Principal Issues: [TaxInterpretations translation] A corporation acquired an automobile at the end of its lease pursuant to the exercise of a bargain purchase option granted under the lease. That price was significantly less than the fair market value of the automobile at that time. Is the cost of the automobile for purposes of calculating the reasonable standby charge for the employee's automobile equal to the bargain purchase price?
Position: A portion of each lease payment could be considered a payment in respect of the right to purchase the property in the future. That portion of each lease payment forms part of the adjusted cost base of the bargain purchase option for the automobile. Pursuant to subsection 49(3), the cost of the automobile acquired as a result of the exercise of the purchase option will be increased by the adjusted cost base of the option. It is this increased cost that will be used for the purposes of C in subsection 6(2). Thus, the cost will be greater than the bargain purchase price.
Reasons: Application of subsection 49(3) taking into account the position previously taken that a portion of each rental payment could be considered to be in respect of the option to purchase the property.
April 25, 2005
Mr. Pierre Langelier Headquarters
Montreal Tax Services Office Sylvie Labarre, CA
(613) 957-89532004-010830
Cost of an automobile
This is further to your email of December 16, 2004, in which you requested our opinion regarding the calculation of the reasonable standby charge for an automobile under subsection 6(2) of the Income Tax Act (the "Act") in the following situation. We apologize for the delay in responding to that request.
A corporation leases an automobile from a person with whom it deals at arm's length. The lease is for a term of five years. The lease agreement provides that the corporation may acquire the automobile at the end of the lease for $100, which is substantially less than the fair market value of the automobile at that time. The corporation acquires the automobile for that price.
Following the acquisition of the automobile, the corporation makes the automobile available to one of its employees. The corporation will have to calculate the reasonable standby charge for the automobile based on the cost of the automobile. The issue is whether the cost of the automobile to the employer for the purposes of subsection 6(2) is $100 or whether it is a greater amount.
Our Comments
According to the information provided, the lease agreement contains an option clause to purchase the car at a bargain purchase price that is much lower than the fair market value of the car at the end of the lease.
Where it is established that a transaction between parties is legally a lease and there is no sham, the inclusion of such a bargain purchase option does not in itself change the nature of the transaction. However, in such a case, we are of the view that part of each lease payment could be considered as a payment in respect of the right to purchase the property in the future.
The determination of the amount of rent attributable to the acquisition of the option is, in our view, a valuation issue that can only be determined after a review of all the facts and documents surrounding the transaction.
Any portion of the lease payment that is determined to be attributable to the acquisition of the option to purchase the automobile is not deductible to the lessee. That portion of the lease payment also does not form part of the total of the amounts payable to a lessor for the lease of the automobile included in the description of E in subsection 6(2) when calculating the reasonable standby charge for an employee's automobile.
The rules in section 49 apply to this purchase option. The portion of each lease payment in respect of the option to purchase the automobile will form part of the adjusted cost base of that option. In accordance with subsection 49(3) of the Act, the adjusted cost base of the option to purchase the automobile will be added to the cost of the automobile acquired as a result of the exercise of that option.
Ghislaine Landry, CGA
for the Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Planning Branch