20 December 1990 External T.I. 9031685 F - Treatment of Leases in Computing Large Corporations Tax

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.

19(1)

December 20, 1990

Dear Sirs:

Re:  Part I.3 of the Income Tax Act ("the Act")

We are responding to your letter of October 26, 1990 in which you requested our interpretation of the treatment of leases for the purpose of calculating the Large Corporation Tax ("LCT").

Paragraph 181.2(3)(f) of the Act provides for on exclusion in calculating taxable capitol of "... any indebtedness in respect of a lease". Where the form of an agreement between two parties reflects their true intention to enter into a lease, and not some other form of financing, such as a loan, it is our opinion that the indebtedness in respect of such a lease will fall within the bracketed exclusion in paragraph 181.2(3)(f) of the Act.

In response to your specific questions, our opinions are as follows:

a)     Is indebtedness related to a so-called capital lease excluded from the taxable capital of the lessee?

The terminology "capitol and operating leases" are derived primarily from generally accepted accounting principles (GAAP). In our opinion, the characterization of an agreement using GAAP, while perhaps relevant, is not determinative for the purpose of determining if an agreement is a lease or not. If the legal effects do not create a lessee/lessor relationship, even though the agreement may, for GAAP purposes, be considered a capital lease, there will be no exclusion in calculating taxable capital.

b)     Will a lessor be entitled to the investment allowance in respect of an asset which is the subject matter of a lease?

It is our view that if a contract creates a loan or advance, or an obligation described in subparagraph 181.2(4)(c), the contract is not a lease but a form of financing eligible for inclusion in the calculation of the investment allowance. In such a situation, the other pay to the contract would be required to include the indebtedness in its taxable capital, even though the contract may be labelled a lease. Conversely, if a lease exists in law, it is our view that the asset held by the lessor would not fall within the enumerated categories of debt in paragraph 181.2(4) of the Act and therefore would not be eligible for the investment allowance.

While we trust the foregoing comments are of assistance, they do not constitute an advance income tax ruling and, therefore, are not binding on the Department.

Yours truly,

for DirectorFinancial Industries DivisionRulings Directorate