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UBC Theses and Dissertations

Canadian income tax postponement and avoidance opportunities afforded by the long term lease : an analysis, history, and suggested solution Duthoit, Russell Gill


The Report of the Royal Commission on Taxation, 1967, stated that tax treatment of leases was of great concern if the system of capital cost allowances was not to be undermined. In spite of this warning, nothing has been done since the repeal of former Section 18 of the Canadian Income Tax Act, in 1963, to remedy the situation. Section 18 was repealed because it was found to be administratively inoperable. A study of current accounting and business practice, of theoretical and research committee recommendations, and of legislation in the United States appears to isolate the reason for legislative difficulties. The premise on which Canadian legislation was based is much too narrow. Only those leases which had purchase options were dealt with. In fact, most long term leases, regardless of whether or not they have purchase options, have most of the attributes of purchases. These attributes include property rights acquired in assets, useful life of assets, equity accumulation in assets, and the fair -market value of assets in relation to the present value of total payments required under the lease. In most long term leases, the present value of contract payments, including options, comprises the major part of the fair market value. Current opinion and practice, as expressed by most writers, by research committees, and as evidenced by accounting practice and business acceptance in balance sheet footnoting of long term leases, effectively treats such acquisition as quasi-purchases. In this regard, both theory and practice is far ahead of legislation. The inequity in the tax treatment of long term leases is much more consequential than is generally realized. Not only is there substantial tax postponement for an ever burgeoning number of realty and equipment leases, but there is 'proper' tax avoidance under the long term lease through depreciation of land for tax purposes, effectively available to lessees, but not available to purchasers. When the thousands of service station and supermarket outlets, and the fact that most are under long term lease in Canada, are considered, tax avoidance from this source alone amounts to many, many, millions of dollars annually. Since leasing is always initially more expensive than purchasing, and the major reason for many leases is tax advantage, it is not unfair to say that legislative inaction contributes considerably to business inefficiency. This taxation problem is examined under varying aspects, including historical applications of the Canadian Income Tax Act; present legislation and its effectiveness; pertinent tax cases in Canada and in the United States; current accounting and business trends, and Carter Report suggestions. Finally, suggested legislation which embodies the transition of long term leasing to purchasing is proposed. While the proposed solution is relatively simple and concise, it is supported by theory, by practicality, and by operability.

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