1 February 1990 Income Tax Severed Letter 7-3550 - [Standby Charge—Employer Financed Lease]

DATE FEB/FEV 1 1990
Source Deductions Division                FROM DE  Business and General
L.P. Mancino Director                               Division 
                                                    A. Humenuk 
                                                    957-2135
Attention: J.C. Wilson

SUBJECT: FILE DOSSIER 7-3550

OBJET: Standby Charge - Employer Financed Lease

We are responding to your memorandum of December 29, 1988, concerning the calculation of the standby charge in the situation where an employer provides a leasing company with the financing to acquire the vehicle to be leased. We apologize for the delay in response.

In the situation you describe, the employer provides passenger vehicles to its executives as part of their compensation package. The employer has an arrangement with a leasing company whereby the employer provides an interest- free loan to the leasing company equal to the purchase price of the vehicle to be leased. The leasing company repays the loan over the period of the lease and the employee benefits by way of a reduced standby charge as a result of the lower lease costs.

You have asked for our views on how to calculate the standby charge. You suggest that the employer and the leasing company do not deal at arm's length and that consequently, the transaction does not have a bona fide purpose. You also suggest that subsection 245(2) of the Act applies and that the standby charge should be calculated based on the "fair market value" lease cost.

As an aside, it should be noted that there is nothing in the documentation submitted to suggest that the employer and the leasing company do not deal at arm's length. However, even if taxpayers are dealing at arm's length it may well be that a particular transaction does not have a bona fide purpose.

We asked Legal Services whether the standby charge could be calculated on an amount other than the actual lease charge specified in the agreement through the application of paragraph 6(l)(a), subsection 6(2) or sections 245 or 246 of the Income Tax Act (the "Act"). In the alternative, we asked whether section 80.4 and subsection 6(9) of the Act could have application with respect to the interest-free loan to the leasing company.

XXXX

We hope our comments will be of assistance to you.

ORIGINAL SIGNED BY ORIGINAL SIGNE PAR B. W. DAPH

B.W. Dath Director Business and General Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch