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 lump sum lease payment made by an individual, while an employee or self-employed, at the beginning of a three-year lease of a passenger vehicle may be amortized over the term of the lease subject to the limitation on the cost of leasing a passenger vehicle in section 67.3 of the Act?
Position TAKEN: Yes.
Reasons FOR POSITION TAKEN:
In a situation that involves a lump sum, non-refundable, lease payment made at the beginning of a multi-year lease of a passenger vehicle that will result in reduced monthly payments over the period of the lease:
? by an employer, or a self-employed individual; or
? in computing the taxable benefit (standby charge - subsection 6(2)) derived by an employee from the personal use of a motor vehicle supplied by an employer
? by an employee earning commission income or earning salary income;
Employer/ Self-employed individual
A substantial lease payment made at the beginning of the lease, resulting in lower monthly payments, represents consideration for services to be rendered after the end of the year such that subparagraph 18(9)(a)(i) of the Act would apply to limit the deductibility of the outlay or expense. Where a deduction for a prepaid expense in one year is denied by paragraph 18(9)(a), paragraph 18(9)(b) permits the deduction in the subsequent year to which the expense relates. In the case at hand subparagraph 18(9)(b)(i) would operate to in effect amortize the lump sum payment over the period of the lease. Section 67.3 of the Act would then be applied to limit the amount otherwise deductible in each year. This view is consistent with opinions provided in 2001-0113465, 9637127, E C1168. The administrative assessing position mentioned below adopted by CCRA with respect to computing the taxable benefit for personal use of an employer's vehicle (standby charge) and published in paragraph 13 of IT-63R5 is consistent with this technical interpretation.
Standby charge
Paragraph 13 of IT-65R5 states as follows.
Where a substantial lease payment is made at the beginning of the lease resulting in lower monthly lease payments, it is CCRA's view that a pro-rata share of the initial payment must be added to each monthly payment over the term of the lease to determine the taxable benefit to an employee, provided the payment is in fact a lease payment and not a payment for the purchase of the automobile. The expression "substantial lease payment" is not intended to cover the usual commercial prepayments such as the first and last month rental amounts.
(Our emphasis added)
Employee earning commission income or earning salary income
While nothing on point was found in CCRA's research bank of published documents, it follows from our published interpretive position in IT-63R5 on this issue that a similar approach should apply with respect to an employee in determining his or her eligible leasing costs where a similar lump-sum lease payment is incurred. Section 67.3 of the Act would then be applied to limit the amount otherwise deductible in each year.
XXXXXXXXXX 2003-001567
P. Diguer, CGA
June 3, 2003
Dear XXXXXXXXXX:
Re: Prepayment of automobile lease
This is in reply to your e-mail dated April 24, 2003, wherein you requested our views with respect to the appropriate treatment of a lump sum prepayment at the commencement of a three year lease of a passenger vehicle for purposes of the Income Tax Act (Canada) (the "Act").
In particular you describe a situation where an individual leased for a three-year period a passenger vehicle which he or she uses for business purposes, and under the terms of the lease made a lump sum payment at the commencement of the lease. The lump sum payment is non-refundable and results in a reduced monthly payment over the period of the lease.
It is not evident from your request whether the individual is an employee or is self-employed. As such, our comments briefly set out CCRA's views on the appropriate treatment of the said lump-sum payment in circumstances where the individual is self-employed as well as where the individual is an employee.
Employer/ Self-employed individual
A substantial lease payment made at the beginning of the lease resulting in lower monthly payments represents consideration for services to be rendered after the end of the year such that subparagraph 18(9)(a)(i) of the Act would apply to limit the deductibility of the outlay or expense. Where a deduction for a prepaid expense in one year is denied by paragraph 18(9)(a), paragraph 18(9)(b) permits the deduction in the subsequent year to which the expense relates. In the case at hand subparagraph 18(9)(b)(i) would operate to in effect amortize the lump sum payment over the period of the lease. Section 67.3 of the Act would then be applied to limit the amount otherwise deductible in each year.
Employer supplied passenger vehicle to employee (standby charge)
Interpretation Bulletin IT-63R5 dated August 21, 1995 sets out CCRA's views on benefits derived by an employee from the personal use of a motor vehicle supplied by an employer. Paragraph 13 of IT-63R5 briefly outlines certain amounts that an employer is required to pay to a lessor (referred to as "lease costs") and mentions that the amount deductible by the employer or a person related to the employer may be limited under section 67.3 to a monthly maximum [currently $800]. With respect to substantial payments made at the beginning of a lease and their relevance in determining the taxable benefit, paragraph 13 of IT-65R5 states as follows.
Where a substantial lease payment is made at the beginning of the lease resulting in lower monthly lease payments, it is CCRA's view that a pro-rata share of the initial payment must be added to each monthly payment over the term of the lease to determine the taxable benefit to an employee, provided the payment is in fact a lease payment and not a payment for the purchase of the automobile. The expression "substantial lease payment" is not intended to cover the usual commercial prepayments such as the first and last month rental amounts.
(our emphasis added)
Employee earning commission income or salary and supplies own vehicle
Subject to the restrictions in paragraph 8(1)(f) [employee earning commission income] and paragraph 8(1)(h.1) [employee earning salary income], where a substantial lease payment is made by the employee at the beginning of the lease resulting in lower monthly lease payments, a pro-rata share of the initial lump-sum payment must be added to each monthly payment over the term of the lease provided the payment is in fact a lease payment and not a payment for the purchase of the automobile. Section 67.3 of the Act would then be applied to limit the amount otherwise deductible in each year.
The foregoing comments represent our general views with respect to the subject matter. As indicated in paragraph 22 of Information Circular 70-6R5 dated May 17, 2002, the above comments do not constitute an income tax ruling and accordingly are not binding on the Canada Customs and Revenue Agency. Our practice is to make this specific disclaimer in all instances in which we provide an opinion.
Yours truly,
Steve Tevlin
Manager
Corporate Financing Section
Financial Industries Division
Income Tax Rulings Directorate
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