| August 10, 1989 | |
| HAMILTON DISTRICT OFFICE | HEAD OFFICE |
| Chief of Audit | Rulings Directorate |
| J.E. Gardiner | Leasing & Financing Section |
| Peter Lee | |
| Attention: R.C. Malchow | (613) 957-2745 |
| Basic File Section | |
| File No. 7-3667 |
SUBJECT: 24(1) Investment Tax Credits
We are writing in reply to your memoranda of February 13 and March 17, 1989, where in you requested our opinion whether 24(1)
24(1)
4. 24(1)
5.
(e)
(f) 24(1)
(g)
(h)
(i)
(j)
(k)
(l)
6. 24(1)
7.
8.
YOUR OPINION
9. 24(1)
OTHER INFORMATION
10. 24(1)
OUR OPINION
11. We concur with you that 24(1) ITC on the trucks destined for leasing under the Program, but with different reasons.
12. The Department's published position on lease-option agreements is set out in IT-233R. This Bulletin is currently being revised. Although the issue at hand is often described as determining whether a purported lease is in reality a sale, this is not an accurate description. The issue concerns whether a purported lease is in reality a lease or a disposition. For purposes of paragraph 54(c) of the Act, the term "disposition" includes a sale as well as certain events which are not regarded as sales under provincial law. Consequently, the term "disposition" has a broader meaning than the term "sale". A taxpayer has disposed of property if he has given up:
(a) title to the property or
(b) the normal incidents of title (such as possession, use and risk).
In determining whether the taxpayer has given up title or the normal incidents of title to the property, one must consider all legal rights and obligations of the parties involved. In our opinion, 24(1) The following factors indicate that the normal incidents of title were transferred to the independent contractor:
(a) Lessee is responsible for insurance, service and maintenance of the leased truck.
(b) At the end of the term of the Lease Agreement, the average retail value/suggested factory price ratio is roughly 29%, but Lessee can exercise the option to purchase the truck without paying anything. Therefore the exercise of the purchase option is a foregone conclusion.
(c) The total amount owing under the Lease Agreement, after deducting interest cost, is equal to the fair market value of the truck at the time the Lease Agreement was entered into.
(d) When the Lease Agreement is terminated or the purchase option is exercised, Lessee will be obliged to pay the monies owing under the Lease Agreement even though certain amounts are not due at that time.
13. To fall within the definition of "qualified transportation equipment" pursuant to subsection 127(9) and former paragraph 127(10.1)(d) of the Act, equipment must be described in section 4601 of the Income Tax Regulations which includes only "depreciable property of a taxpayer". The leased trucks were no longer depreciable property of LCI after the Lease Agreements were entered into, because 24(1) disposed of the leased trucks to the independent contractors. Therefore 24(1) may not claim an ITC on the trucks destined for leasing under the Program. Furthermore, subparagraph 127(11)(b)(iv) of the Act is not applicable in the case at hand because it applies only to "qualified property".
We apologize for the delay in replying to your query.
ChiefFinancing & Leasing SectionFinancial Industries DivisionRulings Directorate