Lease buyout

Client has a piece of equipment setup as a capital lease - capitalized for accounting purposes along with the long term debt liability.

Tax purposes - Not setup on schedule 8 - lease payments are deducted annually.

Midway through lease agreement, client pays out remaining lease balance of $80,000 on the equipment.

My thoughts are setup the $80,000 payment as addition to schedule 8; someone else informed me that the fully paid out amount is claimable as an expense.

I can’t find any support for either way - looking for advice/support on correct treatment.

At the time of the buyout there is no longer any question whether the client intended to return the equipment at the end of the lease, so I can’t imagine CRA (or court) allowing them to expense the $80,000. That’s a major reason for the CCA regime - to prevent the tax deduction of a capital asset (i.e. amortize the expense over the life of the asset). I’d agree with your “thoughts” - consider it a purchase as of that date for that payout amount.

I also agree including the $80,000 as an addition to CCA. I have done this many times and consider the “buyout” as the cost of the asset at that point in time.
To clarify, I would add as asset purchase then depreciate.

I think there was this restriction that prevent you from doing this since the “Accelerated Investment Incentive” introduced in 2018.

Maybe you can argue it wasn’t previously owned, but the fact that you capitalized it and recorded on S8, might deemed to be owned,

I think that restriction was in there, just to prevent abuse of the AII and maybe the now 100% CCA this year

https://www.canada.ca/en/revenue-agency/services/tax/businesses/topics/sole-proprietorships-partnerships/report-business-income-expenses/claiming-capital-cost-allowance/accelerated-investment-incentive.html#AII

  • neither you nor a non-arm’s length person previously owned the property
  • the property has not been transferred to you on a tax-deferred “rollover” basis

Capital lease is considered not a lease, it is a cost for the equipment starting the beginning. It should be captured as if it is an equipment being financed.

I think the current treatment by CRA is that they follow the documentation. If the document is a lease, it should be treated as a lease with the payments deductible in the year. Of course, that $80K buyout is not a deductible lease payment.

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For F/S purposes a capital lease is treated as a loan.
But for tax purpose, a lease is a lease is a lease.

This link has good information for the treatment of leases.
https://www.canada.ca/en/revenue-agency/services/tax/businesses/topics/sole-proprietorships-partnerships/business-expenses/leasing-costs.html

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That is actually good info. So only if you elect to treat the lease as a loan do you not deduct the lease payments. Normally a lease is lease.

Late to the party but I came in with a question and saw this interesting one

You may have set this up as a capital lease, so (dr)assets and (cr)lease obligation, but there does not appear to be a follow though on the tax return with no Sch8 addition

As noted below, CRA says operating lease is the default and a capital lease treatment must be elected by both parties because tax consequences must be properly allocated and reported

Lessor==capital lease is a sale of equipment, operating lease is an agreement to rent out your owned property.

Lessee constructively buys asset under a capital lease, and only rents the asset under an operating lease

But you are not there yet.

What exactly does the documentation say?. Are you buying out the remaining lease obligation (A) where the assets is then transferred at nominal value, or are you buying what you were previously renting (B)

(A) leads you to write off the amount as lease payments
(B) says you bought an asset

All good questions and I tend to straighten this up at the T1 level. Never had the time to make the books bark the way the return has to.

As to travellers amount I need to get some input from the client. The ultimate authority.

Did you Google it?

Just a thought.

Dug

705 750-8262.