24 November 2003 External T.I. 2003-0032565 - COST OF LEASING A PASSENGER VEHICLE

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:

Whether the short-term rental of a passenger vehicle is considered to be an indirect payment of "all or part of the actual lease charges in respect of a passenger vehicle" for the purposes of section 67.3 of the Act.

Position: Question of fact but, generally, no.

Reasons: A daily rental of a passenger vehicle is generally not an indirect payment of the "actual lease charges" of a taxpayer that leased a passenger vehicle for use in the ordinary course of carrying on a business of car rentals.

A. Seidel
XXXXXXXXXX (613) 957-2058
2003-003256
November 24, 2003

Dear Sir:

Re: Cost of Leasing a Passenger Vehicle

We are writing in response to your July 29, 2003, facsimile concerning the application of section 67.3 of the Income Tax Act (the "Act") to short-term passenger vehicle rentals.

The particular circumstances in your letter relate to a factual situation involving a specific taxpayer. As explained in Information Circular 70-6R5, it is not this Directorate's practice to comment on transactions involving specific taxpayers other than in the form of an advance income tax ruling. To the extent that you require confirmation of the tax consequences of proposed transactions involving specific transactions, you should be requesting an advance income tax ruling. However, we would point out that advance income tax rulings are not provided in respect of transactions that are substantially completed. Completed transactions are reviewed by the local tax services office.

Although we cannot provide any specific comments with respect to the situation described in your letter, the following general comments may be of assistance.

Section 67.3 of the Act applies "notwithstanding any other section of the Act" to situations where:

"(a) in a taxation year all or part of the actual lease charges in respect of a passenger vehicle are paid or payable, directly or indirectly, by a taxpayer, and

(b) in computing the taxpayer's income for the year an amount may be deducted in respect of those charges".

Section 67.3 of the Act limits the amount that a taxpayer can claim in respect of the lease cost of a passenger vehicle. Section 67.2 of the Act limits the amount that a taxpayer can claim in respect of interest on money borrowed to purchase a passenger vehicle. Paragraph 67.3(b) of the Act ensures that any reimbursement of lease costs incurred will also result in a restriction on the deductibility of such reimbursement by the payer thereof.

Whether or not the "daily" rental of a passenger vehicle is an indirect payment of all or a part of "actual lease charges" of a lessor is a question of fact that can only be determined after a review of each specific situation. Although it could be argued that any payment in respect of a short-term rental of a passenger vehicle could be considered to be an indirect payment of part of the actual lease charges of the lessor who has actually leased the passenger vehicle, it is our general view that a payment, in respect of an hourly rental or a daily rental of a passenger vehicle, would not normally be considered to be the indirect payment of part of the actual lease charges of a taxpayer carrying on a business of renting out passenger vehicles.

If, on the other hand, the rental of a passenger vehicle were for several weeks, or even months, at a time, there is likely a respectable argument that the cost of the rental is an indirect payment of the lessor's actual lease charges. In such cases, section 67.3 of the Act would apply to restrict the deductibility of the amounts incurred by the lessee.

Yours truly,

John Oulton, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch

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