Principal Issues: In the case of a leased vehicle, are the tests in subparagraphs (e)(i), (e)(ii) or (e)(iii) of the definition of “automobile” in subsection 248(1), applying in the taxation year in which the contract leased was signed or in each of the years covered by the leased contract?
Position: With regard to leased vehicles, CRA is of the opinion that the use criteria apply in the taxation year in which the contract leased was signed.
Reasons: Wording of the legislation.
APFF FEDERAL TAX ROUNDTABLE 10 OCTOBER 2024
2024 APFF CONFERENCE
8. Definition of the term “automobile”
For the purposes of a number of rules set out in the Income Tax Act, it is necessary to refer to the definition of “automobile” set out in subsection 248(1) in order to determine whether a given motor vehicle meets the definition of “passenger vehicle”, also set out in the same subsection. This is the case, in particular, for the purposes of calculating the taxable benefits relating to the standby charge and the operating expenses of an automobile, but also for the purposes of determining a class of tax depreciation or for the purposes of the limits applicable to a leasing expense for a passenger vehicle (section 67.3).
The relevant passages of the definition of “automobile” for the purposes of this question are reproduced below:
“automobile means
(a) a motor vehicle that is designed or adapted primarily to carry individuals on highways and streets and that has a seating capacity for not more than the driver and 8 passengers,
but does not include
[...]
(e) a motor vehicle
(i) of a type commonly called a van or pick-up truck, or a similar vehicle, that has a seating capacity for not more than the driver and two passengers and that, in the taxation year in which it is acquired or leased, is used primarily for the transportation of goods or equipment in the course of gaining or producing income,
(ii) of a type commonly called a van or pick-up truck, or a similar vehicle, the use of which, in the taxation year in which it is acquired or leased, is all or substantially all for the transportation of goods, equipment or passengers in the course of gaining or producing income, or
(iii) of a type commonly called a pick-up truck that is used in the taxation year in which it is acquired or leased primarily for the transportation of goods, equipment or passengers in the course of earning or producing income at one or more locations in Canada that are
(A) described, in respect of any of the occupants of the vehicle, in subparagraph 6(6)(a)(i) or (ii), and
(B) at least 30 kilometres outside the nearest point on the boundary of the nearest population centre, as defined by the last census dictionary published by Statistics Canada before the year, that has a population of at least 40,000 individuals as determined in the last census published by Statistics Canada before the year; (Emphasis added)”
The three exceptions cited above contain a test as to the use of the vehicle during the taxation year in which it is acquired or leased. While the CRA has already clearly stated when this test must be satisfied in the case of a purchased vehicle, the situation is less clear in the case of a leased vehicle, because although the lease contract is signed in a particular, the lease period generally extends over various years.
Question to the CRA
The conditions set out in each of the above subparagraphs for vehicles must be satisfied “in the taxation year in which it is acquired or leased”. In the case of a leased vehicle, does the taxation year in question correspond to the year in which the lease contract is signed only, or does this apply to each of the years covered by the lease contract?
CRA Response
Subsection 248(1) defines an ‘automobile’ as a motor vehicle designed or adapted primarily to carry individuals on highways and streets and having a seating capacity for not more than nine persons, including the driver, other than a vehicle referred to in paragraphs (a) to (e) of that definition.
For a motor vehicle (whether a van or pick-up truck, or a similar vehicle, as the case may be) to come within the exclusion provided for in paragraph (e), it must, among other things, meet one or other of the use criteria provided for in subparagraphs (e)(i), (d)(ii) or d)(iii) of that definition. Those subparagraphs provide that those tests must be carried out “in the taxation year in which it is acquired or leased”. With respect to leased vehicles, the CRA is of the view that the use tests apply in the taxation year in which the lease agreement comes into effect, i.e., generally in the taxation year in which the lease agreement is signed.
Anne Dagenais
October 10, 2024
2024-102889