2006 Ruling 2006-0211021R3 - Lease Option

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: 1. Upon the exercise of an option to acquire property one minute after signing a lease agreement, is there an acquisition and disposition? 2. Does the sales tax form part of the purchase price?

Position: 1. Yes 2. Yes

Reasons: 1. Terms of the Agreement - 2. Part of the cost of property

XXXXXXXXXX 								2006-021102

XXXXXXXXXX, 2006

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling
XXXXXXXXXX (the "Taxpayer") BNXXXXXXXXXX
XXXXXXXXXX (the "Subsidiary") BNXXXXXXXXXX

We are writing in response to your letter of XXXXXXXXXX, and to your e-mails of XXXXXXXXXX wherein you requested an advance income tax ruling in respect of the above-named corporate taxpayers. We also acknowledge information provided in numerous telephone conversations.

To the best of your knowledge and that of the taxpayers involved, none of the issues contained in this ruling herein is:

(i) dealt with in an earlier return of the taxpayers or related persons;

(ii) being considered by a tax services office or a taxation centre in connection with a previously filed tax return of the taxpayers or related persons;

(iii) under objection by the taxpayers or related persons;

(iv) the subject to a ruling previously issued by the Income Tax Rulings Directorate to the taxpayers or related persons; nor

(v) before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has expired.

Unless otherwise stated, all references to a statute are to the Income Tax Act, R.S.C. 1985 (5th Supp.), c. 1, as amended, (the "Act") and all terms and conditions used herein that are defined in the Act have the meaning given in such definition unless otherwise indicated.

DEFINITIONS

In this letter, the following terms have the meanings specified below:

(a) "Accelerated XXXXXXXXXX Rent" means the purchase price of the Aircraft under the exercise provided in subparagraph 15(2) of the XXXXXXXXXX Agreement;

(b) "Aircraft" means a XXXXXXXXXX aircraft, including the engines, equipment and accessories attached to such aircraft;

(c) "Base Rent" means an amount payable for each flying hour of the Aircraft during a Rental Period pursuant to the XXXXXXXXXX Agreement equal to the original purchase cost of the Aircraft to the Subsidiary XXXXXXXXXX;

(d) "CRA" means the Canada Revenue Agency;

(e) "XXXXXXXXXX Agreement" means the Aircraft XXXXXXXXXX Agreement to be made effective at XXXXXXXXXX between the Subsidiary and the Taxpayer;

(f) "Operating Lease" means the Aircraft Operating Lease made between the Subsidiary and the Taxpayer, effective XXXXXXXXXX, and expires at the time the XXXXXXXXXX Agreement becomes effective;

(g) "Sales tax" means provincial sales tax imposed pursuant to the XXXXXXXXXX and

(h) XXXXXXXXXX.

FACTS

1. The Taxpayer is a public corporation and a taxable Canadian corporation. Its taxation year ends on XXXXXXXXXX of each year. The relevant tax services office for the Taxpayer is the XXXXXXXXXX Tax Services Office. The Taxpayer files its income tax returns at the XXXXXXXXXX Taxation Centre.

2. The Taxpayer carries on a XXXXXXXXXX business in several provinces within Canada. The Taxpayer also XXXXXXXXXX holds, directly or indirectly, shares in numerous subsidiaries and investees, which carry on business throughout Canada and the United States and elsewhere in the world.

3. Many of the officers and employees of the Taxpayer and of its subsidiaries must travel in order to carry out their duties of employment. In order to efficiently meet their travel requirements, the Taxpayer has previously owned and operated a XXXXXXXXXX aircraft. Effective on XXXXXXXXXX, the Taxpayer sold the XXXXXXXXXX aircraft.

4. The Taxpayer holds all of the shares of the Subsidiary. The Subsidiary is a taxable Canadian corporation, which generally carries on an investment business only in Canada. The Subsidiary is not in the business of selling, renting or leasing property other than leasing the Aircraft. Its taxation year ends on XXXXXXXXXX of each year.

5. The Subsidiary purchased the Aircraft on XXXXXXXXXX and immediately entered into the Operating Lease with the Taxpayer. The Taxpayer took immediate possession of the Aircraft under the Operating Lease in order to replace the XXXXXXXXXX. The Aircraft is the Subsidiary's only tangible asset.

6. Effective on XXXXXXXXXX , the Subsidiary was issued a XXXXXXXXXX as a XXXXXXXXXX under the XXXXXXXXXX in order to collect and remit sales tax.

