2015-0566011E5 Whether s. 16.1 applies to a transport truck

Principal Issues: Whether section 16.1 applies to a transport truck that is leased.

Position: No.

Reasons: An election under section 16.1 cannot be made in respect of prescribed property, the definition of which includes "exempt property." Exempt property includes a truck or tractor that is designed for hauling freight on highways.

Author: Gibbons, Jim
Section: s. 16.1; R. 1100(1.13)(a)

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                                                                                                                                                            2015-056601
                                                                                                                                                            J. Gibbons

April 28, 2015

Dear XXXXXXXXXX:

We are writing in response to your correspondence of December 9, 2014, in which you asked for our opinion on whether capital cost allowance (“CCA”) can be claimed on a leased transport truck in lieu of deducting the lease payments.  

Our Comments

This technical interpretation provides general comments about the provisions of the Income Tax Act (the “Act”) and related legislation. It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R6, Advance Income Tax Rulings.

As noted in Income Tax Technical News ITTN No. 21, it is our view that the determination of whether a contract is a lease or a sale for income tax purposes is based on the legal relationships created by the terms of the particular agreement, rather than the underlying economic reality.  In the absence of a sham, a lease is a lease and a sale is a sale. 

In the case of a contract that is a lease, the lessor, rather than the lessee, is entitled to deduct CCA on the particular property unless section 16.1 of the Act applies.  Section 16.1 of the Act provides for a special election to be made jointly by the lessor and lessee, the effect of which is to consider the lessee, for the purpose of calculating the lessee’s income only, to have purchased the leased property for the duration of the lease and to have financed the purchase by way of a loan. This will have the effect of allowing the lessee to claim CCA on the property over the term of the lease. In addition, where the election is filed, the lessee will be entitled to deduct the notional interest portion of the rental payments. 

In order to qualify under section 16.1 of the Act, the property must be tangible property, other than “prescribed property,” leased for a term of more than one year from an arm’s length person who is resident in Canada or who carries on business through a permanent establishment in Canada.  For purposes of section 16.1 of the Act, “prescribed property” is defined in section 8200 of the Income Tax Regulations (the “Regulations”) and includes “exempt property” other than certain exempt property leased on or before February 2, 1990.  The term “exempt property” is defined in paragraph 1100(1.13)(a) of the Regulations and includes “a truck or tractor that is designed for hauling freight on highways.” 

Based on the foregoing, since a transport truck would be considered exempt property, a lessee and a lessor would not be entitled to elect under section 16.1 of the Act in respect of such a vehicle.  Thus, the lessee would not be entitled to deduct CCA on this vehicle.

In your letter, you also indicated that the taxpayer would pay an initial down payment for the lease of the transport truck.  In this regard, it should be noted that subparagraph 18(9)(a)(ii) of the Act denies a deduction made in respect of an outlay or expense to the extent that it can reasonably be regarded as having been made or incurred as, on account of, in lieu of payment of, or in satisfaction of, among other things, rent, which is in respect of a period that is after the end of the year.  However, pursuant to paragraph 18(9)(b) of the Act, any rent payments that are denied under paragraph 18(9)(a) may be deducted in calculating a taxpayer’s income for the subsequent year to which the outlay or deduction can reasonably be considered to relate.

We trust our comments will be of assistance.

Yours truly,

G. Moore
For Director
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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