the terminal credit received since a terminal credit represents an overpayment of leasing costs.
With reference to the employer's view on a terminal credit, in our view, a terminal credit can only be applied against the leasing cost amount used in the calculation of the standby charge. A dollar for dollar reduction of the standby charge by the "terminal credit" is not appropriate. In addition, as per the Guide, an employer has two options: deduct the terminal credit from the lease costs in the year the lease is terminated or amend the T4 or T4A slips of the years that are not statute-barred of the individual who used the automobile. In our view, a negative standby charge cannot exist. An employer can make the adjustment in the current or previous year(s) but not in a future year.
Furthermore, if a lease agreement is structured in such a way as to set out a higher charge at the beginning of the term followed by a nominal charge in the latter part of the lease (such as "high end" or "high depreciation" leases), we would have expected that the employer would have evened out the monthly lease charge, for standby charge purposes, by dividing the total lease cost over the term of the lease.
For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Legislation Access Database (LAD) on the Department's mainframe computer. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the LAD version, or they may request a copy severed using the Privacy Act criteria, which does not remove client identity. Requests for this latter version should be made by you to Jackie Page at (613) 957-0682. The severed copy will be sent to you for delivery to the client.
Roberta Albert, CA
for Director
Business and Publications Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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