24 June 2003 External T.I. 2003-0009925 - PRINCIPAL BUSINESS OF LEASING PROPERTY

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:

A corporation is engaged in equipment rentals of class 38 assets (ex. backhoes, dump trucks and excavators) along with operators on an hourly basis to customers who are generally in construction. Would such a corporation's primary activity be that of leasing property or that of construction?

Position TAKEN: General comments given.

Reasons FOR POSITION TAKEN: Question of fact.

XXXXXXXXXX 2003-000992
G. Moore
June 24, 2003

Dear XXXXXXXXXX:

Re: Principal Business of Renting or Leasing Property

This is in reply to your letter received on March 25, 2003, concerning the above-noted subject.

A corporation is engaged in equipment rentals of class 38 assets (ex. backhoes, dump trucks and excavators) along with operators on an hourly basis to customers who are generally in construction. You have asked whether such a corporation's primary activity would be that of leasing property or that of construction? You have referred to IT-443, Leasing Property - Capital Cost Allowance Restrictions, and it is your view that corporations such as those described in paragraph 2 of that bulletin are involved in equipment rental activities and not the construction activities of those from whom they derive their revenues.

Our Comments

It appears that the situation you describe concerns a completed or proposed transaction and therefore, we are unable to provide any confirmation of the tax consequences except, with respect to a proposed transaction, in the context of an advance income tax ruling. Confirmation of the tax consequences respecting a completed transaction must be obtained from the local tax services office. We can offer, however, the following general comments.

Subsection 1100(15) of the Income Tax Regulations (the "Regulations") limits the amount of capital cost allowance ("CCA") that can be claimed on leasing property owned by a taxpayer, with certain exceptions, in order to prevent a taxpayer from creating or increasing a loss to shelter non-leasing income. Regulation 1100(15) does not apply, by virtue of Regulation 1100(16), to a corporation whose principal business is renting or leasing of leasing property including property that would be leasing property were it not excluded under Regulations 1100(18), (19) or (20), or the renting or leasing of such property combined with the sale and service of property of the same general type and description. Such a corporation will qualify for exclusion if its gross revenue for the year from such a principal business was not less than 90% of its gross revenue from all sources. The term "gross revenue" is defined in subsection 248(1) of the Income Tax Act.

The term "leasing property" is defined in Regulation 1100(17). Leasing property of a taxpayer is depreciable property of a prescribed class other than the specific exclusions set out in Regulations 1100(17). The depreciable property must be used principally for the purpose of gaining or producing gross revenue that is rent, royalty or leasing revenue. Leasing property does not include a property leased in the ordinary course of selling goods or rendering services under an agreement by which the lessee undertakes to use the property to carry on the business of selling or promoting the sale of the taxpayer's goods or services.

The word "principally" in the definition of leasing property in Regulation 1100(17) means "primarily" or "chiefly." In establishing whether a depreciable property is used principally for a given purpose, the determining factor is the proportion of time that the property is used for that purpose. Property used more than 50% of the time for the purpose of gaining or producing gross revenue that is rent, royalty or leasing revenue is considered to be used principally for that purpose.

A corporation or each partner of a corporate partnership must meet the requirements of Regulation 1100(16) for each taxation year in respect of which it claims to be exempted from the CCA limitation. Whether the revenues from specific activities of a corporation can be considered part of gross revenues from the principal business of leasing for a particular taxation year in respect of which the corporation claims to be exempted from the CCA limitation is a question of fact.

Where a corporation is engaged in equipment rentals of class 38 assets (ex. backhoes, dump trucks and excavators) along with operators on an hourly basis to customers who are generally in construction, it is our view that this activity, by itself, would not mean that the corporation was in the business of construction. Rather, based on the limited information available, it appears that this activity is in the nature of leasing and that Regulation 1100(15) would apply. As explained above, the requirements of Regulation 1100(16) would have to be met in order for Regulation 1100(15) not to apply. In this regard, we would note that the lease charges include an operator of the machinery, the revenue from which would not be considered to be in respect of leasing property. Should one of your clients wish to apply for an advance income tax ruling, we would be pleased to consider these issues further.

We trust that these comments will be of assistance.

Yours truly,

Steve Tevlin
for Director
Financial Industries Division
Income Tax Rulings Directorate

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