1 March 2011 External T.I. 2011-0395221E5 - Purchase and Lease of a Luxury 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: Whether the cost of the luxury automobile can be included in Class 10 of Schedule II of the Income Tax Regulations (the "Regulations") instead of Class 10.1.

Position: General comments provided.

Reasons: Question of fact.

XXXXXXXXXX 				2011-039522
					Michael Cooke, C.A.

March 1, 2011

Dear XXXXXXXXXX :

Re: Purchase and Lease of a Luxury Automobile

We are writing in response to your facsimile of February 7, 2011, concerning a situation involving the purchase and lease of a luxury automobile (i.e., an automobile costing more than $30,000 - excluding taxes) by a corporation and whether the cost of the luxury automobile can be included in Class 10 of Schedule II of the Income Tax Regulations (the "Regulations") instead of Class 10.1.

Briefly, we understand that the corporation will purchase or has purchased a luxury automobile for the purpose of earning income from a leasing business. We also understand that the amount of lease payments charged by the corporation, while somewhat lower than the competition, will allow the corporation to make an acceptable return on its investment. Initially, the corporation will only have one automobile available for lease but it intends to expand its leasing activities over time.

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 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 (the "TSO"). A list of TSOs is available on the "Contact Us" page of the CRA website. Notwithstanding the forgoing, we are prepared to provide the following comments.

Class 10.1 of Schedule II of the Regulations includes property that would otherwise be included in Class 10 that is a "passenger vehicle", the cost of which exceeds $20,000 or such other amount as may be prescribed for the purposes of subsection 13(2) of the Income Tax Act (the "Act"). The current prescribed amount is $30,000 before applicable taxes pursuant to subsection 7307(1) of the Regulations.

The definition of "passenger vehicle" in subsection 248(1) of the Act means an "automobile" acquired after June 17, 1987 (other than an automobile acquired after that date pursuant to an obligation in writing entered into before June 18, 1987) and an automobile leased under a lease entered into, extended or renewed after June 17, 1987. The definition of "automobile" in subsection 248(1) of the Act includes, inter alia, a motor vehicle that is designed or adapted primarily to carry individuals on highways and streets and that has a seating capacity for not more than the driver and 8 passengers. However, pursuant to paragraph (d) of the definition of "automobile", it will not include, except for the purposes of section 6, a motor vehicle acquired to be sold, rented or leased in the course of carrying on a business of selling, renting or leasing motor vehicles or a motor vehicle used for the purpose of transporting passengers in the course of carrying on a business of arranging or managing funerals.

Where a particular motor vehicle would otherwise meet the respective definitions of "automobile" and "passenger vehicle" but for the fact that it has been acquired by a taxpayer for the purpose of earning rental or leasing income from the taxpayer's motor vehicle rental or leasing business, such a motor vehicle would not be property described in Class 10.1 of Schedule II of the Regulations. Accordingly, in such a situation, the motor vehicle would be included in Class 10 of Schedule II of the Regulations unless the taxpayer did not expect the motor vehicle to be rented or leased to any particular person for more than 30 days in any 12 month period, in which case the motor vehicle would be included in Class 16 of Schedule II of the Regulations.

We would like to mention that, subject to certain exceptions for corporations and partnerships, subsection 1100(15) of the Regulations limits the amount of capital cost allowance deduction that can be claimed under paragraph 20(1)(a) of the Act in respect of a "leasing property" owned by a taxpayer. Where subsection 1100(15) of the Regulations is applicable, a taxpayer is prevented from creating or increasing a loss to shelter non-leasing income. For a detailed discussion of these rules please refer to Interpretation Bulletin IT-443, Leasing Property - Capital Cost Allowance Restrictions.

While a determination of the above issues can only be made having regard to consideration of all relevant facts (including a review of any supporting documentation), the fact that a corporation may initially only acquire one motor vehicle would not, in and of itself, mean that such motor vehicle was not acquired for the purposes of earning rental or leasing income from a motor vehicle rental or leasing business or that such business was not that corporation's principal business.

We trust that these comments will be of assistance.

Yours truly,

Sandy Parnanzone
Manager
For Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch