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 CCRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.
Principal Issues:
Whether the lease receivable reported on the financial statements of a lessor that is not a financial institution is eligible for an investment allowance under either paragraph 181.2(4)(b) or (c).
Position:
Generally no. The instruments listed in paragraphs 181.2(4)(b) and (c) are to be given their legal meanings and a lease receivable would generally not fit the legal definition of any of the instruments listed in those paragraphs. However, as with some conditional sales agreements the specific elements of a lease contract may result in the creation of one of the instruments listed in these paragraphs but this would be a factual determination that could only be rendered after examining a particular lease agreement.
Reasons:
The courts have considered the meanings of the terms used in paragraphs 181.2(4)(b) and (c) and have looked to the legal meaning of those terms in assessing whether any particular balance sheet item was included within the paragraph. A lease receivable does not generally fall within the legal meaning of these terms.
XXXXXXXXXX 2001-011266
Alison Campbell
March 25, 2002
Dear XXXXXXXXXX:
Re: Part I.3 Tax and Direct Financing Leases
This is in your reply to your letter of November 27, 2001 wherein you requested our views on whether a direct financing lease receivable would be included in computing the investment allowance of a lessor that is not a financial institution. Written confirmation of the tax implications inherent in particular transactions are given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. However, we are prepared to provide the following comments.
The computation of the investment allowance for non-financial institutions is found in subsection 181.2(4) of the Income Tax Act (the "Act"). The investment allowance reduces the capital of the corporation in determining the corporation's taxable capital upon which Part I.3 tax must be paid. Subsection 181.2(4) of the Act provides a listing of the items for which an investment allowance may be claimed. This list includes among other items:
? a loan or advance to another corporation (other than a financial institution) (181.2(4)(b)), and
? a bond, debenture, note, mortgage, hypothecary claim or similar obligation of another corporation (other than a financial institution) (181.2(4)(c))
It is our understanding that a direct financing lease is a lease that transfers substantially all the risks and benefits associated with ownership of the property to the lessee, and at the time of inception of the lease the fair market value of the leased property is the same as the carrying amount of the property to the lessor. For the purposes of financial statement presentation, generally accepted accounting principle provide under section 3065 of the CICA Handbook, that a direct financing lease should be accounted for by the lessor as though there has been a disposition of the property that is the subject of the lease.
You question whether it may be possible, in light of recent court decision dealing with Part I.3 tax, to interpret paragraph 181.2(4)(b) or 181.2(4)(c) of the Act to include a direct financing lease receivable. Our view following the recent court decisions, is that we will continue to look at the legal nature of items with regard to the characterization issue where the principle meaning of the term is not derived from accounting.
The issue in the Royal Trust case to which you referred (Royal Trust Company and the Royal Trust Corporation of Canada v. Her Majesty the Queen (2001 DTC 52)), was whether the lease receivable reported on the balance sheet of the taxpayer "reflected" "tangible property" of the taxpayer. The Tax Court of Canada held that a lease receivable reported on the financial statement of a financial institution does not reflect the carrying value of the tangible property that is the subject of the lease and therefore no amount in respect of the tangible property which is the subject of the lease must be included in the computation of taxable capital employed in Canada by a financial institution pursuant to subsection 181.3(1) of the Act.
Federated Co-Operatives Limited v. Her Majesty the Queen (2001 DTC 5414), and Autobus Thomas Inc. v. Her Majesty the Queen (2001 DTC 5665), both heard by the Supreme Court of Canada, dealt with the meaning of the terms found in paragraphs 181.2(4)(b) and (c) of the Act. In Oerlikon Aerospatiale Inc. v. The Queen (99 DTC 5318), one of the issues examined by the court was the meaning of the term "advance" for the purposes of computing the taxpayer's capital under paragraph 181.2(3)(c) of the Act. In each of these cases, the courts looked to the legal meaning of the words in question in determining whether a particular balance sheet item fell within the scope of the relevant provision in Part I.3 of the Act.
It is our view that a lease receivable will not, in most cases, fall within the scope of any of the terms listed in paragraph 181.2(4)(b) or (c) of the Act. It is possible however, that some conditional sales agreements may be structured in a manner that a legal note is created between the lessor and lessee. If it could be shown that a particular lease agreement brings into existence a loan, or note, as those terms are defined in law, such loan or note, to the extent it is reflected on the balance sheet would be eligible for an investment allowance. It would be a question of fact whether any particular lease agreement involved the creation of a loan or note.
Generally, a lessee's lease payable is considered to be other indebtedness in respect of a lease which is excluded from inclusion in the computation of capital pursuant to paragraph 181.2(3)(f) of the Act. However, if it can be shown that a particular lease agreement results in the creation of a note or loan or other component of 181.2(4)(b) or (c) of the Act, as those terms are legally defined, while the lessor would be entitled to claim an investment allowance in respect of the amount, it is our view that the lessee would also be considered to have a capital inclusion under either paragraph 181.2(3)(c) or (d) of the Act.
While the comments provided above are not binding on the Canada Customs and Revenue Agency, we hope they will be of assistance to you.
Yours truly,
F. Lee Workman
Manager
Financial Institutions Section
Income Tax Rulings and Directorate
Policy and Legislation Brach
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© Her Majesty the Queen in Right of Canada, 2002
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 2002
Email this Content