26 January 2004 External T.I. 2003-0046941E5 - Deductibility of a down payment on an equipment le

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 or not paragraph 28(1)(e) limits the deductibility of an initial non-refundable lease down payment for a cash-basis farmer.

Position: Yes

Reasons: Farmers who use the cash method of reporting income for tax purposes cannot deduct a prepaid expense (other than for inventory) relating to a taxation year that is two or more years after the year the expense is paid.

RCT PUBLICATIONS: E9126795, E9324587, E9633615, E9720815, F2001-0110477, F2002-01184611, F2002-0118461A, ITTN 16, T4003.

XXXXXXXXXX 	2003-004694
		Kathryn McCarthy, CA
January 26, 2004

Dear XXXXXXXXXX:

Re: Deductibility of a down payment on an equipment lease

We are writing in response to your letter of October 29, 2003, concerning the above-noted issue as it pertains to a farmer who computes income using the cash method pursuant to subsection 28(1) of the Income Tax Act (the Act).

In your letter, you indicated that the farmer entered into a three-year equipment lease which provided for a significant initial non-refundable down payment of $75,000, an annual lease payment, and an option to purchase the equipment at the end of the lease term. You requested our view on whether paragraph 28(1)(e) of the Act would limit the deductibility of the initial non-refundable down payment.

Our Comments

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. We are, however, prepared to provide the following general comments.

In general terms, farmers who use the cash method of reporting income cannot deduct a prepaid expense (other than for inventory) relating to a tax year that is two or more years after the year the expense is paid, pursuant to subparagraph 28(1)(e)(iii) of the Act. For example, if a farmer paid $600 for a three-year lease in 2003, the farmer's deduction for income tax purposes is limited to $400 in 2003. This represents the portion of the prepaid lease expense which relates to 2003 and 2004. Pursuant to paragraph 28(1)(e.1) of the Act, the farmer could deduct the final $200 in 2005 for the portion of the prepaid lease expense which relates to that year. For further information on prepaid amounts for cash-basis farmers, refer to Guide T4003, Farming Income, which is available on our web site at www.ccra-adrc.gc.ca.

We trust our comments will be of assistance to you.

Yours truly,

John Oulton, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch