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 an agreement between an automobile dealership and an individual is a lease or a sale
Position TAKEN: Question of fact
Reasons FOR POSITION TAKEN: ITTN 21.
XXXXXXXXXX 2002-013887
G. Moore
December 19, 2003
Dear XXXXXXXXXX:
Re: Lease v. Sale: Tax Treatment of Automobile Lease
This is in reply to your correspondence of May 2, 2002, in which you ask for our views concerning the income tax consequences of an automobile lease.
In the situation you describe, the lease in question involves car dealerships where the manufacturer provides certain incentives to the dealer if the automobile is leased rather than sold to a customer. The customer, who fully intends to purchase the vehicle at the outset, will enter into a lease with the lease payments paid up front and a small residual value to be paid at the end of the lease. Ownership of the vehicle passes to the customer upon payment of the residual value. For example, under this lease program, a customer who fully intends to purchase a $42,000 vehicle would pay $41,000 (cash and/or trade-in) up front and have a $1,000 buyout at the end of the lease term.
You have asked us to confirm that these transactions should be treated as a sale rather than a lease for income tax purposes because nearly the entire purchase price is paid up front; there is no stream of lease payments; and the short duration of the lease suggests that the sale really occurred at the beginning of the lease.
Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are he 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 Supreme Court held in Shell Canada Ltd. v. The Queen, 99 DTC 5682, and other decisions 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. As a result, the Canada Customs and Revenue Agency ("CCRA") announced in Income Tax Technical News No. 21 (ITTN No. 21), dated June 13, 2001 that it has cancelled Interpretation Bulletin IT-233R dated February 11, 1983 entitled "Lease-option Agreements and Sale-leaseback Agreements," which described circumstances where the substance of a transaction was allowed to dictate its treatment for tax purposes rather than its legal form.
As stated in ITTN No. 21, it is now CCRA's 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. In the situation you describe, the parties intended the transaction to be a purchase/sale at the outset but structured it as a lease to allow the dealer the access to certain manufacturer incentives. We would have a concern as to how each party is treating the transaction for tax purposes. Whether the contract is structured by the parties as a lease or a sale, our concern would be to ensure that both parties to a particular transfer are not both claiming ownership to the property and as such are not both claiming capital cost allowance and investment tax credits with respect to the property.
We trust that these comments will be of assistance.
Yours truly,
Steve Tevlin
for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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