Principal Issues:
Whether a lump-sum lease payment that is refundable in full without conditions at the end of the lease has to be included by the employee in the calculation of the standby charge on his automobile. If yes, how?
- Car lease (calculation of a standby charge on an automobile)
Position: No.
2006-016703 XXXXXXXXXX Anne Dagenais, M. Fisc. (613) 957-2121 May 29, 2006
Dear Sir,
Subject: Car rental
Request for technical interpretation
This is in response to your letter of January 16, 2006, in which you requested our opinion on a refundable deposit at the end of the lease with no conditions attached.
You wish to know if this deposit should be considered as part of the employee's automobile benefit and if so, how.
Unless otherwise indicated, all statutory references herein are to the provisions of the Income Tax Act (the "Act").
Facts
A company leases a car to its employee for the employee’s personal use. That car is leased for a period of 48 months and a deposit of $7,800 is given to the dealer. That deposit will be refunded in full at the end of the lease without any conditions. That deposit reduces the monthly lease payment.
Our Comments
As stated in paragraph 22 of Information Circular 70-6R5 dated May 17, 2002, it is the practice of the Canada Revenue Agency (the "CRA") not to issue written opinions on proposed transactions otherwise than by way of advance rulings. Furthermore, when it comes to determining whether a completed transaction has received appropriate tax treatment, that determination is made first by our Tax Services Offices as a result of their review of all facts and documents, which is usually performed as part of an audit engagement. However, we can offer the following general comments that we hope may be helpful to you. These comments may, however, under certain circumstances, not apply to your particular situation.
Section 6 provides that where an employer makes an automobile available to an employee for personal use, the employee must include an amount as a taxable benefit in computing employment income. The value of the benefit takes into account the availability of the automobile and the operating costs of the automobile paid for by the employer, if any. The calculation of the availability benefit, i.e., the standby charge for an automobile, is provided for in paragraph 6(1)(e) and in the manner set out in subsection 6(2), while the calculation of the operating expense benefit is provided for in paragraph 6(1)(k).
Under subsection 6(2), to calculate the benefit in respect of an automobile leased by the employer, the third element of the formula 2/3 × (E - F) applies. Element E refers to the amounts payable to a lessor by the employer for the lease of the automobile for the period during which the automobile is made available to the employee. This amount does not include the portion that relates to the cost of insurance for loss or damage to the automobile or for liability that may arise from its use.
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.
This interpretation refers to a deposit that is refundable at the end of the lease without any conditions. We understand that this is not a security deposit or "prepayment" which is a common business practice, such as first and last month's lease payments.
For more details on the calculation of these benefits, please refer to Interpretation Bulletin IT-63R5, Benefits, Including Standby Charge for an Automobile, from the Personal Use of a Motor Vehicle Supplied by an Employer - After 1992, and Chapter 2 of the Employers' Guide-- Taxable Benefits, Publication Number T4130.
This decision is based on the current Act and does not take into account the proposed amendments.
These comments are not advance income tax rulings and do not bind the CRA with respect to any particular factual situation.
We hope these comments are of assistance. If you require additional information regarding the content of this document, please do not hesitate to contact us.
Best regards,
Phil Jolie
Director
Business and Partnerships Division
Income Tax Rulings Directorate