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: How is a lump sum lease payment made at the beginning of a three-year lease treated for purposes of the limitation on the cost of leasing a passenger vehicle in section 67.3 of the Act?
Position: If the lump sum payment is made or incurred as consideration for rent in respect of a period after the end of the year, subsection 18(9) of the Act would apply to deduct a portion of the payment in the year or years subsequent to its payment. Section 67.3 of the Act would then apply to the monthly rental charges and the portion of the lump sum payment deductible in each of the years.
Reasons: This position is supported by the provisions indicated and is consistent with the treatment accorded to such lump sum payments made by employees who lease automobiles that are used to earn employment income. In this respect, please refer to paragraph 9 of IT-522.
XXXXXXXXXX 2001-011346
J. E. Grisé
January 14, 2002
Dear XXXXXXXXXX:
Re: Lump Sum Lease Payment
This is in reply to your letter of November 28, 2001, requesting clarification with respect to the deduction of leasing costs.
In your letter, you describe a situation where Mr. A is a self-employed individual and a Canadian resident for income tax purposes. He uses his car for business and is allowed to deduct automobile leasing costs incurred. He leases a car on January 1, 2000, for a three-year period. The manufacturer's list price plus taxes is $25,000. He pays a non-refundable lump sum lease payment of $7,000 on January 1, 2000 and his monthly lease costs are $450. This results in a total lease cost of $12,400 in 2000.
Your questions with respect to the above situation are as follows: if the maximum deduction allowable in respect of the lease costs is $9,794 ($700 x 1.15 x 365/30) in 2000, can he deduct the $2,606 (12,400 -$9,794) remaining lease costs in a subsequent year? Alternatively, you ask if he can amortize the lump sum payment over the term of the lease ($7,000/36 months = $194.44 per month) and add the amount to the monthly lease charges? This would result in a monthly lease cost of $644.44 ($450 = 194.44), which would be fully deductible.
Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R4, dated January 29, 2001. Where the particular transactions are completed, the enquiry should be addressed to the relevant tax services office. Also, it would be necessary to review all relevant documentation before a determination of the tax implications could be made. Therefore, we can only provide you with the following general comments.
The portion of the actual lease charges paid or payable in a year in respect of a passenger vehicle that cannot be deducted in the year pursuant to section 67.3 of the Income Tax Act (the Act) cannot be deducted in a subsequent year.
Where a required lump sum payment is made at the beginning of a lease for a passenger vehicle and such a payment represents rent in respect of a period that is after the end of the year, subsection 18(9) of the Act would apply, which could have the effect of amortizing the lump sum payment over the period of the lease. Section 67.3 of the Act would then be applied to the amount otherwise deductible in each year.
We hope our comments are helpful.
Yours truly,
John Oulton, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
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