1 February 2011 External T.I. 2010-0384021E5 - Leasing Business and the Half-Year Rule

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: Whether the exception to the half-year rule in paragraph 1100(2)(v)of the Regulations applies to the property being leased by the corporation.

Position: It is a question of fact which depends on whether two requirements are met.

Reasons: The taxpayer must be a corporation that was throughout the year a corporation described in subsection 1100(16) of the Regulations and the taxpayer's property must be "specified leasing property". Subsection 1100(1.11) of the Regulations defines "specified leasing property" and subsection 1100(1.13) of the Regulations defines "exempt property".

XXXXXXXXXX
                                                      2010-038402
                                                      Kathryn McCarthy, CA
                                                      (613) 828-9377
February 1, 2011

Dear XXXXXXXXXX :

Re: Leasing Business and the Half Year Rule

This is in response to your e-mail of October 16, 2010, and further to a telephone conversation on October 13, 2010 (McCarthy/XXXXXXXXXX ), concerning the above noted subject.

You described a client which is a corporation in the principal business of leasing property. Most of the leases are for new and used modestly priced vehicles and light trucks. The remainder includes leases for larger trucks and other types of equipment (e.g., veterinary imagers, 3D movie cameras, industrial machinery, computer assets, farm equipment and trailers). The lease terms run from 12 to 60 months, with the average being approximately 36 months. Your client has some large customers with either a fleet of leased business vehicles or a variety of equipment, but the majority of the customers are individuals with personal vehicle leases. You indicated that your client is not in the business of selling the assets which are leased to its customers and suggest that the assets are capital assets.

In your correspondence you indicated that the corporation has been applying the half-year rule referred to in subsection 1100(2) of the Income Tax Regulations ("Regulations") to its property acquisitions since 2001 following a Canada Revenue Agency ("CRA") reassessment.

You are concerned that the half-year rule may not be applicable to the corporation. Specifically, you enquired whether the exception to the half-year rule in paragraph 1100(2)(v)of the Regulations applies to the property being leased by the corporation because the corporation's principal business is leasing as described in subsection 1100(16) of the Regulations and the property is "specified leasing property" as defined in subsection 1100(1.11) of the Regulations.

Our Comments

The situation outlined in your letter appears to relate to a factual one, involving a specific taxpayer. It is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advance income tax ruling. For more information about how to obtain a ruling, please refer to Information Circular IC 70-6R5, Advanced Income Tax Rulings, dated May 17, 2002. This IC and other CRA publications can be accessed on the Internet at www.cra-arc.gc.ca.

Since your situation involves a specific taxpayer and in effect you seem to be questioning the accuracy of a prior CRA reassessment of the corporation and the accuracy of continuing to apply the half-year rule to new acquisitions, we suggest that you submit all relevant facts and documentation to the appropriate Tax Services Office ("TSO") for their views. A list of TSOs is available on the "Contact Us" page of the CRA website. However, we are prepared to provide the following comments, which may be of assistance, regarding the exception to the half-year rule for specified leasing property.

The half-year rule generally allows only half of the CCA that is otherwise deductible in the year a property is first available for use, determined on a class by class basis. However, pursuant to paragraph 1100(2)(v) of the Regulations, the half-year rule is generally not applicable if two requirements are met: first, the taxpayer is a corporation that was throughout the year a corporation described in subsection 1100(16) of the Regulations, and, second, the taxpayer's property is "specified leasing property".

As regards the first requirement, subsection 1100(16) of the Regulations describes a corporation, otherwise referred to as a Principal Business Corporation ("PBC"), whose principal business is the renting or leasing of "leasing property", including property that would be leasing property were it not excluded under subsections 1100(18), (19) or (20) of the Regulations, or the renting or leasing of such property combined with the sale and service of property of the same general type and description. In addition, to qualify as a PBC, the corporation's gross revenue for the year from such a principal business cannot be less than 90% of its gross revenue from all sources. "Gross revenue" is defined in subsection 248(1) of the Income Tax Act.

The term "leasing property" ("LP") is defined in subsection 1100(17) of the Regulations. LP of a taxpayer is depreciable property of a prescribed class other than the specific exclusions set out in subsection 1100(17) (i.e., rental property, computer tax shelter property, and property referred to in Class 10(w) and Class 12(n)), that is used principally for the purpose of gaining or producing gross revenue that is rent, royalty or leasing revenue. LP does not include a property leased by a taxpayer in the ordinary course of selling goods or rendering services under an agreement by which the lessee undertakes to use the property to carry on the business of selling or promoting the sale of the taxpayer's goods or services.

Whether the revenue from specific activities of a corporation can be considered part of the gross revenue from the principal business of leasing is a question of fact. Please refer to Interpretation Bulletin, IT-443, Leasing Property - CCA Restrictions, and the Special Release at www.cra-arc.gc.ca/menu/ITSC_400-e.html, for more information.

As regards the second requirement, the expression "specified leasing property" ("SLP") is defined in subsection 1100(1.11) of the Regulations and generally means depreciable property (other than exempt property) of a taxpayer that is used by the taxpayer or a non-arm's length person principally for the purposes of earning gross revenue that is rent or leasing revenue; is subject to an arm's length lease of a term of more than one year; and is the subject of a lease of property where the tangible property (other than exempt property) that is the subject of the lease has an aggregate fair market value in excess of $25,000 at the time the lease is entered into. SLP excludes intangible property (including systems software and property referred to in Class 10(w) and Class 12(n) or (o)).

Exempt property is defined in subsection 1100(1.13) of the Regulations and generally includes:

• general purpose office furniture or equipment included in Class 8, other than an individual piece that has a capital cost in excess of $1,000,000;
• general-purpose computer equipment, and ancillary data processing equipment, included in Class 45, 50 or 52, other than an individual piece having a capital cost in excess of $1,000,000;
• furniture, appliances, television and radio receivers, telephones, furnaces, hot-water heaters and other similar properties designed for residential use;
• motor vehicles that are designed or adapted primarily to carry individuals on highways and streets and that have a seating capacity for not more than the driver and eight passengers, or a motor vehicle commonly called a van or pick-up truck, or a similar vehicle;
• trucks or tractors designed for hauling freight on highways and trailers therefor;
• buildings included in Class 1, 3, 6, 20, 31 or 32, unless the building was leased to certain tax exempt entities who owned the building or part thereof at any time before the commencement of the lease (subject to a one year exemption period);
• a vessel mooring space; and
• property included in Class 35 (e.g., railway cars).

As announced in the 2010 Federal Budget, on August 27, 2010, the Department of Finance released draft legislation proposing to extend the application of the SLP rules to property leased under certain circumstances, by excluding them from the definition of exempt property. Generally, the proposal would apply to property that is the subject of a lease to a government or other tax-exempt entity, or to a non-resident, if the total value of the property that is the subject of the lease exceeds $1,000,000. The new measures will apply to leases entered into after 4:00 p.m., Eastern Standard Time, on March 4, 2010.

Since, pursuant to paragraph 1100(2)(v) of the Regulations, the exception to the half-year rule is for depreciable property that qualifies as SLP of a corporation that was throughout the year a PBC, the half-year rule would be applicable to property that is exempt property since such property would not qualify as SLP. Because of this, it is necessary to evaluate each property to determine if it qualifies as SLP or as exempt property.

We trust the foregoing comments are of assistance.

Yours truly,

S. Parnanzone
Manager
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch