25 May 2006 Internal T.I. 2006-0174951I7 - Investment Allowance - Leases

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 a taxpayer is entitled to an investment allowance under paragraph 181.2(4)(c) with respect to a direct financing lease.

Position: Depends on whether the indebtedness under the lease constitutes a note or similar obligation of another corporation within the meaning of paragraph 181.2(4)(c).

Reasons: Based on the terms of the lease agreements provided, it is our view that the indebtedness under such agreements constitutes a note or similar obligation of another corporation within the meaning of paragraph 181.2(4)(c) of the Act. Accordingly, the taxpayer is entitled to claim an investment allowance in respect of the indebtedness.

	 							May 25, 2006

TORONTO CENTRE TSO					HEADQUARTERS
Sandra Mallory, Manager					Income Tax Rulings
Large File Case Program					  Directorate
								Jenie Leigh
Attention:  G. MacGibbon				(613) 952-1505

								2006-017495

XXXXXXXXXX. - Part I.3

This is in reply to your two memoranda dated February 28 and March 16, 2006 wherein you requested our views as to whether XXXXXXXXXX is entitled to an investment allowance under subsection 181.2(4) of the Income Tax Act (the "Act") with respect to direct financing leases and conditional sales agreements that it is a party to. In this regard, you have provided us with two direct financing leases and two conditional sales agreements.

A taxpayer is entitled to an investment allowance under paragraph 181.2(4)(c) of the Act in respect of the carrying value at the end of the year of an asset that is a bond, debenture, note, mortgage, hypothecary claim or similar obligation of another corporation (other than a financial institution). With reference to the "General Issues" that you identified on page 4 of your first memorandum, it is not relevant whether the form of the agreement is a sale or lease but rather whether the agreement creates an asset of the type described in paragraph 181.2(4)(c) of the Act. The determination as to whether a particular agreement constitutes a sale or lease may be relevant for the purpose of determining what amount, if any, would be included in the capital of a corporation pursuant to subsection 181.2(3) of the Act. If the amount of any indebtedness under the agreement is represented by a bond, debenture, note, mortgage, hypothecary claim, banker's acceptance or similar obligation, it would be included in the debtor corporation's capital pursuant to paragraph 181.2(3)(d) of the Act independent of whether the agreement constituted a sale or lease. If the indebtedness under the agreement was not so represented, then it would have to be determined whether the agreement constituted a sale or lease for purposes of paragraph 181.2(3)(f) of the Act which excludes any indebtedness in respect of a lease. In this regard, it has always been, and continues to be, our position for purposes of Part I.3 of the Act the legal nature of an agreement and not its economic substance determines whether a particular contract constitutes a sale or lease.

In our previous memorandum dated May 16, 1997 (our reference 7-962940) which dealt with agreements similar to those included with your current request, we dealt at some length with whether the agreements which were the subject of that request constituted leases or sales. In retrospect, we realize that this has created some confusion in that, as noted above, this distinction is not relevant to the determination of whether one of the parties to the contract is entitled to an investment allowance by virtue of paragraph 181.2(4)(c) of the Act.

XXXXXXXXXX the details of the indebtedness under the agreements are sufficiently set out so as to constitute a note or similar obligation of another corporation within the meaning of paragraph 181.2(4)(c) of the Act. In this regard, Black's Law Dictionary (7th ed.) broadly defines "note" to mean "a written promise by one party (the maker) to pay money to another party (the payer) or to bearer." It is to be noted that with regard to each agreement, the page thereof or schedule thereto evidencing the indebtedness has been signed on behalf of the corporate purchaser or lessee.

Accordingly, it is our view with respect to the agreements provided that XXXXXXXXXX. as holder of the note or similar obligation is entitled to an investment allowance pursuant to paragraph 181.2(4)(c) of the Act. It follows that to the extent that the lessee or purchaser is subject to tax under Part I.3 of the Act the amount of the note or similar obligation will be included in its capital pursuant to paragraph 181.2(3)(d) of the Act.

While we have not specifically commented on all of the points that you raised in your memoranda and the letters from the taxpayer's representative, it appears unnecessary to do so given the comments provided above.

If you have any questions, do not hesitate to contact the undersigned at (613) 957-3497.

F. Lee Workman
Manager
Charitable and Financial Institution Sectors
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch