8 April 1993 External T.I. 9234865 F - Definition of Automobile

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.

Mr. Les Jones Revenue Canada and Excise General Tax Policy9th Floor, Place Vanier "C"   25 McArthur Avenue  Ottawa, Ontario K1A 0L5

Attention:  Mr. Les Jones

Dear Sirs:

RE:  Passenger Vehicles and Automobiles

This is in reply to your letter of November 22, 1992 in which you requested our assistance in connection with a case concerning the goods and services tax that involves the definition of "automobile" in the Income Tax Act (the Act). We apologize for the delay in responding.

XXXXXXXXXX

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With respect to the above situation, you have requested our comments on whether or not Holdco, in relation to the leasing arrangement, could be considered to be "carrying on a business of renting or leasing motor vehicles" for the purposes of the exception in paragraph (c) of the definition of "automobile" in subsection 248(1) of the Act. In the event that the Vehicle can be regarded as not being described within the exception, it is our understanding that the goods and services would be payable in respect of the Vehicle. In connection with your concern, we also wish to acknowledge that in our discussion with Mr. J. Cuillerier on January 10, 1992, we were requested to provide some general comments and guidelines with respect to the above arrangement in the event that we were unable to provide you with a definitive opinion on this situation.

Our Comments:

Based on the information to provided us, it is unfortunately not possible to provide you with definitive comments on this situation. However, we hope that our comments, which are based on the limited information provided to us, will be of assistance to you.

In the situation under consideration, the leasing arrangement involves two closely held corporations, there is no formal written leasing agreement between the two corporations and Holdco only leased one vehicle. In addition, Holdco does not have any employees and it appears that the individual (the Individual) who owns 60% of Holdco would have authorized the arrangement and it is our understanding that Holdco does not lease any vehicles other than the Vehicle. While this information is relevant in considering the situation at hand, we do not believe that it is sufficient for the purposes of establishing whether the Vehicle is a "motor vehicle acquired to be sold, rented or leased in the course of carrying on a business of selling, renting or leasing motor vehicles" for the purposes of the definition of automobile in subsection 248(1) of the Act.

With respect to a luxury vehicle, the Act contains a number of provisions which limit costs that can be deducted. One of these provisions is section 67.3 which limits the deductibility of leasing costs in respect of luxury vehicles. In relation to the situation under consideration, it appears that Holdco might be charging leasing costs which are below the leasing costs that would be charged for the rental of the Vehicle in an arm's length commercial transaction (This would not have a corresponding effect on the deductibility of the leasing costs by Holdco because section 67.3 would significantly limit the deductibility of the leasing costs). If fair market value leasing charges are not being charged by Holdco, it appears to us that it may well be possible for the position to be taken that the Vehicle does not fall within the previously mentioned exception in the definition of automobile. The basis for this comment is that we believe that in order for the Vehicle to fall within the above exception, the object of the leasing arrangement from Holdco's standpoint must be to earn leasing revenues. In other words, for a vehicle to be acquired for lease "in the course of carrying on a business of ... leasing motor vehicles" where only one vehicle is involved, the leasing costs charged to a client should be consistent with leasing costs charged in normal business transactions. In our view, it would follow that the leasing arrangement in question could be regarded as having been entered into by Holdco for the purposes of accommodating Opco. However, in order to substantiate this allegation, it would be necessary to consider the extent that the leasing costs paid by Opco are below the costs that would be charged in a normal arm's length transaction (assuming that this is in fact the case). Furthermore, the profitability of the "leasing" operation would be a consideration in this context.

