Principal Issues: [TaxInterpretations translation] A corporation provides a fleet management service to its clients whose compensation policy includes the provision of automobiles to some of their employees. If the corporation charges a management fee separately from a lease fee, will the management fee constitute a lease fee for purposes of element E of the formula used to calculate the standby charge for an automobile in subsection 6(2) of the Income Tax Act?
Position: While lease costs are not limited to costs relating to the employee's use of the automobile, it is a question of fact what costs are incurred for the lease of an automobile and what costs are for additional services that do not, in and of themselves, result from the lease of the automobile.
Reasons: This determination must ultimately take into account the terms of the lease and the intrinsic purpose of the payment made by a client.
2008-027015 XXXXXXXXXX François Bordeleau, Advocate March 13, 2008
Dear Sir,
Subject: Section 6(2) of the Income Tax Act
This is further to your email of March 4, 2008 in which you requested our opinion regarding the calculation of lease costs under subsection 6(2) of the Income Tax Act (the "Act").
You raised the situation where Opco is a Canadian-controlled private corporation whose principal activity is to offer a fleet management service to its clients whose compensation policy includes the provision of automobiles to some of the clients' employees. The agreement between Opco and its clients allows the client's employees to choose the vehicle according to the budget allocated to them and to inform Opco. Opco then purchases the vehicle and leases it to the respective client. The client is fully responsible for the vehicle both during the lease and at the end of the lease and for the residual value of the vehicle.
In the context of car rental, Opco provides its clients with the following services:
1. the purchase of the vehicle from the dealer;
2. registration of the vehicle;
3. the signature of the documents and delivering the vehicle to the client's employee;
4. preparation of monthly reports for all vehicles leased to the client;
5. follow-up on the return of vehicles at or before term;
6. sale of the vehicle at the time of return;
7. annually calculating the taxable benefit for each of the client's employees.
In the event that Opco charges the fees for the services described in items 1 to 7 separately from the lease costs, you wish to know whether those fees may constitute lease amounts as provided for in the description of E in subsection 6(2).
Unless otherwise indicated, all statutory references herein are to the provisions of the Act.
Our Comments
Element E of section 6(2) reads as follows:
is the total of all amounts that may reasonably be regarded as having been payable by the employer to a lessor for the purpose of leasing the automobile […]
The Canada Revenue Agency ("CRA") has clarified its interpretation of the term "lease costs" in a number of publications, including Interpretation Bulletin IT-63R5 (the "Bulletin") and the Employer's Guide to Taxable Benefits (the "Guide"). For example, paragraph 13 of the Bulletin states
Subsection 6(2) (see E of 11 above) contains the expression "amounts ... payable by the employer... to a lessor for the purpose of leasing the automobile". These amounts (referred to as "lease costs") refer to amounts (other than for the cost of insurance - see F of 11 above) that the employer or a person related to the employer is required to pay to the lessor, including [...]
In the Guide, the following is stated under the heading "Lease costs": [TaxInterpretations translation]
For the purpose of calculating the standby charge, the lease costs include
- the cost of leasing the automobile;
- any related charges you pay to the lessor under the lease agreement. Related charges include maintenance contracts, excess mileage charges, residual charges less residual credits, GST and PST, or HST.
The lease costs do not include the cost of insurance against damage to the car or liability insurance.
The question of whether certain charges are incurred for the lease of an automobile is one of fact that can only be resolved after a detailed examination of all the relevant facts and circumstances. Furthermore, this determination must take into account the terms of the lease agreement and the intrinsic purpose of the payment made by a customer. However, lease costs, including related costs, are not limited to costs related to the use of the automobile by an employee. Thus, we are of the view that all of the expenses listed above, with the exception of expenses charged by Opco to its clients for the purpose of making annual calculations of the taxable benefit to employees, constitute lease costs to be included in the description of E in subsection 6(2).
These comments are not advance income tax rulings and do not bind the CRA with respect to any particular factual situation.
Best regards,
Randy Hewlett
Manager
Business and Partnerships Division
Income Tax Rulings Directorate.