Principal Issues: Whether the payments made by a self-employed individual to terminate an automobile lease contract early is subject to section 67.3 of the ITA when he is calculating his income under subsection 9(1)?
Position: The limitation on deductible leasing cost for an automobile in section 67.3 applies to a taxpayer who is a self-employed individual when he is entitled to deduct, in calculating his business income for the purposes of subsection 9(1), an amount as “actual lease charges “ paid or payable for a passenger vehicle.
Reasons: Question of facts.
APFF FEDERAL TAX ROUNDTABLE 10 OCTOBER 2024
2024 APFF CONFERENCE
10. Tax treatment of an amount paid by an individual in business to terminate an automobile lease early
A taxpayer signed a lease for an automobile in the summer of 2023, which he used in carrying on his business. After a few months, he decided to return it to the dealership in order to lease a vehicle of another make, which he will also use in carrying on his business.
In order to be able to return the vehicle to the dealer, the latter determined the value of the vehicle at that time and calculated the difference with the total of the remaining payments. This resulted in a shortfall of $10,000 to the dealer, which the self-employed worker had to pay when turning in the keys to the car.
In Technical Interpretation 2008-0285361C6 (question 35 of the APFF 2008 Conference Federal Taxation Roundtable) (footnote 1), the CRA ruled on the tax treatment of an amount for early termination of an automobile lease paid by an employee who claimed employment expenses related to the automobile. Specifically, the CRA responded that the early termination costs of an automobile lease, if they represent actual lease costs under the lease, may be deductible pursuant to paragraph 8(1)(h.1), subject to the limitations of section 67.3. Thus, the amount of the early termination costs must be added to the other lease costs also subject to section 67.3.
If the early termination costs of an automobile lease are instead to be paid by a self-employed individual or a corporation in respect of an automobile used in the course of carrying on a business, the same principle should normally apply, namely that if they are actual lease costs under the lease, they would be deductible under section 9, while still being subject to the limitations set out in section 67.3.
Questions to the CRA
(a) Does the CRA agree with our analysis for the application of the Income Tax Act to a self-employed individual or corporation using an automobile in the course of a business?
(b) In the event that the usual lease payments (according to the basic contract) were already limited by section 67.3 (for example, if it were a luxury automobile), does the CRA agree that the $10,000 payment, even if deductible under section 9, could not be deducted in computing business income by virtue of section 67.3?
CRA Response to Question 10(a)
Essentially, section 67.3 limits all or part of the “actual lease charges” paid or payable for a passenger vehicle that a taxpayer may deduct in computing income for the year.
If the taxpayer is an employee and may, where certain conditions are satisfied, deduct “actual lease charges” in computing employment income as motor vehicle expenses under paragraph 8(1)(h.1), such costs will be subject to the limit set out in section 67.3.
If the taxpayer is self-employed or a corporation, the limit set out in section 67.3 also applies to determine the maximum amount that may be deducted as “actual lease charges” paid or payable for a passenger vehicle in computing the taxpayer's business income for the purposes of subsection 9(1). That means, among other things, that such costs must be current in nature and must have been incurred for the purpose of earning income from a business or property. Those expenses are also subject to various provisions of the Income Tax Act that could impose restrictions depending on the circumstances, such as paragraph 18(1)(h).
CRA Response to Question 10(a)
Section 67.3 uses the expression “actual lease charges”. That term is not defined in the Income Tax Act.
Generally speaking, “actual lease charges” include the monthly payments for the use of a passenger vehicle. They also include other expenses provided for in the leasing contract, such as mileage or other final charges paid or payable and relating to the use of the vehicle by the lessee.
The determination of whether the costs of early termination of an automobile lease constitute “actual lease charges” is a question of fact. That determination can only be resolved after an analysis of the lease contract.
Where the $10,000 early termination fee for an automobile lease constitutes “actual lease charges”, it must be added to the usual lease charges (as per the base lease). If the taxpayer's total annual lease charges exceed the limit allowed under section 67.3, the taxpayer will not be able to deduct the excess charges.
Anne Dagenais
October 10, 2024
2024-102891
FOOTNOTES
Due to our system requirements, footnotes contained in the original document are reproduced below:
1 CANADA REVENUE AGENCY, Technical Interpretation 2008-0285361C6, October 10, 2008.