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.
Principal Issues: Whether an automobile over-mileage lease penalty incurred by a business on the return of a leased vehicle to the lessor is deductible in computing business income.
Position: Question of fact.
Reasons: A taxpayer is entitled to deduct the reasonable cost of leasing an automobile to the extent that it is used for the purpose of gaining or producing income from a business. As such, an over-mileage lease payment incurred by a taxpayer in respect of that same automobile is deductible. The over-mileage lease penalty must be included with the other lease costs incurred by the taxpayer in the year to determine the total lease costs that are eligible for a deduction as a result of application of section 67.3 of the Act. Section 67.3 of the Act restricts the amount that may be deducted in respect of leasing costs of an automobile. The total lease costs eligible for a deduction following the application of section 67.3 of the Act is further reduced by the taxpayer's personal use of the automobile, to arrive at the actual lease costs deductible in the year by the taxpayer in computing income from the business.
Randy Hewlett, B.Comm.
XXXXXXXXXX 613-957-8973
2004-007219
April 29, 2004
Dear XXXXXXXXXX:
Re: Automobile "Over-Mileage" Lease Penalty
We are writing in response to your letter of April 15, 2004, wherein you requested our opinion on the deductibility of an automobile "over-mileage" lease penalty under the Income Tax Act (the "Act").
In your letter, you indicated that the automobile in question is used by a proprietor in the course of earning income from a business. The proprietor paid a penalty to the lessor at the end of the lease term because the mileage of the automobile exceeded the amount stipulated in the lease agreement. You inquired whether this penalty is deductible by the proprietor in computing income from the business.
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 income tax 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. However, we are prepared to offer the following comments.
The Canada Revenue Agency's general position on the deductibility of motor vehicle expenses incurred by self-employed individuals in computing their income from a business, is discussed in Interpretation Bulletin IT-521R, Motor Vehicle Expenses Claimed by Self-Employed Individuals. As explained in IT-521R, a taxpayer is generally entitled to deduct the reasonable cost of leasing an automobile to the extent that it is used for the purpose of gaining or producing income from a business. In this regard, we are of the view that an over-mileage lease penalty incurred by a taxpayer in respect of that same automobile is deductible.
We would also like to note that the over-mileage lease penalty must be included with the other lease costs incurred by the taxpayer in the year to determine the total lease costs that are eligible for a deduction as a result of application of section 67.3 of the Act. Section 67.3 of the Act restricts the amount that may be deducted in respect of leasing costs of an automobile. Finally, the total lease costs eligible for a deduction following the application of section 67.3 of the Act is further reduced by the taxpayer's personal use of the automobile, to arrive at the actual lease costs deductible in the year by the taxpayer in computing income from the business.
We trust our comments will be of assistance to you.
Yours truly,
Randy Hewlett, B. Comm.
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Planning Branch
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