Machinery leasing costs

Tax Topics
1

Hello community,

I’m seeking guidance on the appropriate GIFI code for recording machinery leasing costs for a corporation. Can anyone help me identify the correct code in schedule 125? The only code I found in the CRA guide is 9765, which pertains to machinery lease expenses for farms.

Thank you!

2

You should first determine if it is a capital lease or straight lease.

Capital leases should be recorded as an asset on the F/S, but an adjustment should be made on Schedule one to claim it as a lease. [GIFI 1910 to 1917 for the capital portion of the asset and GIFI 8710 for the interest included in the lease payment]

For straight leases, what about GIFI 8410?

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3

where on sch. 1 do you make this adjustment if you have a capital lease? Do you just make an additional deduction for the capital portion (since the interest portion will already be included in the F/S & Sch net income line)?

4

On Schedule 1, Line 395 I enter something like “Principal portion of Capital Lease Payments”

5

I think that the adjustment entries on the T2 Schedule 1 for a capital lease will be (1) adding back the interest on the capital lease reported on the income statement in column 119 and (2) deducting the actual lease payments in column 395.

6

You can’t add back something you never expensed in the first place. Principal portion of lease payments is a balance sheet item, not income statement. You add back interest only. Deduct 100% of lease payments.

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7

@jhd.hemeon
Technically you are correct.
So if total lease payments of for example $ 15,000 were recorded as $ 15,000 loan payments and $ 2,500 interest was added to the loan you would have a reduction of the loan in the amount of $12,500.
[The “loan” is the lease that was setup as a loan in the F/S]

You can either reverse the interest on line 295 and deduct the full lease payments on line 395, or just deduct the additional $12,500 on line 395 with the note "principal portion of lease payments].
You would end up with a deduction of $15,000 in both cases.

@lokki I don’t believe that Line 119 is used for the reversal of this kind of interest. Capitalized interest is the unpaid interest added to the balance of the loan. Capital interest occurs when the borrower is not making payments on the loan and interest continues to accrue.

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8

Hi Rein, I believe you are right, so I will add back the interest on the capital lease in column 295 and describe it as “Interest on capital lease”, then deduct the actual lease payments in column 395 as “Capital lease expenses”. Thanks for your advice.

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9

deleted by moderator

10

Sorry, wrongly sent it to the group.

11

Sorry to dredge this topic up again but want to be clear on the FS entries vs tax entries.

  • FMV of equipment is $1,300,000
  • Prepayment on lease of $520,000
  • Total lease payments $493,000 including implicit interest of $188,000 over 5 years
  • Lease end buyout $475,000
  • FMV of equipment end of lease should be ~ $1,000,000

So would the following be correct

Financial Statements

  • DR Fixed assets $1,300,000
  • CR Lease obligation liability account $1,300,000
  • DR prepaid lease and CR bank for $520,000
  • Each year CR bank for payments and DR Implicit interest costs and lease obligation account
  • Each year CR prepaid lease and DR lease obligation by 1/5 of the prepaid amount
  • Each year record depreciation on FMV of asset
  • At lease end CR bank and DR Lease obligation for $475,000 buyout

Tax return

  • nothing initially entered on S8
  • Each year add back depreciation and implicit interest on S1 and deduct the full amount of the lease payments on S1
  • At lease end add $475,000 to schedule 8

Thanks
Jim

12

If you’re following ASPE 3065 or IFRS 16, the initial recognition should be the lesser of the FMV of the asset or the PV of the minimum lease payments. Here’s a simple guide:

I’m not sure what’s going on with the $520,000 prepayment - wouldn’t that just immediately reduce the lease liability? Is it some kind of separate account held by the lessor, with a balance they apply to the lease once a year for 5 years?

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13

Is this for a compilation …? What makes you think this shouldn’t just be an operating lease? and I’m not referring to the ROU recognition under IFRS 16… different treatment altogether.

14

Since the buyout is less then half of the FMV at the end of the lease, doesn’t that make it a capital lease?

15

Fairly subjective.

We aren’t dealing with any review standards here (ASPE/IFRS/USGAAP), so the treatment should theoretically depend on the if the lessor has a buyout clause and if leasee has an intent to own the asset.

Per compilation standards, you could go either way with it, but usually in practice we tend to see if the scope of the lease value is >90% or more of FMV (similar to ASPE standards, but without the PV clause). If you want to lock it in, fill a 2145 election form so that lessors B/S is in check with yours.

I’ll leave this in OP’s hands.

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16

As mentioned by @Deepinthemoneycall, if you’re not doing a review or audit, there is probably no need to apply ASPE or IFRS in detail. The main question is whether the lessee INTENDS to keep the asset at the end of the lease. FMV in the future is not guaranteed, so it’s really difficult to say whether the buyout value is a “bargain purchase option” until the lease end date occurs.

Don’t make it more difficult than it needs to be…unless you’re trying to inflate your bill to the client… :wink:

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