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.
Auto Leasing - sale or lease
Depending on the facts
Risk, use. possession - recent court cases
XXXXXXXXXX C. Tremblay
January 28, 1997
Re: Auto Leasing
This is in reply to your letter of December 1, 1996, wherein you requested a technical interpretation of whether a lease is a sales type lease or an operating lease based on a given set of facts.
The situation that is described appears to involve a series of actual completed and on-going transactions involving specific taxpayers; consequently, your questions should be directed to your District Services Taxation Office which has the responsibility of determining the tax consequences of completed transactions and their implications to the specific taxpayers. 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.
It is a question of fact as to who owns a property and such a determination during the term of the lease is required in order to determine who gets to claim the capital cost allowance on the property. A lessor and a lessee should treat the transaction in the same manner, whether it is a sale type lease or an operating lease at the inception of the lease. Only one of them is eligible for the capital cost allowance claim. A disposition is given its widest possible meaning in the capital cost allowance provisions. As long as title or the normal incidences thereof - that is possession, use and risk, are transferred, the courts have generally ruled that there has been a disposition of the relevant asset and correspondingly an acquisition.
The guidelines in IT-233R describing circumstances in which a transactions structured as a lease will be treated as an acquisition and disposition of property continue to represent the Department's general position in this regard. Although we generally will rely on the assumption that the form of an agreement reflects the true relationship between the parties, if it is established that the form does not reflect the true legal relationship between the parties involved, the form of the agreement may be ignored. However, the parties to an agreement will not be allowed to avoid the legal consequences of their own transaction by claiming that the form of the agreement does not reflect the true legal relationship between them.
Civil law cases where the concept of beneficial ownership does not exist are also being reviewed, however, generally it is our view that the purchaser has acquired the assets when title has passed or when the purchaser has all the incidents of title, such as possession, use, risk, although legal title may remain in the vendor as security for the purchase price. A recent decision of the Supreme Court of Canada, Mitsui & Co v. Royal Bank ((1995) 2 R.C.S. 187), on uniform provincial conditional sales acts indicates that all leases with purchase options are conditional sales contracts. This was not a tax case, but the implications of the decision will have to be carefully studied.
It remains a question of fact whether the lease results in a disposition of the property to the lessee notwithstanding that the lessor may be successful in having the lessee take the risks in the resale of the property at the end of the lease period.
We trust our comments will be of assistance to you.
Financial Industries Division
Income Tax Rulings and
Policy and Legislation Branch
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