In connection with the above comments, we have referred to a number of cases which involved paragraph 20(1)(l) of the Act which, prior to a 1988 amendment, included the phrase "loans made in the ordinary course of business by a taxpayer part of whose ordinary business was the lending of money" since we believe that this wording is quite similar to the wording used in the exception being considered. While we have reviewed a number of cases which provide useful information concerning the interpretation of that phrase (e.g., Jack Dichter Developments Ltd. v. MNR (1979 DTC 608), Dutch-More Corporation v. MNR (1981 DTC 34), and Highfield Corporation Ltd. v. MNR (82 DTC 1835)), we believe that the Charles Chaffey case (1978 DTC 6176) and the Industrial Developments case (73 DTC 118) which were decided in favour of the Department could be used as support with respect to the above comments. Since loans were made in both these cases in which interest was not charged, we believe that these decisions could be analogous to the situation where fair market leasing costs in respect of a vehicle are not charged.

It also appears that if the above position is relevant, it could be strengthened if it could be established that the arrangement was entered into with the primary purpose in mind of enabling the Individual to use the Vehicle. In our view, information in this regard could include the following:

(a)     the manner in which Opco uses the Vehicle as a "marketing tool" with respect to its business activities and the personal use made of the Vehicle by the Individual;

(b)     whether the business use of the Vehicle by Opco as a "marketing tool" justifies the leasing costs (and other costs related to the vehicle) paid by Opco; and

(c)     the year round use made of the Vehicle by Opco with respect to its business operation.

In connection with the above comments, it would also be useful to compare the leasing arrangement to a typical leasing arrangement of an entity that leases automobiles on a day to day basis.

We are also providing you with the following additional comments in respect of the exception in the definition of automobile which refers to "a motor vehicle acquired to be sold, rented or leased in the course of carrying on a business of selling, renting, or leasing motor vehicles":

(a)     In order to fall within the above exception, the leasing of the Vehicle by Holdco, amongst other things, would have to comprise one business (i.e., the leasing of the building would have to comprise a separate business or property income (see the excerpt in (b) from Interpretation Bulletin It-73R4 for comments on property income)). For general comments on whether such a separate business would exist, we refer you to Interpretation Bulletin IT-206R entitled "Separate Businesses". We are also adding that, as a consequence of the two types of assets in your situation (i.e., a building and the Vehicle), it appears that the rental of the building and the rental of the Vehicle may not comprise one business.

(b)     If the leasing of the Vehicle was considered to give rise to property income, it would not fall within the exception. In relation to this exception, the following comments in paragraph 5 of Interpretation Bulletin IT-73R4 may be of assistance:

"Where a corporation was incorporated to earn income by carrying on business, there is a general presumption that profits arising from its activities are derived from a business (or from separate businesses as discussed in IT-206R). ... However, in some circumstances, a corporation's entire profits can be characterized as income from property, as might be the case where the corporation is formed for the sole purpose of holding shares of a second corporation or holding a property to be rented with limited landlord responsibilities."

In connection with the comments in (b) above, the facts that Holdco has no employees and that there is no written lease agreement suggest that Holdco may have limited responsibilities with respect to the lease arrangement. However, the determination of whether the leasing income of Holdco can be regarded as being property income can only be made when Holdco's responsibilities in that regard are known. As a further comment, we wish to note that in some recent cases, the courts have proceeded to characterize income as being in the nature of property income rather than business income. Examples of cases where this has occurred are the Muttart case (86 DTC 1301), the Burri case (85 DTC 5287) and the Ellaman Holdings case (87 DTC 480).

We are also adding that an additional consideration would be whether or not the general anti-avoidance provisions of section 245 of the Act could be applied. The consideration in relation to this provision is whether the amount in respect of the cost of the Vehicle could be recharacterized under paragraph 245(5)(c) of the Act. But in order to make such an assessment, it would seem that audit procedures should be carried out since it would be necessary to consider the overall income tax treatment of the Vehicle in relation to the leasing arrangement and the use of the Vehicle by Opco in its business operations. However, at this time, we are not aware of a basis for the application of section 245 of the Act in the circumstances.

We trust that you will find the foregoing satisfactory.

Yours truly,

P.D. Fuoco for DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch