Motor vehicle lease agreements between a company and a leasing company provide that the company will automatically acquire ownership of the leased vehicles after making specified rent payment, and with the payment of the residual value, which might be as low as $0.01. If the company decides not to acquire, a credit is applied to its account where the proceeds of the sale of the car by the leasing company exceed the residual value. Are these contracts for the purchase or lease of motor vehicles? After indicating that generally “re-characterization of legal relationships is only possible where a taxpayer's designation of the transaction does not adequately reflect its true legal effects,” CRA stated:
[W]hether a contract is a purchase contract or a lease contract should be resolved primarily on the basis of the legal relationships created by the terms of the agreement. However, in light of the facts as presented, we believe that there should be further study to determine the nature of the contract.