Section 16.1

Regarding a lease of a truck tractor, CRA indicated that the s. 16.1 election could not be made, as a truck tractor is prescribed property.

Before concluding that "since a transport truck would be considered exempt property, a lessee and a lessor would not be entitled to elect under section 16.1…[so that] the lessee would not be entitled to deduct CCA on this vehicle, " CRA stated:

As noted in Income Tax Technical News ITTN No. 21, it is our view that the determination of whether a contract is a lease or a sale for income tax purposes is based on the legal relationships created by the terms of the particular agreement, rather than the underlying economic reality. In the absence of a sham, a lease is a lease and a sale is a sale.

and then noted that the effect of s. 16.1 election:

is to consider the lessee, for the purpose of calculating the lessee's income only, to have purchased the leased property for the duration of the lease and to have financed the purchase by way of a loan. This will have the effect of allowing the lessee to claim CCA on the property over the term of the lease. In addition, where the election is filed, the lessee will be entitled to deduct the notional interest portion of the rental payments.

CRA stated:

Since subsection 16.1(1) is not listed in section 600, a subsection 16.1(1) election cannot be late-filed.

Does "the particular time" in s. 16.1(1)(b) mean the time when the lease began or when it was entered into? CRA stated:

[S.] 16.1(1)… states that they must "jointly elect in prescribed form filed with their returns of income for their respective taxation years that include the particular time when the lease began." Since this is the only reference to the "particular time" in subsection 16.1(1), it is our view that this term refers to the time when the lease began.

As s. 16.1(1)(b) does not deem a taxpayer to have disposed of an acquired or reacquired property, Regulations 1100(2.21) will not apply to the property.

After the confirmation of Finance that it was not intended that an election under s. 16.1 should cause equipment not to qualify for an investment tax credit, RC on an administrative basis has adopted the position that Regulation 2902(b)(ii) will not apply to the leased equipment.

Re effect of election on availability of investment tax credit.

A partnership is a person for purposes of s. 16.1. The partner who is first required to file an income tax return for the taxation year in which the election is made is required to file the prescribed form with its income tax return.