17 December 1992 Income Tax Severed Letter 9224127 - Lease Options

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.

December 18, 1992

Edmonton District Office Financing & Leasing
Section
Attention: E.J. Scherman Rulings Directorate
Chief of Audit Michael Cooke
(613) 957-8972

922412
XXXXXXXXXX
Inventory vs Depreciable Property

We are writing in reply to your memorandums of August 12, 1992, and December 4, 1992, wherein you requested our opinion as to the proper income tax treatment of XXXXXXXXXX

The particular facts of this situation have been adequately summarized in your above noted memorandums, and in the taxpayer's submissions to you, dated February 24, 1992, and December 2, 1992, respectively, and are, therefore, not repeated in the body of our response.

Since the transactions are regarded as leases of property, and not as sales; XXXXXXXXXX is the rightful owner of the leased property. However, this raises the question as to whether the leased property can properly be described as inventory, as is suggested by the taxpayer.

We have considered the body of case law referred to by the taxpayer's representatives in making our determination. In our view, the real estate cases referred to by them, are not directly relevant to the facts of this particular situation. Those cases differ, due to the nature of the property leased (land), requiring a determination of whether a secondary intention existed for entering into the lease.

Support for our proposition that secondary intention is not relevant is found in Plaza Pontiac Buick Limited v. MNR' [[1983] C.T.C. 2371] 83 DTC, 316,(FCTD), a case regarding the deduction of an inventory allowance. The Presiding Member, D.E.Taylor, commented as follows on the cars leased as part of a car sales and leasing business:

• "That they (the vehicles) would be sold ultimately is beyond question, but to contend that such eventual sale was the main purpose for their acquisition has not been supported. As I see it, if they were not purchased for sale, they could not possibly have been "held for sale" during the tenure of the Lease."

In our view, the facts of the taxpayer's situation more properly reflect those found in the above noted case, and in Tri-Star Leasing Inc. vs. MNR [[1992] 2 C.T.C. 2099] '92 DTC, 1787,(TCC). In the Tri-Star case, it was found that the leases were true leases, rather than conditional sales agreements, and the assets in question were depreciable property. Although the court found that the lack of an enforceable option was important in its findings, it also stated other reasons for rejecting the argument that the leased property was inventory at page 1789:

• "The so called options to purchase of which the lessees were advised during the currency of the lease term were based on amounts which on the evidence adduced were either higher than or at least equal to the fair market value of the asset at the time the option could be exercised."

We trust these comments will be of assistance to you.

Chief
Leasing and Financing Section
Financial Industries Division
Rulings Directorate
Legislative and Intergovernmental
Affairs Branch