22 January 1990 Income Tax Severed Letter ACC9013 - Draft Interpretation Bulletin IT-233R2 on Lease and Sale and Leaseback Agreements

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.

January 22, 1990

Audit Application Division
Technical Publications Section          Rulings Directorate
                                        Financial Industries
                                          Division
Ms. Lois C. Pollack, Chief              T. Murphy
                                        957-2747

Draft Interpretation Bulletin IT-233R2 Lease and Sale - Leaseback Agreements

The enclosed draft bulletin has been prepared by the Financial Industries Division and is now being distributed for review.

We would appreciate receiving by February 12, 1990 your comments with respect to administrative matters that are relevant to positions described in the draft.

We wish to draw your attention to the fact that the draft has been written on the basis that a lease agreement which is regarded as a disposition will be treated as such for all purposes of the Income Tax Act (the "Act") including Part XIII, unless the application of Part XIII is overridden by the applicable tax convention. This may be perceived as a change from our position as stated at the 1981 Round Table, a copy of which is attached.

The comments made at the 1981 Round Table were not reflected in Interpretation Bulletin IT-233R dated February 11, 1983. This appears to have been an inadvertent omission. A note placed on the support file for the bulletin by Jim Vegan on March 1, 1983, recommended that the position be included in the next revision of the bulletin.

In our opinion, the 1981 Round Table position is now out of date.

It was based on the premise that the statements concerning the treatment of leases made in Interpretation Bulletin IT-233 were purely administrative in nature and not supported by jurisprudence. Today, however, the position on the treatment of leases in the draft bulletin is supported by jurisprudence.

We have also noted that the 1981 Round Table position was formulated before the introduction of the Income Tax Conventions Interpretation Act ("ITCIA"), which is applicable, in the case of tax under Part XIII of the Act, to amounts paid or credited after June 23, 1983. Under the ITCIA, if a term is not defined in the provisions of a convention, it has the same meaning it has for the purposes of the Act. In such cases, if the lease agreement is regarded as a disposition of property under the Act, then the payments made by the Canadian lessee to the non-resident lessor are considered to be blended payments of principal and interest and not rental payments (the interest portion of the blended payment may be exempt from withholding tax by virtue of subparagraph 212(1)(b)(vii)). Conversely, of the payments are described in a definition of rentals in the applicable tax convention, then the payments to the non-resident, in respect of a lease regarded as a disposition of property under the Act, would be rental payments. In both instances, the Canadian lessee is considered to have acquired a property for purposes of the Act.

Director General Rulings Directorate Legislative and Intergovernmental Affairs Branch

Enclosures