Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CCRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.
Principal Issues:
1. Is the subvention payment considered to be income and not a capital payment.
2. Is the subvention payment considered to be leasing income.
Position:
1. Yes, the payment is on account of income.
2. Yes, the subvention payment is leasing income.
Reasons:
The positions are consistent with jurisprudence. We reconsidered our previous opinion as expressed in 990387.
August 22, 2001
XXXXXXXXXX Tax Services Offices HEADQUARTERS
Large File Cases Income Tax Rulings
Directorate
Attn: XXXXXXXXXX N.L. Storry
957-3499
2000-004778
XXXXXXXXXX - Subvention Payments
This is in reply to your memorandum received on September 19, 2000, wherein you requested us to reconsider our opinion given in our memorandum dated February 25, 1999 (#990387) in view of further submissions by the taxpayer's legal representative, XXXXXXXXXX (the "taxpayer's representative"). We apologize for the delay in responding but as indicated above it was necessary for us to reconsider our previous position, which required the involvement of a number of participants.
The issue relates to the taxability of "subvention payments" made by XXXXXXXXXX to XXXXXXXXXX in support of low interest rate automobile lease contracts acquired by XXXXXXXXXX from XXXXXXXXXX automobile dealers. XXXXXXXXXX dealers offer the low rate leases to their customers on the condition that XXXXXXXXXX will purchase the vehicles and the low rate leases without discount. XXXXXXXXXX, the dealer and the customer agree that the vehicle and the lease will be acquired by XXXXXXXXXX have agreed that XXXXXXXXXX will make a subvention payment to XXXXXXXXXX equal to the difference between the lease payment calculated using the normal market rate and the lease payment calculated using the low rate. There is no overriding agreement between XXXXXXXXXX dealing with the payment of the subvention amounts. When XXXXXXXXXX is preparing a low rate lease program, it advises XXXXXXXXXX of the proposed lease rate and XXXXXXXXXX advises XXXXXXXXXX of the required subvention payment by memo only.
In our previous memorandum, we had concluded that subvention payments would not constitute leasing income for purposes of subsection 1100(15) of the Regulations nor would they be specifically captured by subsection 1100(17.2) of the Regulations, which provides that certain items of gross revenue are considered rent derived from the property for the purpose of determining whether the property is "leasing property" within the meaning of subsection 1100(17) of the Regulations.
As a result of the additional information provided and the arguments raised by the taxpayer's representative, we have reconsidered our previous position. While the taxpayer's submissions do not refer to it, we also find that the decision of the Federal Court Trial Division in Echo Bay Mines Ltd. (92 DTC 6437 (FCTD)) also supports the taxpayer's view. In the Echo Bay decision, the court concluded that a gain or loss from a hedge designed to limit the risk associated with the price to be derived from the future sale of production from a mine would be included in its "incomes ... from production ... of minerals" for the purposes of section 1204 of the Regulations. In our view, the decision demonstrates that where the Regulations refer to income derived from an activity (e.g., from leasing a leasing property), such income includes income from all directly related activity. Therefore, based on the taxpayer's submissions and the Echo Bay decision, it is our opinion that subvention payments do constitute leasing income for purposes of subsection 1100(15) of the Regulations.
We have some difficulty with the taxpayer's secondary argument that the subvention payment is received in respect of the purchase of a capital asset. This secondary argument is not without merit since each subvention payment is certainly linked to the acquisition of title to an automobile. However, it would appear more appropriate to view the subvention payment to be on income account because it is intended to directly compensate XXXXXXXXXX for the below market lease payments received by it on the lease contracts.
At the Supreme Court of Canada in Ikea Limited v. The Queen, 98 DTC 6092 (S.C.C.), the court stated "that amounts received or realized by a taxpayer, free of conditions or restrictions upon their use, are taxable in the year realized, subject to any contrary provision of the Act or other rule of law, and that the TIP received by Ikea in the present case fitted that description perfectly." As referred to in the Ikea decision, the realization principle states that when a taxpayer becomes entitled to an amount which is not subject to any conditions or restrictions, the taxpayer has an absolute right to that amount and therefore, the amount should be included in income pursuant to section 9 of the Act.
In our view, by analogy to the reasoning in the Ikea decision with respect to tenant inducement payments, the subvention payments would be received on income account under section 9 of the Act rather than being considered as in respect of the acquisition of a capital asset.
For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Legislation Access Database (LAD) on the Department's mainframe computer. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the LAD version or they may request a copy severed using the Privacy Act criteria which does not remove client identity. Requests for this latter version should be made to Jackie Page at 613-957-0682. The severed copy will be sent to you for delivery to the client.
for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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