22 September 2010 External T.I. 2010-0379411E5 - Accounting for rent-to-own assets

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: Should "rent-to-own" assets be treated as capital assets with capital cost allowance being claimed or as inventory which is expensed through the cost of goods sold.

Position: General comments provided.

Reasons: Depends on taxpayer's business.

XXXXXXXXXX
									2010-037941
									Andrea Boyle, CGA

September 22, 2010

Dear XXXXXXXXXX :

Re: Accounting for Rent-to-Own Assets

I am writing in reply to your email dated August 30, 2010, in which you asked about the correct classification of the assets which you rent to customers in your "rent-to-own" business.

You have indicated that you rent furniture, electronics, appliances, and computers to customers for terms which range from 12-36 months with most customers taking the 36 month option. If all payments are made, ownership of the asset transfers to the customer at that time; otherwise the product is "repossessed" and rented to a different customer. You want to know whether these assets should be treated as capital assets with capital cost allowance being taken at the appropriate rate or as inventory which would be expensed through the cost of goods sold.

The particular situation outlined in your email is a factual one, involving a specific taxpayer. 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 an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant tax services office. We are, however, prepared to offer the following general comments, which may be of assistance.

All statutory references in this letter are references to the provisions of the Income Tax Act, R.S.C. 1985 (5th supp.) c. 1, as amended.

A review of all the relevant circumstances and facts and the details of the rental agreements would be necessary to reach a conclusion on the proper classification of the property. Generally, whether property is capital or inventory at acquisition depends upon the taxpayer's intention and, in this case, whether the nature of the transaction is a rental agreement or whether it is an instalment purchase and sale agreement. It will also depend upon other factors such as the taxpayer's business, specifically whether a taxpayer both sells and rents property of the same kind.

If the transaction is an instalment purchase and sale agreement, then the property would be considered inventory and would be expensed through the cost of goods sold.

Generally, a property subject to a long-term rental agreement would be considered capital property. A possible exception to this position is discussed in paragraph 4 of Interpretation Bulletin IT-102R2 Conversion of property, other than real property, from or to inventory (this bulletin is available on the Canada Revenue Agency Web site at http://www.cra-arc.gc.ca/E/pub/tp/it102r2/it102r2-e.html):

Where a taxpayer both sells and either rents or leases property of the same kind, it is the Department's position that all proceeds from the sale of property that has been rented or leased constitutes income of the taxpayer from the sale of inventory unless

a) the taxpayer operates a separate and clearly distinguishable leasing division, including the keeping of separate records,

b) specific property is set aside by the taxpayer for either renting or leasing and is factually so used, and

c) properties that are so rented or leased are normally sold for an amount that is less than their cost to the taxpayer.

Where the conditions in (a) to (c) above are complied with, the ultimate disposal of property used for renting or leasing will be treated as the disposal of capital property.

Therefore if your business both sells furniture, electronics, appliances, and computers and also offers rent-to-own agreements, then the assets would be considered inventory unless the conditions in (a) to (c) above are met. Specifically, if you are carrying on a separate rental business and can identify specific property which has been acquired for use in the rental business and that the rented properties are normally sold for an amount that is less than their cost, such rental property will be considered to be acquired, held and sold as capital property.

We trust that these comments will be of assistance.

Yours truly,

Randy Hewlett
Manager
for Director
Ontario Corporate Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch