21 May 2015 External T.I. 2015-0576831E5 - "eligible property" - lessee's interest in a lease

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 lessee's interest in a lease for equipment would be considered eligible property pursuant to subsection 85(1.1).

Position: Question of fact.

Reasons: Although a lessee's interest in a lease would generally be considered property, it is a question of fact whether a particular interest under a lease contract would be on account of capital.

XXXXXXXXXX
2015-057683
J. Gibbons

May 21, 2015

Dear XXXXXXXXXX:

We are writing in response to your letter of March 11, 2015, regarding whether a lessee's interest in a lease for equipment would be considered "eligible property" pursuant to the definition of this term in subsection 85(1.1) of the Income Tax Act (the "Act"). This relates to a situation in which a lessee assigns his lease for farm equipment to a corporation on the incorporation of his proprietorship.

Our Comments

This technical interpretation provides general comments about the provisions of the Act and related legislation. It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R6, Advance Income Tax Rulings.

The term "eligible property" is relevant for purposes of the rollover provisions in subsection 85(1), which allows a transfer of eligible property by a taxpayer to a taxable Canadian corporation on a tax-deferred basis. Under subsection 85(1.1) of the Act, eligible property includes a capital property other than real property (see paragraph 85(1.1)(a)), or an interest in or an option in respect of real property owned by a non-resident person.

The term "capital property" under the definition of this term in subsection 54(1) means "any depreciable property and any property (other than depreciable property), any gain or loss from the disposition of which would, if the property were disposed of, be a capital gain or a capital loss, as the case may be, of the taxpayer." However, to determine whether a lease is capital property, it must first be determined whether a lease is "property."

The term "property" is defined for purposes of the Act in subsection 248(1) and includes "a right of any kind whatever." Based on the commonly accepted definition of a "lease" as a contract by which a person who owns property grants to another the right to possess, use, and enjoy the property for a specific period of time in exchange for periodic rent payments, with the obligation to return the property at the end of the lease, it is our view that a lessee's interest in a lease would generally be considered property.

It is a question of fact whether a particular interest under a lease contract would be on account of capital. This determination can only be made after a thorough review of all the pertinent facts.

We trust our comments will be of assistance.

Yours truly,

G. Moore
For Director
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch