29 September 1994 Internal T.I. 9419767 - PROCEEDS OF DISPOSITION

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:

proceeds of disposition vs other income

Position TAKEN:

excess over FMV should be other income. Question of fact.

Reasons FOR POSITION TAKEN:

facts of case.

			September 29, 1994

Montreal District Office Head Office
D. Vincent Rulings Directorate
Director S.J. Tevlin
(613) 957-2746
Attention: Kwee-Chen Chung
941976

Early Buy-Outs of Leases

We are writing in response to your memorandum dated August 2, 1994, wherein you requested our opinion with respect to whether an amount received in excess of the fair market value of a depreciable asset constitutes proceeds of disposition or should be considered other income.

Our understanding of the facts is as follows:

The taxpayer corporation is in the business of commercial leasing. It leases equipment under 2 types of leases:

(1)$1 - purchase option leases (financial leases)

(2)FMV - purchase option leases (operating leases)

Most of the leases are FMV - purchase option type. The lease contracts do not include any clause on early buy-outs by the lessee. However, early buy-outs by the lessee are not uncommon and are the subject of your letter.

When early buy-outs occur, very often the taxpayer receives excess amounts over the net lease receivable balance which is allocated in part to the income statement accounts "Gain\Loss on sale of leased equipment" and in part to "Administration Fee". The "Administration Fee" is a % of (Net Lease Receivable + Gain\Loss on sale of leased asset).

The accounting "Gain\Loss on sale of leased assets" and "Administration Fee" amounts are reversed on the T2S(1). The total amount received from the lessees is included as proceeds of disposition.

Request

You have asked for our comments with respect to the following questions:

1)Should the amount received by the lessor in excess of the net lease receivable (ie: "Administration Fee" and "the Gain\Loss on the sale of leased assets") constitute business income or is the total amount received to be considered proceeds of disposition?

2)The most appropriate sections of the Act that would be applicable.

District Office Position

Your position is that for purposes of subsection 13(21) and the definition of "proceeds of disposition" both the "Administration Fee" and the "Gain\Loss on sale of leased assets" represent amounts that are in excess of the fair market value of the asset sold and should be included in income pursuant to section 9 of the Act as opposed to being credited to the particular class as proceeds of disposition.

Taxpayer Representations

The price charged to the lessee on early buy-out constitutes the selling price (FMV) bargained between arm's length parties.

The selling price is contained in the Bill of Sale and this amount is presumably set up by the purchaser as a capital expenditure.

The selling price is the proceeds of disposition for purposes of subsection 13(21).

Comments

Generally, it is a question of fact as to whether the total Bill of Sale amount is to be considered proceeds of disposition as that term is defined in subparagraph 13(21) or whether a portion represents something else.

Where it can be substantiated that the amount described as proceeds of disposition is in excess of the fair market value of the asset at the time of the sale then we would agree that such excess is representive of something else (ie: compensation for failure to receive foregone rental payments) and would constitute income to the vendor.

Since the "administration fee", which is calculated as a percentage of a specific amount, can be segregated and determined with certainty, it would appear that such amount should be categorized as "other income" and included in income pursuant to section 9.

We trust our comments will be of assistance to you. If you wish to discuss the above please contact Steve Tevlin at (613) 957-2746.

for Director
Financial Industries Division
Rulings Directorate
Policy and Legislation Branch