7. The Taxpayer employs a flight crew and a maintenance staff. The Taxpayer pays all of the costs of operation of the Aircraft.

8. To the extent that the passengers who travel on the Aircraft are officers or employees of subsidiaries of the Taxpayer, the Taxpayer recovers the cost of such travel from those subsidiaries as part of a general administrative charge to each subsidiary.

9. Apart from:

(a) the sale of the XXXXXXXXXX aircraft by the Taxpayer;

(b) the purchase of the Aircraft by the Subsidiary; and

(c) the Taxpayer and the Subsidiary entering into the Operating Lease;

the Taxpayer and the Subsidiary have not completed any significant transactions prior to the proposed transactions and will not undertake any significant transactions after the completion of the proposed transactions.

PROPOSED TRANSACTIONS

10. Immediately upon the completion of the term of the Operating Lease at XXXXXXXXXX, the Taxpayer and the Subsidiary will enter into the XXXXXXXXXX Agreement and the Taxpayer will continue to have possession of the Aircraft under the XXXXXXXXXX Agreement.

11. Immediately thereafter, effective at XXXXXXXXXX, the Taxpayer will exercise its option to purchase and the rights of acceleration as provided in XXXXXXXXXX Agreement, and immediately pay all of the Accelerated XXXXXXXXXX Rent to the Subsidiary and purchase the Aircraft. The Subsidiary will thereupon automatically transfer its security interest in, and the legal title to the Aircraft to the Taxpayer, as required by subsection 15(1) of the XXXXXXXXXX Agreement.

12. At the same time as the Taxpayer pays all of the Accelerated XXXXXXXXXX Rent and acquires legal title to the Aircraft, the Taxpayer will also pay sales tax to the Subsidiary on XXXXXXXXXX the Accelerated XXXXXXXXXX Rent XXXXXXXXXX.

13. The Subsidiary will not claim any capital cost allowance under paragraph 20(1)(a) of the Act and Schedule II of the Income Tax Regulations on the Aircraft for the period of ownership from XXXXXXXXXX, to XXXXXXXXXX.

PURPOSE OF THE PROPOSED TRANSACTIONS

The purpose of the proposed transactions is to enable the Taxpayer to acquire beneficial and legal ownership of the Aircraft under the XXXXXXXXXX Agreement.

RULINGS GIVEN

Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, the proposed transactions and purpose of the proposed transactions, and that the final agreements referred to in this letter are substantially the same as the documents provided to us as reflected herein, and provided further that the proposed transactions are completed in the manner described above, we rule as follows:

A. Effective immediately after the Taxpayer has exercised its option under the XXXXXXXXXX Agreement as described in 11 above, the Subsidiary will have a disposition of the Aircraft for the purposes of the Act for proceeds of disposition equal to the greater of:

(i) the fair market of the Aircraft at that time; and

(ii) the total of the Accelerated XXXXXXXXXX Rent.

B. Effective immediately after the Taxpayer has exercised its option under the XXXXXXXXXX Agreement as described in 11 above, the Taxpayer will acquire the Aircraft as depreciable property at a capital cost equal to the lesser of:

(a) the fair market of the Aircraft at that time; and

(b) the total of the Accelerated XXXXXXXXXX Rent,

and the amount of that capital cost will be added in the calculation of the undepreciated capital cost of the Taxpayer's Class 9 depreciable property under Schedule II of the Income Tax Regulations as of the end of the Taxpayer's XXXXXXXXXX taxation year.

C. For the purposes of the Act, the sales tax payable by the Taxpayer as determined in 12 will be added to the capital cost of the Aircraft.

The above rulings are given subject to the general limitations and qualifications set out in Information Circular 70-6R5 issued by the CRA on May 17, 2002, and are binding provided the XXXXXXXXXX Agreement is entered into, on or before XXXXXXXXXX and the option to purchase the Aircraft is also exercised before XXXXXXXXXX.

The rulings are based on the Act in its present form and do not take into account the effect of any proposed amendments to the Act.

Nothing in this letter should be construed as implying that the CRA has agreed to or accepted:

(i) the GST implications of any of the proposed transactions;

(ii) any other tax consequences of the proposed transactions or of related transactions or events that are not described herein;

(iii) the nature of the legal relationship entered into or contemplated by the entities named above; nor

(iv) XXXXXXXXXX.

Yours truly,

XXXXXXXXXX
for Director
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch