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: What amount should the standby charge benefit be based on after an automobile is purchased at the completion of a lease contract?
Position: Depends on the facts of the situation. CRA will examine the true consideration exchanged. If the amount paid is not grossly deviant from the fair market value of the automobile at the time of the purchase, then it is acceptable for the nominal amount paid to be used as the cost of the automobile for the purposes of the standby charge calculation.
Reasons: CRA will examine the true consideration exchanged. In an arm's length transaction where a lessor has recovered a substantial value of the automobile from the lease arrangement, then the nominal amount paid to purchase the automobile should reasonably represent its fair market value. As such, if the amount paid is not grossly deviant from the fair market value it would be acceptable for the nominal amount paid to be used as the cost of the automobile for the purpose of calculating the standby charge benefit.
Where the nominal amount paid is grossly below the fair market value of the automobile at the time it is purchased, a portion of each lease payment could be considered to be in respect of the right to purchase the property in the future. That portion would therefore be considered as the option cost and in accordance with section 49 of the Income Tax Act, the cost of the automobile will be increased by the option cost.
CRA PUBLICATIONS: IT-63R5; E9335735; E9505055; E9600705; E2000-0005628; E2000-0020047; E2000-0054037; E2001-0075605; F2004-0108301I7
2009-035054
XXXXXXXXXX Henry Leung
613-957-9232
January 29, 2010
Dear XXXXXXXXXX :
Re: Calculation of Standby Charge involving Nominal Purchase Price
This is in response to your letter of December 7, 2009 inquiring about what cost value the calculation of the standby charge benefit pursuant to subsection 6(2) of the Income Tax Act (the "Act") should be based on after the automobile is purchased at the completion of a lease contract.
You have described a situation in which a company (the "Lessee") leased a XXXXXXXXXX from an arm's length dealership (the "Lessor") for a 2 year term commencing September 30, 2005. The monthly lease rate was $628.15 plus all taxes, and the expected residual value, guaranteed by the Lessee, was $4,800.00. The terms of the lease agreement were such that at the completion of the lease term, the Lessee had the option of purchasing the vehicle at the guaranteed residual value or the Lessor could sell the automobile to a third party, and charge or refund the Lessee the resulting deficit or surplus between the amount received on the sale and the guaranteed residual value.
When the initial lease period expired, the lease was extended for an additional year. The monthly lease amount during the extended period was $482.92 plus all taxes, and the expected residual value, guaranteed by the Lessee, was $1.00. The extended agreement had terms similar to the initial agreement as to how the guaranteed residual value could be satisfied by the Lessee as described in the paragraph above.
At the completion of the extended lease term, the Lessee chose to purchase the automobile at the guaranteed residual value of $1.00.
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 a request for an advance income tax ruling submitted in the manner set out in Information Circular 70-6R5, "Advanced Income Tax Rulings", dated May 17, 2002. This Information Circular and other Canada Revenue Agency ("CRA") publications can be accessed on the internet at http://www.cra-arc.gc.ca. Where the particular transactions are complete, the inquiry should be addressed to the relevant tax services office, a list of which is available on the "Contact Us" page of the CRA website. Although we cannot comment on your specific situation, we are prepared to provide the following comments in respect of the issues that you raised. Please note, however, that these comments are of a general nature only and are not binding on the CRA.
Our Comments:
The calculation of the standby charge is based on the formula contained in subsection 6(2) of the Act. Where the automobile is purchased, the standby charge is calculated based on 2% of the cost of the automobile to the employer for each month the automobile was made available to the employee in the year. The cost of the automobile is also described in subsection 6(2) of the Act under variable C which states:
C is the cost of the automobile to the employer where the employer owns the vehicle at any time in the year;
Where a lessee purchases an automobile from a dealership at a nominal amount, the CRA will examine the true consideration exchanged. Furthermore, if the nominal amount paid is grossly below the fair market value of the automobile at the time the automobile is purchased, the CRA may adopt the position that a portion of each lease payment could be considered to have been in respect of the right to purchase the property in the future. That portion would therefore be considered as the "option" cost and the rules in section 49 of the Income Tax Act would apply, effectively increasing the cost of the automobile by the "option" cost. The "option" amount may be subject to a valuation.
On the other hand, in an arm's length transaction where a lessor has recovered a substantial part of the value of the automobile from the prior lease or similar arrangement, and the nominal amount paid to purchase the automobile at the end of the lease contract is not grossly deviant from the fair market value, then it is acceptable for the nominal amount paid to be used as the cost of the automobile in the calculation of the standby charge benefit.
We trust the foregoing will be of assistance.
Yours truly,
Renée Shields
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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