9 September 1999 Internal T.I. 9919497 - STANDBY CHARGE - TERMINA CREDIT

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:

Whether or not an employer has "terminal credits" for purposes of the standby charge where the employer sells a leased automobile at the end of the lease to an employee for the "book value" which is the residual purchase price of the automobile pursuant to the lease, The employer's contract with the lessor on an automobile that is returned to the lessor, is that it is sold by the lessor and the difference between the selling price and the "book value" is returned to the employer.

Position:

We should accept that there is a terminal credit for purposes of the standby charge.

Reasons:

An employee who purchases an automobile from his employer at "book value" will have a taxable benefit equal to the excess of the automobile's fair market value over the "book value". If we take the position that the employer provided such a benefit to an employee, it would be difficult to argue that the employer had not obtained an equal value from the lessor at the end of the lease.

September 9, 1999

Vancouver Tax Services Office						HEADQUARTERS
Mr. Art Werk								Jacques E. Grisé
E.C.A, Large Case								957-2059
										991949

Employee Auto Purchase Benefit

This is in reply to your memorandum of July 15, 1999, requesting our interpretation on the calculation of benefits to employees on the purchase of automobiles from their employer at less than fair market value.

The employer leases automobiles for the use of its employees from a non-arm 5 length leasing company. The leases are referred to as "high end" or "high depreciation" leases which provide for large monthly payments and a low buyout value (book value). The use of such leases is allegedly to reduce the employer's exposure to a high residual cost where an employee is terminated or leaves the company's employ during the lease term. The employees are subject to standby benefits pursuant to paragraph 6(1)(e) of the Income Tax Act (the Act) on the basis of the somewhat large monthly payments. At the end of an automobile's lease, it is usually sold to an employee for the book value

In our view, an employee who purchases an automobile from his employer for an amount below the automobile's fair market value will have received a benefit in the year of purchase which is required to be included in the employee's income pursuant to paragraph 6(1)(a) of the Act. The benefit is the excess of the automobile's fair market value over the purchase price of the automobile.

We are also of the view that the employer has effectively received a "terminal credit" in respect of a leased automobile that is sold to an employee at a book value which is lower than the automobile's fair market value. Such a "terminal credit" (i.e., the automobile's fair market value less the book value) should be used in determining the standby charge of the employee who used the leased automobile. It would seem difficult to argue that the employer has given an employee a taxable benefit of the difference between the automobile's fair market value and its selling price (i.e., book value) and not concede that the employer had obtained the value equal to the benefit from the leasing arrangement.

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 by you to Jackie Page at 613 957-0682. The severed copy will be sent to you for delivery to the client.

We hope our comments are helpful

John Oulton
Manager
Business, Property and Employment Income Section III
Income Tax Rulings and
Interpretations Directorate