11 April 1990 Ruling 74711 F - Interpretation Bulletin IT-435R Re Inventory of Rental Equipment

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.

SUBJECT:  Interpretation Bulletin IT-435R ("IT-435R")

This is in reply to your memorandum of February 7, 1990 regarding an inventory allowance on a taxpayer's "inventory" of rental equipment, you have asked us whether an opinion given in a January 11, 1982 memorandum to the Appeals Branch still reflects our current position even though it is not reflected in IT-435R, dated June 23, 1982.

The opinion stated in our previous memorandum, which dealt with the deductions of inventory allowance claims by several computer companies, is as follows:

     "As far as we can recall, the issue whether property on a month-to-month lease contract qualifies for the inventory allowance was not considered by us previously.  However, it is our opinion that property on these lease contracts would not ordinarily qualify for the inventory allowance, unless the equipment leased was acquired primarily for sale and only temporarily assigned for rental use. Equipment purchased primarily for rental use, such as may be the case if it is rented on a month-to-month basis continuously would not qualify."

You believe that paragraph 16 of IT-435R provides for an inventory allowance on a leased asset only where the lease asset only where the lease provides the lessee with an option to purchase the leased asset.  However you also believe that the comments in our previous memorandum would appear to permit an inventory allowance to be claimed on an asset leased under a month-to-month lease contract where "the asset leased was acquired primarily for sale and only temporarily assigned for rental use", even though the lease contract would not stipulate a purchase option.  You requested us to confirm your understanding.

It is always a question of fact whether a leased asset is "an inventory held for sale".  The above-quoted opinion was given in light of certain factual situations and in our view, it must be read in conjunction with the comments in paragraphs 15 and 16 of IT-435R.  It is generally our view that an inventory allowance can be claimed on a leased asset provided:

(a)     the leased asset is included in a taxpayer's inventory (presumably because it was acquired primarily for resale and is only being rented or leased temporarily),

(b)     the leased asset remains available for sale and is offered for sale throughout the term of the lease through a purchase option,

(c)     IT-102R (or IT-102R2) and IT-128R do not require the leased asset to be classified as depreciable property, and

(d)     the other requirements under former paragraph 20(1)(gg) of the Act are met.

We hope that our views are helpful to you.

Chief Leasing and Financing SectionFinancial Industries DivisionRulings Directorate