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 a dealer in farm equipment, which both sells and leases inventory, is entitled to investment tax credits on such farm equipment that is leased. When farm equipment is leased, the lease and the particular farm equipment are assigned to the farm equipment manufacturer for an immediate credit.
Position: Likely not.
Reasons: Since the dealer does not operate a separate leasing division, the farm equipment, including that which is leased, would be considered inventory in its hands. By entering into leases with its customers for new farm equipment and coincidentally assigning them and the farm equipment to the manufacturers for full consideration, the dealer is engaging in the sale of inventory.
April 3, 2002
XXXXXXXXXX Tax Services Office HEADQUARTERS
J. Gibbons, CGA
(613) 957-2135
Attention: XXXXXXXXXX
2002-012235
XXXXXXXXXX (the "Dealer") - Investment Tax Credits
Your enquiry concerning the Dealer's entitlement to investment tax credits ("ITC's") was forwarded to us by XXXXXXXXXX on February 6, 2002. The ITC's relate to farm equipment that the Dealer leases to its customers and then assigns to a manufacturer. We also acknowledge our telephone conversations on February 28 and March 7 (Gibbons/XXXXXXXXXX ) and the additional information you sent us by email on March 15.
The facts, as we understand them, are as follows:
1. The Dealer deals in XXXXXXXXXX and XXXXXXXXXX farm equipment.
2. The Dealer sells or leases farm equipment to its customers. However, the Dealer does not have a separate leasing division and treats all of its farm equipment as inventory when it is acquired from the manufacturers.
3. The Dealer has a retail financing agreement (the "financing agreement") with XXXXXXXXXX or XXXXXXXXXX (the "Manufacturer") with respect to the financing of the acquisition of XXXXXXXXXX inventory. In general terms, the financing agreement provides that the Manufacturer may assist the Dealer in acquiring XXXXXXXXXX inventory by purchasing from the Dealer its debt instruments, including leases the Dealer enters into with its customers. In return for the Dealer's debt instruments, the Manufacturer settles with the Dealer by way of a credit (the "credit") in the amount of the unpaid principal balance set forth in the debt instrument (excluding any finance charges or time differential as to sales and excluding lease charges as to leases) less insurance and other amounts that the Manufacturer requires the Dealer to keep in reserve accounts.
4. Under the financing agreement, the Manufacturer first applies the credit to any outstanding indebtedness owed by the Dealer to the Manufacturer on the particular item sold or leased as described in the debt instrument. If any surplus exists, the remainder may be credited, at the Manufacturer's sole discretion, to any other indebtedness owed by the Dealer to the Manufacturer and if any surplus still exists, the excess may be paid to the Dealer or credited to their account.
5. The financing agreement provides for different types of assignments including full-recourse assignments. On full-recourse assignments, the Dealer is liable for any losses incurred by the Manufacturer with respect to the leases assigned to them.
6. If a customer wishes to lease new farm equipment, he or she applies to the Dealer for credit. The Dealer then sends the application to the Manufacturer for approval of the credit application.
7. If the customer's credit application is approved by the Manufacturer, a lease agreement is prepared and signed between the Dealer and the customer. The lease agreement also provides for the assignment of the lease, as well as title to the equipment, to the Manufacturer.
8. When equipment is leased, the Dealer transfers it from inventory to a "lease equipment" account. For income tax purposes, the Dealer treats the equipment as specified leasing property and claims CCA each year. It also claims ITC's on the equipment. However, the Manufacturer does not claim ITC's on this equipment, as verified through our online system.
9. The Dealer treats the credit received from the Manufacturer for the assignment of the lease as "deferred revenue" and includes the deferred amount in income over the life of the lease.
10. There are only a small number of leases assigned to the Manufacturer on a non-recourse basis. In this case, the Dealer treats the leased farm equipment as part of "cost of goods sold," records the full amount received from the Manufacturer as revenue, and does not claim CCA. Also, neither the Dealer nor the Manufacturer has claimed ITC's on the leased farm equipment in these cases.
11. The Dealer also has a retail financing agreement with XXXXXXXXXX ("Manufacturer 2"), similar to the one with the Manufacturer. In this case, Manufacturer 2 has claimed the ITC's on leased farm equipment received on assignments. Since the Dealer only started entering into assignment agreements with Manufacturer 2 in its fiscal period ending XXXXXXXXXX, 2001, it would not comment on how it would account for them until we advise them how we are going to treat ITC's.
Your Views
? Farm equipment that is leased to customers is considered to be acquired by the Dealer when the lease is signed with the customer.
? The leased farm equipment meets the definition of depreciable property since, if it were owned by the Dealer at year end, the Dealer would be entitled to a deduction under paragraph 20(1)(a) of the Income Tax Act. Accordingly, for purposes of the definition of "qualified property" in subsection 127(9) of the Act, it qualifies as "prescribed machinery and equipment" pursuant to subsection 4600(2) of the Income Tax Regulations.
? The equipment was not previously acquired for use, lease or any other purpose before the Dealer acquired it, by virtue of having leased it to the customer.
? When the lease is assigned to the Manufacturer, on a full or non-recourse basis, the farm equipment has already been "acquired" by the Dealer.
? When the Manufacturer acquires title to the leased equipment, via the assignment of the lease, the equipment has already been acquired for the purposes of earning income by the Dealer, i.e., when the lease is signed between the Dealer and the customer.
? Any ITC's related to farm equipment that is leased by the Dealer to a customer should be claimed by the Dealer and not by the Manufacturer to which the Dealer has assigned the lease.
Our Views
In our view, the Dealer is involved in only one business, and that is the sale of farm equipment. By entering into leases with its customers for new farm equipment and coincidentally assigning them and the farm equipment to the manufacturers for full consideration, the Dealer is engaging in the sale of inventory. At no point is the new farm equipment held by the Dealer as depreciable property. This position is consistent with paragraph 4 of Interpretation Bulletin IT-102R2, which states that where a taxpayer both sells and either rents or leases property of the same kind, it is the CCRA's position that all of the taxpayer's property is inventory unless the taxpayer meets the following three conditions:
(a) the taxpayer operates a separate and clearly distinguishable leasing division, including the keeping of separate records,
(b) specific property is set aside by the taxpayer for either renting or leasing and is factually so used, and
(c) properties that are so rented or leased are normally sold for an amount that is less than their cost to the taxpayer.
However, an exception is provided where, at any time, a particular property is leased (a) without option to purchase, (b) for a sufficiently long period of time so that the anticipated sales price of the particular property at the time of expiry of the lease will not ordinarily exceed its cost to the lessor, and (c) the particular property is not ordinarily replaced by other property during the currency of the lease. In the case at hand, the lease agreements contain an option to purchase.
Based on the foregoing, we do not see how the Dealer would be entitled to ITC's on leased farm equipment since it is inventory and not depreciable property. Similarly, we would also question the Dealer's entitlement to CCA and its deferral of the amounts received from the manufacturers.
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 Agency'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. Should you wish to send a severed copy to the client, you may obtain one by contacting Jackie Page at 613 957-0682.
John Oulton, CA
Manager
Business and Individual Section
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch
- 4 -
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