4 July 1990 Internal T.I. 9009017 F - Inventory Allowance on Leased Asset

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.

Subject: Inventory Allowance on Leased Asset

In reply to your memorandum of May 23, 1990, we are writing to further clarify certain comments in our previous memoranda of April 11 and May 1, 1990.

The term "purchase option" referred to in paragraph (b) of our previous memorandum of April 11, 1990 (#7-4711) should be read as "purchase option contained either in the lease".  The separate agreement and the lease must be entered into at the same time. In accordance with the comments in paragraph 4 of Interpretation Bulletin IT-233R, the separate agreement may either be a verbal agreement or a written agreement.  In either case, the separate agreement must be legally enforceable.  The essential criteria of an agreement are:

(a)      there must be at least two persons;

(b)      they must intend the same thing;

(c)      their intention must be communicated; and

(d)      the object of their intention must be such as will, when carried out, alter their legal position.

The communication of intention must always be reduced to the elements of a proposal made by one party and accepted by the other party.  In a situation wherein a company policy of the lessor would allow the lessee to purchase the leased asset from the lessor, the company policy, in and by itself, would not be considered an agreement unless the purchase option has been offered by the lessor and accepted by the lessee.  Thus while the separate agreement may be verbal or written, it is obviously much more difficult for a lessor to prove that the above criteria of an agreement have been met if the separate agreement is a verbal one.  If a person were to accept that such an agreement did exist, it would be necessary to consider whether the lessor had disposed of the leased asset at the time the agreement was entered into.  Please refer to the comments with respect to leasing in Interpretation Bulletin IT-233R and in the Round Table of the 1988 Canadian Tax Foundation Conference.

We hope our comments are helpful to you.

for Chief Leasing and Financing SectionFinancial Industries DivisionRulings Directorate