Principal Issues: [TaxInterpretations translation] Are contracts for automobiles purchase or lease contracts?
Position: The question of whether it is a purchase or lease agreement must be resolved on the basis of the legal relationship created by the parties in light of the agreement between them. It is possible to rely on the economic reality of the relationship between the parties provided that the legal relationship established is, among other things, a sham.
Reasons: 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.
October 28, 2010
Estrie-Mauricie Tax Services Office Headquarters Business and Partnerships Division Attention: Isabelle Vandal A. Dagenais Advocate, M. Fisc. B.A.A.
2010-037604
Nature of the contract signed between the parties
This is in response to your email of July 19, 2010 in which you requested our opinion as to whether a specific contract is a contract to purchase or lease a motor vehicle. More specifically, your question concerns the nature of the contract signed between the parties. It goes without saying that this determination is crucial to the calculation of the standby charge benefit.
Unless otherwise indicated, all statutory references herein are to the provisions of the Income Tax Act (the "Act").
Specifically, you described a situation where a company signs motor vehicle lease agreements with a leasing company that provides that the company will automatically acquire ownership of the leased vehicles after paying a specified amount in the form of rent. The company will then be required to pay the residual value (the book value), which can be as low as $0.01, depending on the contract.
If the company decides not to acquire, a credit is applied to the company's account where the sale of the car by the leasing company exceeds the residual value.
You wish to know whether the contracts between the company and the leasing company are contracts for the purchase or lease of motor vehicles.
Our Comments
As a result of comments of the Supreme Court of Canada, notably in Shell Canada Ltd. v. The Queen, 99 DTC 5682 where it held that the economic reality of a situation could not justify a re-characterization of the legal relationships established by taxpayers, we are of the view that, subject 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.
We are of the opinion that the question of whether 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.
Access to Information
For your information, unless exempted, a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Revenue Agency's electronic library. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should the taxpayer request a copy of this memorandum, they may request a severed copy using the Privacy Act criteria, which does not remove taxpayer identity. Requests for this latter version should be made by you to Ms. Celine Charbonneau at (819) 994-2898. In such cases, a copy will be sent to you for delivery to the taxpayer.
We hope that these comments are of assistance. Should you require additional information regarding the content of this document, please do not hesitate to contact us.
François Bordeleau, Advocate
Manager
Business and Partnerships Division
Income Tax Rulings Directorate.