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
1. Does the existence of a bargain purchase option, supercede the legal relationship such that it is considered a sale?
2. What would be an avoidance transaction?.
Position TAKEN
1. Per ITTN 21, a lease is a lease and a sale is a sale.
2. Question of fact.
REASON FOR POSITION TAKEN: ITTN No 21
2002-015757
XXXXXXXXXX C. Tremblay, CMA
(613) 957-2139
December 5, 2003
Dear XXXXXXXXXX:
Re: Income Tax Technical News No.21 (the "ITTN")
This is in reply to your letter of July 26, 2002, wherein you asked the following questions with respect to a lease and asked for clarification of comments in the ITTN.
Question 1
(a) Does the existence of a bargain purchase option, or a purchase option at nominal value supercede the "legal relationship" created by the terms of the agreement?
(b) Does the fact that the assets are transferred automatically to the lessee at the expiry of a lease supercedes the "legal relationship" created by the terms of the agreement?
(c) Can one objectively say that the intent, or the reasonableness to believe that the lessee will elect to take ownership of the assets at the end of the lease or during the course of it, is not, by itself, superceding the "legal relationship" created by the terms of the agreement?
(a) As stated in the ITTN, 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. If the true relationship between the parties were one of lessor and lessee the inclusion of a bargain purchase option would not, by itself, change the nature of the transaction. However, in our opinion, a portion of the lease payments is in respect of the right to purchase the property in the future. Therefore, that portion would be considered as the "option" cost to the lessee and a disposition of property to the lessor. This "option" amount would be subject to a valuation.
(b) 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 monthly 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. Subject to our comments in (a) above, the "right" may be subject to a valuation where the periodic lease payments require larger amounts than a comparative lease without such an automatic transfer of property.
(c) Whether an agreement between two parties constitutes a lease or some other form of financing is a question of fact, which can only be determined by reviewing the terms of the agreement between the parties. It is our view that if a lease is, at law, a lease, then it will be treated as a lease for all purposes of the Act. However, in leasing or sales transactions, it is CCRA's view that an agreement between the parties can contemplate only one owner of the property in question. Thus, whether the transaction is a lease or a sale, only one party is entitled to the capital cost allowance claim and any related investment tax credits.
Question 2
Can you provide examples of what you consider to be an avoidance transaction when leases are signed between persons dealing at arm's length that will trigger GAAR.
The application of GAAR to any situation is fact specific and, accordingly, no general comments can be provided in this regard.
Question 3
The ITTN also states that whether or not the taxpayer can continue to determine the tax consequences on the basis of the position of the cancelled Bulletin will "depend on the particular facts of a given situation". Can you be more specific as to what facts would be relevant?
Generally, taxpayers can rely on the position of cancelled IT-233R for leases entered into until the date it was announced in the ITTN that IT-233R had been cancelled, that is, June 14, 2001.
Where the two parties to a lease agreement are not treating the transaction consistently for tax purposes, reliance on the position in the former IT may not be available.
We trust the above comments are of assistance
Yours truly,
Steve Tevlin
For Director,
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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