A company leases a car for a 48-month term to its employee for the employee’s personal use. A deposit of $7,800 is given to the deal, which is refunded in full at the end of the lease without any conditions. That deposit reduces the monthly lease payment. What is the effect on the standby charge? CRA responded:
In order to reduce the monthly lease payments, a lessee may make a deposit of varying amounts at the time of entering into the lease agreement or may "trade in" the old car that the lessee owns. In general terms, that deposit or trade-in value is included in the amounts payable to the lessor and must be allocated to each monthly payment for the purpose of calculating the amount of the taxable benefit, provided that the payment is for the purpose of leasing the automobile and not for its purchase. However, security deposits such as the first and last lease payments are not included in the amounts payable to the lessor.
In addition, for the purposes of E in subsection 6(2), the CRA is also of the view that amounts payable to a lessor include payments that are made at the end of the lease such as, for example, "residual charges" (i.e., amounts charged at the end of a lease), less any "residual credits" (i.e., amounts credited at the end of a lease).
Thus, in principle, based on the above and the information you have provided, the $7,800 deposit at the beginning of the lease would reduce the monthly lease payments while the repayment at the end of the lease would also affect the calculation of the standby charge. In light of the above, the CRA considers that the deposit at the beginning of the lease must be spread over the term of the lease. The deposit refund can be considered a residual credit. Any adjustment at the end of the lease may be made by an adjustment to the lease expense for the year in which the lease ends or, if the employer and employee agree, the amount of such payments may be spread over the entire lease period provided that no year is statute-barred.
On the other hand, with reference to the information you have submitted to us, given that the refund of the deposit is unconditional, that it is provided for at the time the contract is entered into, and that the refund is exactly the same amount as the deposit, it appears to us that the standby charge benefit calculated under paragraph 6(1)(e) would not be affected by the refundable deposit and the refund at the end of the lease. Thus, the refundable deposit and the reimbursement at the end of the lease should not be considered in any way in the employee's automobile benefit.