Section 16.1

Subsection 16.1(1) - Leasing properties

Administrative Policy

S3-F4-C1 - General Discussion of Capital Cost Allowance

Overview

1.26 Subsection 16.1(1) provides special rules to allow a lessee to claim CCA on certain property (other than property prescribed by section 8200 of the Regulations) leased for a term of more than one year. Where the lessor and lessee jointly elect in a prescribed form, the lessee will be deemed to have acquired the tangible property (or corporeal property under civil law) at the particular time the lease commenced, at a cost equal to its fair market value at that time. For tax purposes, the rental payments made under the lease will be treated not as rent but as blended payments of principal and interest on a notional loan in accordance with paragraph 16.1(1)(c). To the extent that the property is used to earn income, the lessee will be able to claim CCA in respect of the property (subject to the normal rules, such as the half-year rule) and deduct the interest portion of each payment in respect of the notional loan. When the lease is either cancelled, expired or assigned, the lessee will be treated as having disposed of the property and the rules in paragraph 16.1(1)(f) will apply to determine the amount of any resulting recapture or terminal loss. The joint election is made by filing Form T2145, Election in Respect of the Leasing of Property, or Form T2146, Election in Respect of Assigned Leases or Subleased Property, with both the lessor and lessee's income tax return for the year in which the lease agreement is made.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(b) - Capital Expenditure v. Expense - Improvements v. Repairs or Running Expense 476
Tax Topics - Income Tax Act - Section 13 - Subsection 13(21) - Undepreciated Capital Cost - A 669
Tax Topics - Income Tax Act - Section 13 - Subsection 13(21) - Depreciable Property 170
Tax Topics - Income Tax Act - Section 13 - Subsection 13(28) 194
Tax Topics - Income Tax Act - Section 13 - Subsection 13(27) 178
Tax Topics - Income Tax Act - Section 13 - Subsection 13(29) 145
Tax Topics - Income Tax Regulations - Regulation 1100 - Subsection 1100(2) 184
Tax Topics - Income Tax Regulations - Regulation 1100 - Subsection 1100(2.2) 267
Tax Topics - Income Tax Regulations - Regulation 1100 - Subsection 1100(3) 60
Tax Topics - Income Tax Act - Section 18 - Subsection 18(3.1) 140
Tax Topics - Income Tax Act - Section 13 - Subsection 13(7.5) 167
Tax Topics - Income Tax Act - Section 261 - Subsection 261(2) 53
Tax Topics - Income Tax Act - Section 128.1 - Subsection 128.1(1) - Paragraph 128.1(1)(b) 204
Tax Topics - Income Tax Regulations - Regulation 1102 - Subsection 1102(1) - Paragraph 1102(1)(c) 150
Tax Topics - Income Tax Act - Section 13 - Subsection 13(7) - Paragraph 13(7)(e) 55
Tax Topics - Income Tax Act - Section 43 - Subsection 43(1) 142
Tax Topics - Income Tax Act - Section 68 153
Tax Topics - Income Tax Act - Section 13 - Subsection 13(21.1) - Paragraph 13(21.1)(a) 65
Tax Topics - Income Tax Act - Section 13 - Subsection 13(21.1) - Paragraph 13(21.1)(b) 117
Tax Topics - Income Tax Act - Section 13 - Subsection 13(1) 403
Tax Topics - Income Tax Act - Section 8 - Subsection 8(2) 65
Tax Topics - Income Tax Act - Section 20 - Subsection 20(16.1) 142
Tax Topics - Income Tax Act - Section 13 - Subsection 13(9) 207
Tax Topics - Income Tax Act - Section 152 - Subsection 152(4) 299
Tax Topics - Income Tax Regulations - Schedules - Schedule II - Class 8 214
Tax Topics - Income Tax Act - Section 13 - Subsection 13(5) 259
Tax Topics - Income Tax Act - Section 13 - Subsection 13(6) 191

28 April 2015 External T.I. 2015-0566011E5 - Whether s. 16.1 applies to a transport truck

identification of lease based on legal substance/no election for transport truck

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.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 18 - Subsection 18(9) deferred deduction of initial lease "down payment" 143

15 December 2014 External T.I. 2014-0548041E5 - Leasing Properties

no late election

CRA stated:

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

Locations of other summaries Wordcount
Tax Topics - Income Tax Regulations - Regulation 8000 - Paragraph 8000(a) primary purpose of logging trucks not highway use 111

18 June 2014 External T.I. 2013-0516251E5 - Paragraph 16.1(1)(b) - the particular time

"particular time" means lease commencement

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.

22 August 2000 External T.I. 2000-000288 -

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.

8 June 1993 T.I. (Tax Window, No. 32, p. 18, ¶2615)

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.

Locations of other summaries Wordcount
Tax Topics - Income Tax Regulations - Regulation 2902 46

7 May 1993 T.I. (Tax Window, No. 31, p. 7, ¶2514)

Re effect of election on availability of investment tax credit.

13 November 1991 T.I. (Tax Window, No. 13, p. 18, ¶1594)

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.

89 C.R. - Q.8

"A lease is a contract by which a person who owns property grants to another the right to possess, use and enjoy the property for a specific period of time for periodic payments of the stipulated price, referred to as rent, with the obligation to return the property at the term of the lease ... . Transactions which are structured as management agreements or licences and under the terms of which a lessee/lessor relationship does not exist would not generally be considered as leases for income tax purposes."

Locations of other summaries Wordcount
Tax Topics - General Concepts - Substance 49

IT285R2 ARCHIVED - "Capital Cost Allowance - General Comments" 31 March 1994

22. Where by joint election subsection 16.1(1) applies to leased tangible property, the lessee is deemed to have acquired the property, at the particular time the lease commenced, at a cost equal to its fair market value at that time. Consequently, the lessee may be eligible to claim CCA on the property, although the lessee does not own the property.

Articles

R. Ashton, "Leasing: Recent Developments", 1997 Corporate Management Tax Conference Report, c. 11.

Howick, "Income Tax Aspects of Leasing", Tax Profile, May 1992, p. 211