Words and Phrases - "lease"


24 December 2015 Internal T.I. 2014-0560831I7 - International shipping

commercial management is still sufficient/charterparties are “leases”

The Taxpayer is a non-resident corporation that carries on business in many countries, including Canada. The activities of the non-resident Taxpayer in Canada help satisfy the shipping requirements of related companies (the “Related Party Customers”), who generally are residents of Canada or non-residents carrying on business in Canada and who are not themselves in the shipping business. Would the Taxpayer’s activities carried on in Canada be considered “the operation of a ship in international traffic” under the previous version of s. 81(1)(c), or as “international shipping” under the current version (so that various chartering arrangements could be considered “leases” under the new “international shipping” definition?

Respecting the former version, CRA stated:

[T]he Taxpayer never has management of the ships’ operations, in that it is not responsible for the crew nor the service and maintenance of the ships…[so that it] does not have the “Technical Management” of the ships. However…this requirement could also be met where the Taxpayer has the so-called “Commercial Management” of the ships…[which] means the right to exploit the earning capacity of the ship…[which] right does not necessarily go hand in hand with the responsibility for the crewing and maintenance of the ship. … [T]he Taxpayer would need to demonstrate that the ship owner is operating the ship under the Taxpayer’s direction and not, in effect, under the direction of the Related Party Customers.

Respecting the post-amendment version, CRA stated:

[T]hese amendments were not intended to effect any significant scope limitations. …[T[]he term “lease” as used in the specific context of the international shipping rules would include chartering arrangements whereby taxpayers do not have the Technical Management of the ship but do have the Commercial Management of the ship. As such, we are of the view that the Taxpayer may continue to qualify for the international shipping exemption in taxation years that begin after July 12, 2013 on the same basis as for taxation years beginning before that time, that is, provided that the Taxpayer has the Commercial Management of the ship.

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Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - International Shipping lease includes time charter 65

Barclays Mercantile Industrial Finance Ltd. v. Melluish, [1990] BTC 209 (Ch. D.)

no "lease" where failure to provide exclusive possession

A British corporation ("WBDL") entered into a distribution agreement with a California corporation ("WBI") pursuant to which WBI was granted the right to license and to exhibit and distribute the picture, largely in Canada and the U.S., but with WBDL retaining control of the master negative. WBDL was found not to be "leasing" the film to WBI because it did not provide "exclusive possession at a rent for a term" (see p. 243).

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Canadian Acceptance Corp. Ltd. v. Regent Park Butcher Shop Ltd. (1969), 67 WWR 297 (Man. C.A.)

Dickson J.A. found that the hiring of a cash register was a chattel lease notwithstanding a clause that provided that the lease was irrevocable for the full term and that the aggregate rentals would not abate by reason of the hirer's right to retake possession on default. The right of the hirer to collect the full balance of rentals for the remaining term following a default (minus any proceeds received from a sale or re-leasing within the 60-day period following default) instead represented a penalty clause that was void.

Dickson J.A. also accepted a definition of a lease of chattels as "a contract by which the hirer obtains a right to use the chattel hired, in return for the payment of the price of the hiring to the owner'".

Words and Phrases