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: Whether conversion of capital to inventory when leasing company sells 3-year old trucks?
Position: yes
Reasons: Trucks are not worn out or obsolete and sale of formerly leased trucks is essential to operation of business.
July 20, 2000
XXXXXXXXXX Tax Services Office Partnerships Section Business Audit Denise Dalphy (613) 957-9231
Attention: XXXXXXXXXX
2000-003501
XXXXXXXXXX
This is in response to your memorandum dated June 29, 2000, where you requested our comments on whether certain assets of the above-noted company were converted from capital assets to inventory in the fiscal period ended XXXXXXXXXX.
Facts
1. XXXXXXXXXX is a Canadian controlled private corporation located in XXXXXXXXXX.
2. XXXXXXXXXX is in the business of leasing and renting trucks, buses and automobiles.
3. XXXXXXXXXX generally leases vehicles for XXXXXXXXXX terms. At this time new trucks are purchased and the old trucks are sold. The future ongoing repairs and maintenance on these trucks make the releasing of these vehicles a poor business decision, and at the end of the lease term, clients want new trucks to lease.
4. XXXXXXXXXX.
Issue
May capital cost allowance be claimed on the trucks at the end of the lease term, but prior to their sale?
Conclusion and Analysis
No. When the trucks are no longer available for lease and are to be sold, there has been a conversion of capital property to inventory and cca may not be claimed.
While a truck rental company would not be seen as having converted capital property to inventory where the leased trucks are being replaced only when worn out or obsolete [see Anthes Equipment Ltd. 87 DTC 59], where leased vehicles are withdrawn from leasing prior to that time and are sold as an integral part of the taxpayer's normal business operations, a conversion of the trucks to inventory is considered to occur prior to their sale [ see Wang Canada Ltd. 91 DTC 1279; Canadian Kodak Sales Ltd. 54 DTC 1194].
In this situation we are of the view that the sale of used trucks is an integral part of XXXXXXXXXX business operations and the comments in paragraph 8 of Interpretation Bulletin IT-102R2, Conversion of property, other than real property, to inventory, are applicable to its situation. Although XXXXXXXXXX prime function is truck rentals, the active sale of used trucks is essential to the efficient operation of its business
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 CCRA'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.
Please contact the writer at 957-9231 if we can be of further assistance.
Paul Lynch
for Director
Resources, Partnerships and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch
3
...cont'd
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