23 February 1994 Internal T.I. 9402106 - CLASSIFICATION OF LEASED ASSETS

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.

Principal Issues:

Classification of leased assets as capital or inventory

Position TAKEN:

It is a question of fact and the positions taken under the Income Tax Act may not be relevant

Reasons FOR POSITION TAKEN:

The definition of "inventory" under the Excise Tax Act differs from that under the Income Tax Act

Canada Customs and Excise
General Tax Policy Division
Ottawa, Canada 940210
K1A 0L5 F. Francis

Attention: R. Allwright
Manager Exports and Transition Unit

February 23, 1994

Dear Sirs:

This is in reply to your letter of January 27, 1994, wherein you requested our comments concerning leasing property. You requested information on the treatment of such property as either capital or inventory under the Income Tax Act (the "Act").

Under the Act, the determination of whether a property subject to a lease is capital or inventory is a question of fact, to be determined on the basis of a review of all the relevant facts and actual lease agreements. Generally, it is our position that a property subject to a long term lease would be considered as capital property. The Department considers each fact situation separately before determining whether property should be classified as capital or inventory.

It is the Department's position, as stated in the 1988 Canada Tax Foundation, that in determining whether a transaction is a lease or a disposition, the Department will normally rely on the assumption that the form of an agreement reflects the true relationship of the parties involved. There may be situations whereunder a lease may be considered as a disposition. In this regard, we refer you to the comments outlined in Interpretation Bulletin 233 (attached), however, we caution that this is currently under review.

We understand that your particular concern is with respect to companies in the auto rental business. While the determination as to whether a leased car is capital or inventory is a question of fact, the tax consequences arising under the two classifications may not be significantly different under the Act and the determination is not crucial. Consequently, our Audit Division does not have any specific concerns in this area.

Moreover, we note that the treatment of these properties under the Act may not be relevant for your purposes due to the different definitions of "inventory" under the Act and the Excise Tax Act.

We trust the above comments are of assistance to you.

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