18 July 2002 Internal T.I. 2002-0149987 - DEALER OF FARM EQUIPMENT

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 is entitled to investment tax credits on farm equipment that it leases to customer but then transfers, along with the lease, to the manufacturer.

Position: No.

Reasons: Based on the particular facts, the particular farm equipment is never held as depreciable property.

		July 18, 2002

	XXXXXXXXXX  Tax Services Office	HEADQUARTERS
J. Gibbons, CGA
	Attention:  XXXXXXXXXX 	(613) 957-2135

		2002-014998

XXXXXXXXXX (the "Dealer") - Investment Tax Credits (ITC's)

We are replying to your memorandum dated June 26, 2002, concerning the Dealer's entitlement to ITC's. We wrote to you about this issue on April 3, 2002, expressing the view that the Dealer would not be entitled to ITC's for particular farm equipment since such equipment was inventory and not depreciable property. The Dealer has written to you asking that we reconsider this position.

The Dealer argues that it is entitled to ITC's for particular farm equipment that it leases to customers on the basis that the requirements of paragraph 6 of IT-102R2, "Conversion of Property, Other than Real Property, from or to Inventory," are satisfied. This paragraph provides an exception to our general view that property which a taxpayer both sells and leases will be considered inventory unless certain requirements are met, including the operation of a separate leasing division. Paragraph 6 states that, 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, the lessor may, from that time, treat the particular property as capital property rather than inventory.

It appears that you and the Dealer do not agree on whether the particular lease agreements entered into between the Dealer and its customers contain an option to purchase. Obviously, if there is an option to purchase, the exception in paragraph 6 does not apply, and the particular farm equipment should be considered inventory. In our view, regardless of whether the lease agreements contain an option to purchase, we would likely, in this particular fact situation, still regard the particular farm equipment as the Dealer's inventory.

First, the assignment of the particular leases to XXXXXXXXXX (the "Manufacturer") is subject to a standing agreement between the Dealer and the Manufacturer such that it is known beforehand that the particular leases and the farm equipment will be assigned to the Manufacturer. Second, the lease must be pre-approved by the Manufacturer. Third, the assignment of the particular leases from the Dealer to the Manufacturer is included on the written lease agreements entered into by the Dealer and its customers so that the particular farm equipment is clearly never held by the Dealer as depreciable property. That is, since there is no separate leasing division and all of the leased farm equipment is always part of the Dealer's inventory before being transferred to the Manufacturer, none of the Dealer's property is ever held as capital property.

Finally, it is our view that there is no distinction between the Dealer's leasing arrangements and its ordinary sales transactions, i.e., both results in a disposition of the Dealer's farm equipment for proceeds of disposition. Accordingly, as stated in our earlier memorandum, it is our view that the Dealer is engaging in the sale of inventory when it enters into a lease with a customer and then immediately assigns the lease and the farm equipment to the Manufacturer. Thus, the Dealer is not entitled to ITC's on such farm equipment since such equipment is part of their inventory.

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

- 2 -