13 January 2010 External T.I. 2009-0338531E5 - Standby Charge benefit with Nominal Lease Charge

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 a nominal lease charge is a reasonable amount to use as a lease cost in determining the Standby Charge.

Position: Question of fact, but possibly yes

Reasons: Where the lease contract is between arm's length parties and there is no barter transaction, it is acceptable for the monthly nominal administrative fee paid to the lessor to be used as a lease cost where that is the amount that is actually payable to the lessor.

									2009-033853
XXXXXXXXXX 								Henry Leung
(613) 957-9232
January 13, 2010

Dear XXXXXXXXXX :

Re: Calculation of Standby Charges involving Nominal Lease Charge

This is in response to your email correspondence of August 26, 2009 requesting a Technical Interpretation on whether a nominal charge is a reasonable amount to use as a lease cost in determining the standby charge benefit pursuant to subsection 6(2) of the Income Tax Act (the "Act").

You have described a situation in which a company (the "Employer") has a fleet of automobiles that are typically leased from an arm's length party (the "Lessor") for 36 or 48 months. In a departure from prior practice, at the completion of the lease term of the automobiles most recently leased, the automobiles have been retained by the Employer and continue to be driven by its employees rather than being returned to the Lessor. The Lessor retains ownership of the automobiles.

During the lease term, the monthly charge for each automobile was approximately $500 per month. The monthly lease charges paid off the entire cost of the automobile leaving no residual value at the end of the lease term. Upon expiration of the lease term, the monthly charge was reduced to a $20 per month administration fee. This amount was determined by the Lessor. There were no additional fees or charges in addition to the $20 per month, nor were there any commitments (e.g. a commitment to lease future vehicles from the lessor) between the Employer and the Lessor in consideration for the nominal $20 per month charge.

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. Although we cannot comment on your specific situation, we are prepared to provide the following comments in respect of the issues that you raised. Please note, however, that these comments are of a general nature only and are not binding on the CRA.

Our Comments:

The calculation of the standby charge is based on the formula contained in subsection 6(2) of the Act. Where the automobile is leased, the standby charge is calculated based on 2/3 of the lease cost less the amount payable to the lessor for insuring against the loss of, damage to or liability resulting from the use of the automobile. The lease cost is also described in subsection 6(2) of the Act under variable E which states:

E is the total of all amounts that may reasonably be regarded as having been payable by the employer to a lessor for the purpose of leasing the automobile during such of the total available days as are days when the automobile is leased to the employer ...(emphasis added)

Where a lessor charges a lessee a nominal monthly amount for the use of its automobiles, the CRA will examine the consideration exchanged. We would first determine whether an arm's length relationship existed between the parties. Where an arm's length relationship is found, we would then look for the existence of a barter transaction.

We are aware that it is not uncommon for the use of automobiles to be provided in exchange for non-cash consideration. Some examples may include, but are not limited to:

* A commitment or obligation to renew existing and perhaps enter into future leases with the lessor;
* An agreement by the lessee to provide the lessor with financing to acquire vehicles or future vehicles to be leased; or
* Other services to be provided by the lessee.

Where the goods or services given up cannot readily be valued but the goods or services received can, the CRA will normally accept the value of the latter as being the price at which the transaction took place between the arm's length parties. For example, if it is the lessor's customary practice to sell its automobiles after the automobiles are returned at the expiration of the lease term, it would be reasonable to consider that a residual value is expected to be recovered by the lessor. As such the lessor would be expected to charge the lessee a lease amount, at a minimum, that equals the decrease in sale value of the automobile between the expiry date of the lease contract and the additional time that the lessee retains the automobiles for before returning them to the lessor.

In a straightforward transaction occurring at arm's length, where there is no evidence of a barter transaction, it would be acceptable for the actual administrative fee paid by an employer to be used in the calculation of the standby charge benefit of its employees.

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