3 November 2010 External T.I. 2010-0370211E5 - Employee's Purchase of employer-leased automobile

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.

Principal Issues: The income tax treatment of automobiles purchased by employees from a lessor where the particular automobiles were previously leased by the employer.

Position: An employee benefit, equal to the excess of the automobile's fair market value over the purchase price paid by the employee for the automobile, will be considered to have been received by the employee. We will also accept that for the purposes of determining the employee's standby-charge that the employer has effectively received a "terminal credit" in respect of that leased automobile equal to the amount of the employment benefit.

Reasons: In this situation, the employee's right to purchase the leased automobile arose directly from the employee's employment with the employer.

XXXXXXXXXX
				2010-037021
				Michael Cooke, C.A.

November 3, 2010

Dear XXXXXXXXXX :

Re: Purchase by an employee of employer-leased vehicle

We are replying to your letter dated June 1, 2010, wherein you asked whether a taxable benefit under paragraph 6(1)(a) of the Income Tax Act (the "Act") would arise in the situation described in your letter.

More specifically, under a particular lease arrangement between an employer and a lessor, employees are given the right to purchase an employer-leased automobile at the end of the lease term directly from the lessor for the residual value ("RV") of the particular automobile as specified in the lease agreement. Where an automobile is not purchased by an employee the lessor will sell the automobile at auction. If the lessor receives less than the RV for the automobile the employer must pay the lessor the difference (i.e., a "terminal charge") and conversely, if the lessor receives more than the RV for the automobile the lessor must pay the employer the difference (i.e., a "terminal credit"). However, where the employee purchases the automobile from the lessor for its RV, the lessor does not have to pay the employer any terminal credit nor would the employer have to pay the lessor any terminal charge.

Our Comments:

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of a request for an advance income tax ruling submitted in the manner set out in Information Circular 70-6R5, Advanced Income Tax Rulings, dated May 17, 2002. This Information Circular and other Canada Revenue Agency ("CRA") publications can be accessed on the internet at http://www.cra-arc.gc.ca. Where the particular transactions are complete, the inquiry should be addressed to the relevant tax services office, a list of which is available on the "Contact Us" page of the CRA website. Notwithstanding the above, we are prepared to offer the following comments.

Our Comments

In our view, the wording of paragraph 6(1)(a) of the Act is very broad and can apply when any benefit is received or enjoyed in respect of or in connection with an office or employment. The fact that an employee might purchase the automobile directly from the lessor and not the employer is not fatal to the application of paragraph 6(1)(a) of the Act where such right to purchase arose in respect of, in the course of, or by virtue of that employee's employment.

You have referenced technical interpretation 2009-0350541, which did not involve the potential application of paragraph 6(1)(a) of the Act. However, the situation described in technical interpretation 2001-0075355, which you also referenced, did involve the potential application of paragraph 6(1)(a) of the Act and, it is our view that the position taken there is more relevant to your question. Accordingly, where an employer makes an arrangement that provides an employee with the right to acquire an employer-leased automobile for a price less than its FMV at that time, the excess of the FMV over the amount paid by the employee will result in a taxable benefit under paragraph 6(1)(a) of the Act.

However, in these types of circumstances, the CRA is prepared to consider that the employer will have effectively received a "terminal credit" that is equal to the amount of the employee's taxable benefit under paragraph 6(1)(a) of the Act for the purpose of computing the employee's standby-charge under the rules in paragraph 6(1)(e) and subsection 6(2) of the Act. Accordingly, the employer could compute the employee's standby-charge taking into account the amount of the "terminal credit" in the year the leased automobile is acquired by the employee by following one of the two methods described in Chapter 2 of the T4130 provided the other conditions described therein are otherwise met.

We trust the foregoing will be of assistance.

Yours truly,

Renée Shields
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch