17 December 1993 Income Tax Severed Letter 9323875 - Specified Leasing Property Rules

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department. Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

                 RULINGS DIRECTORATE
                CORRESPONDENCE SUMMARY

DOCUMENT TYPE:

Opinion.

PRINCIPAL ISSUES:

When a lessee dealing at non-arm's length with the lessor disposes of his interest in a lease to an arm's length purchaser does the property become specified leasing property?

POSITION TAKEN:

Depending on the facts of the situation. An amendment to a lease or a new lease would cause the property to become specified leasing property. Where there is a sublease, we would look at the facts and whether a material change occurs.

REASONS FOR POSITION TAKEN:

Our Interpretation of the Specified Property Rules.

LEGAL:

N/A

FINANCE OPINION:

N/A

JURISPRUDENCE:

N/A

RCT PUBLICATIONS:

IT-361R2 , paragraphs 12 to 15

IT-285R , IT-195R4

IT-526

HAA NUMBER:

HAA 5036-6

                                                 932387
XXXXXXXXXX

Attention: XXXXXXXXXX

December 17, 1993

Dear Sirs:

Re: Specified Leasing Property and Optional Inventory Election

This is in reply to your letters, of April 6, 1993, and May 4, 1993, addressed to the Regina District Taxation Office which was forwarded to us for reply. We apologize for the delay.

Our Comments

The situations that are described appear to involve a series of actual completed transactions. It is not our practice to give written opinions concerning completed transactions, as indicated in Information Circular 70-6R2. Although we are unable to provide any opinion in respect of the specific transactions described in your letter, we have set out some general comments which may be of some assistance.

Definition of Specified Leasing Property

Specified leasing property is defined in subsection 1100(1.11) of the Income Tax Regulations (the "Regulations"). It refers to all depreciable property having a fair market value of $25,000 or more and leased for a term exceeding one year, with certain exceptions such as exempt property and non-arm's length leases.

Property becoming "Specified Leasing Property"

When a non-arm's length leasee sells his interest in a lease to an arm's length purchaser, the transaction is most often accomplished either by a new lease or a sublease. In some circumstances, it may be possible to simply amend the existing lease.

In our view, a new lease would cause the property to become "specified leasing property" as defined in subsection 1100(1.1) of the Regulations. The circumstances of a particular fact situation will determine whether a sublease causes the property to become "specified leasing property". If the transaction is undertaken by an amendment to the existing lease, it is our view that such an amendment would constitute a material change to the lease and cause the property to be specified leasing property.

Separate Classes

Where a taxpayer should have reclassified depreciable property because of a change in its use in the income earning process, and has claimed and been allowed capital cost allowance in the incorrect class, it is our view that subsection 13(5) of the Act would apply on the basis that the property in question is misclassified by virtue of subsection 1101(1) of the Regulations and should be transferred to its proper class. Moreover, paragraph 1101(5)(n) of the Regulations deems that where property is specified leasing property, a separate class is prescribed in respect of that property.

Notional Loan

The notional loan principal for the purpose of the specified leasing property rules is equal to the fair market value of the property at the time it becomes specified leasing property.

Prescribed Rate of Interest

The prescribed interest rates pursuant to section 4302 of the Regulations are used to determine and limit the amount of capital cost allowance that a lessor may claim in respect of "specified leasing property". The interest portion for these purposes in any month is one percentage point greater than the long term Government of Canada bond rate which is published monthly in the Bank of Canada Review.

For leases subject to this legislation, the rates are as follows:

                1989    1990     1991      1992       1993
                ------------------------------------------
January          --    10.80    11.70     10.18       9.66
February         --    10.69    11.51      9.97       9.54
March            --    11.04    11.22      9.92       9.67
April            --    11.64    10.89      9.97       9.19
May              --    11.91    10.88     10.28       9.27
June             --    12.54    10.91     10.51
July          10.85    11.86    10.91     10.17
August        10.60    11.72    11.36      9.87
September     10.62    11.78    11.17      9.21
October       10.62    11.83    10.97      9.19
November      10.91    12.54    10.59      9.53
December      10.54    12.15    10.12      9.33

Other

In our view, a farm account receivable would not meet the definition of inventory for the optional inventory election available to farmers.

We trust our comments are of assistance to you.

Yours truly,

for Director Financial Industries Division Rulings Directorate Legislative and Intergovernmental Affairs Branch