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. Before indicating that the contract required further study to determine its nature, CRA stated:
[S]ubject to the application of the general anti-avoidance rule and in the absence of sham, a re-characterization of legal relationships is only possible where a taxpayer's designation of the transaction does not adequately reflect its true legal effects or where there is an express provision in the Act that the legal relationships are not to be respected.
The term "sham" generally refers to a transaction with an element of deception so as to create an illusion intended to conceal the actual nature of the transaction or a pretence whereby the taxpayer creates an appearance that is different from the reality it serves to conceal.
[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.
The CRA summary stated:
In the present case, because of certain facts, we believe that it might be appropriate to go beyond the legal relationships established by the parties.