12 April 2001 External T.I. 2001-0064675 - LEASE OPTION AGREEMENT

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 Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

Lease-option agreement.

Position TAKEN:

General comments.

Reasons FOR POSITION TAKEN:

Query referred to us by the Ontario Ministry of Finance, Retail Sales Tax Branch. It appears that it should have been directed to the Ministry's Corporations Tax Branch. We provided general comments on CCRA's views. We also provided the writer with the coordinates for the Ontario Ministry of Finance, Corporations Tax Branch.

XXXXXXXXXX 							2001-006467
P. Diguer CGA
April 12, 2001

Dear Sir:

Re: Lease-option agreements

This is in reply to your letter dated November 27, 2000 addressed to the Ontario Ministry of Finance in which you request their views on the characterization of a lease with a purchase option. We understand that you were advised by letter that your request has been forwarded by the Ontario Ministry of Finance, Retail Sales Tax Branch, to the Canada Customs and Revenue Agency ("CCRA") for reply.

Specifically, in your letter you describe a situation where a lessee has the right at the expiration of the lease (48 month term) to acquire the leased property for $1. In your view, the lease would be considered, for federal income tax purposes, to be a capital lease. You ask what is the correct provincial income tax treatment for this arrangement?

Our Comments

It appears that your inquiry pertains to the Corporations Tax Act (Ontario).

As you know, the CCRA is responsible of the administration of the Federal Income Tax Act (the "Act") and is not in a position to provide an interpretation concerning Ontario provincial tax. We assume that by now, you have redirected your inquiry to the appropriate provincial income tax authorities. We attempted to contact you by telephone to confirm this. However, our attempts failed.

We offer the following general comments concerning the treatment of a lease transaction under the Act which we hope are of assistance to you.

It is CCRA's view that the determination of whether a contract is a lease or sale is based on the legal relationship created by the terms of the agreement, rather than on any attempt to ascertain the underlying economic reality. Therefore, in the absence of sham, it is the CCRA's view that a lease is a lease and a sale is a sale. However, notwithstanding the legal relationship, the General Anti-avoidance Rule (GAAR) may be used to assess cases in which there is an avoidance relationship that results in a misuse or an abuse of provisions of the Act.

Should you require confirmation of the tax implications under the Corporations Tax Act (Ontario) we suggest that you contact the Ministry of Finance, Corporations Tax Branch, Desk Audit Unit at 1-800-262-0784 ext. 6559 or write to them at

Ministry of Finance
Corporations Tax Branch
Desk Audit Unit
PO Box 622, 33 King Street West
Oshawa ON L1H 8H6

We trust our comments will be of assistance to you.

Yours truly,

for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch