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 particular agreement would be considered a lease such that the payments made under the terms of the said agreement would be deductible in computing income for purposes of the Act.
Position: Question of fact.
Reasons:
See ITTN - 21 - Question of fact to be determined based on the legal relationship created by the terms of the agreement.
XXXXXXXXXX 2002-013366
G. Moore
December 16, 2003
Re: Lease vs. Sale
We are writing in response to your correspondence of April 8, 2002, regarding the above-mentioned subject.
You requested our opinion concerning a hypothetical arrangement whereby assets are acquired and then "leased" to a prospective purchaser. The purchaser (the "Purchaser") wishes to acquire property from a particular vendor (the "Vendor") and to do so, arranges financing of the asset with a third party (the "Lender"). The Lender acquires the property and then "leases" the property to the Purchaser pursuant to an agreement (the "Agreement"). Security for repayment will be the purchased asset. In the event of default by the Purchaser, the Lender has the right to seize the asset. The purpose for using such an Agreement is to provide the Lender with greater legal protection in the event of default by the Purchaser. Legal title to the asset will automatically pass to the Purchaser when all or substantially all of the lease payments have been made to the Lender. It was always the intention of the Vendor and the Purchaser to have the transaction treated as a sale/purchase arrangement.
You have asked whether the Agreement is considered to be a purchase and sale of an asset or a lease for purposes of the Income Tax Act (the "Act"). 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 income tax ruling request submitted in the manner set out in Information Circular 70-6R5 dated May 17, 2002. Therefore, the following comments are of a general nature only.
The Canada Customs and Revenue Agency ("CCRA") announced in Income Tax Technical News No. 21, dated June 13, 2001, that:
". . . it is 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."
Whether a contract between parties is set up legally as a sale or a lease is a question of fact that can only be resolved by reviewing the legal contract. If the parties structure the contract as a lease, then generally, for income tax purposes, it will be treated as a lease. If the parties structure the contract as a sale, then generally, for income tax purposes, it will be treated as a sale. Whether the contract is structured by the parties as a lease or a sale, our concern would be to ensure that both parties are not claiming capital cost allowance and investment tax credits in respect of the property.
It is a question of fact whether an automatic transfer at the end of a lease is a sale at the inception of the lease. Where the automatic transfer of title upon receipt of the last payment is in fact a right to purchase the property at the expiry of the agreement if the lessee has met all the conditions under the agreement, absence a sham, we will not consider that a sale has in fact occurred until the right to purchase is exercised. However, in our opinion, a portion of the lease payments will be in respect of the right to purchase the property in the future where the periodic lease payments require larger payments than a comparative lease without such an automatic transfer of property.
We trust these comments will be of assistance.
Steve Tevlin
for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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