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 a loan agreement between XXXXXXXXXX and an individual for the purchase of an automobile is considered a Lease Agreement?
Position: No
Reasons: Individual has legal and beneficial ownership of property.
XXXXXXXXXX 2001-006766
N. L. Storry
April 19, 2001
Dear XXXXXXXXXX:
Re: Financial Arrangement
We are writing in response to your correspondence of January 26, 2001, wherein you describe a unique arrangement for financing automobile purchases. You have requested our view regarding the characterization of the arrangement for income tax purposes and in particular whether it would qualify as a lease agreement.
The situation described in your letter appears to be an actual situation and as such should be the subject of an advance income tax ruling request if it relates to a proposed transaction or the subject of a referral to Winnipeg Tax Services Office if it involves a completed transaction. While we will not comment specifically on the facts outlined in your letter, we offer the following general comments.
The Supreme Court held in Shell Canada Ltd. v. The Queen, 99 DTC 5682 and other decisions, that the economic realities of a situation cannot be used to recharacterize a taxpayer's bona fide legal relationships. It held that absent a specific provision of the Income Tax Act to the contrary or a finding that there is a sham, the taxpayer's legal relationships must be respected in tax cases. As a result, the Canada Customs and Revenue Agency has announced that it intends to withdraw Interpretation Bulletin IT-233R dated February 11, 1983 entitled "Lease-option Agreements and Sale-leaseback Agreements," which sets out circumstances where the substance of a transaction is allowed to dictate its treatment for tax purposes rather than its legal form. Thus, it is now our view that the determination of whether a contract is a lease or a sale is based on the legal relationships created by the terms of the particular agreement, rather than on any attempt to ascertain the underlying economic reality. Therefore, in the absence of a sham, it is our view that a lease is a lease and a sale is a sale.
It appears that you have described an arrangement whereby, in the course of acquiring the automobile, a borrower enters into a loan agreement with a lender. The lender is not in the business of selling or leasing automobiles and it appears that at no time will the lender have beneficial ownership of the automobile. The borrower will acquire an automobile from an automobile dealership using funds borrowed from the lender. Title and all the incidents of title to the automobile will pass from the dealership to the borrower. The lender will only provide the funds to facilitate the acquisition of the automobile. Given these facts, it would seem that the agreement is in respect of a debt obligation between a borrower and a lender and is not, in anyway, a lease or sales agreement.
Depending upon the manner in which the vehicle is used by the borrower (e.g., in a business for the purpose of gaining or producing income), all or a portion of any interest paid under a loan used to purchase the vehicle, capital cost allowance and other permissible expenses may be deductible for tax purposes. However, if the automobile is used strictly for personal transportation then such expenditures would not be deductible for tax purposes.
We trust these comments will be of assistance.
for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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