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: Asset Securitization
Position: General comments given
Reasons: N/A
February 28, 2003
TORONTO WEST TSO HEADQUARTERS
Verification and Enforcement Corporate Financing Section
G. Moore
Attention: Paul Lubega-Mativu (613) 957-2747
2002-013241
Asset Securitization
We are writing in response to your memo of March 25, 2002, regarding asset securitizations. We apologize for the delay in replying.
As we understand the situation, the taxpayer, XXXXXXXXXX received certain amounts as part of a financing arrangement known as a "sale-sale\leaseback". In this arrangement, XXXXXXXXXX transferred a master lease agreement together with all ownership of certain leased vehicles to a trust called XXXXXXXXXX ("XXXXXXXXXX"). XXXXXXXXXX then repurchased the vehicles from the XXXXXXXXXX using the funds received from the XXXXXXXXXX on the initial transfer. Finally, the XXXXXXXXXX leased the vehicles from XXXXXXXXXX pursuant to the master lease agreement. The XXXXXXXXXX prepaid its lease obligations with the proceeds received when it sold the vehicles to XXXXXXXXXX. You have advised us that XXXXXXXXXX has claimed a reserve pursuant to paragraph 20(1)(m) of the Act. In respect of the prepayment, you have asked for our comments in explaining the tax and legal issues related to the transaction and in particular to the reserve.
The prepayment of the lease represents income to the lessor which is usually offset with a deduction under subparagraph 20(1)(m)(iii) of the Act. The reserve is permitted if the lease applies to chattel property, that is, physical property such as equipment.
The form of the contract entered into by a taxpayer may be either in the form of a securitization or a collaterized loan. The tax consequences will follow the legal form of the transaction. Therefore, there is a legal issue of whether there is a sale of assets from the vendor to the SPV or whether there is a collaterized loan.
Whether a securitization is a sale or a secured loan is a legal issue to be determined by examining the legal form and legal substance of the transaction. The Supreme Court held in Shell Canada Ltd. v. The Queen, 99 DTC 5682, 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.
We would also note that the SPV is subject to subparagraph 18(9)(a)(ii) of the Act on the prepayment of the lease.
For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Customs and Revenue Agency's electronic library. 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 electronic library version, or they may request a severed copy using the Privacy Act criteria, which does not remove client identity. You should make requests for this latter version to Mrs. Jackie Page at (819) 994-2898. A copy will be sent to you for delivery to the client.
We trust that our reply will be of assistance to you.
Steve Tevlin
for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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