I-3 - Taxation Act

Section 125.1 Disposition versions

2006-03-01

125.1. Where a taxpayer, in this division referred to as the “lessee”, has leased corporeal property, other than prescribed property, that would, if the lessee had acquired the property, have been depreciable property of the lessee, from a person resident in Canada other than a person whose taxable income is exempt from tax under this Part, or from a person not resident in Canada who holds the lease in the course of carrying on a business through an establishment in Canada any income from which is subject to tax under Part I of the Income Tax Act (Revised Statutes of Canada, 1985, chapter 1, 5th Supplement), who owns the property and with whom the lessee was dealing at arm’s length, in this division referred to as the “lessor”, for a term of more than one year, the following rules apply for the purpose of computing the income of the lessee for the taxation year that includes the particular time when the lease began and for all subsequent taxation years, if the lessee and the lessor have jointly so elected in a prescribed form filed with their fiscal returns under this Part for their respective taxation years that include the particular time:

(a)  in respect of any amount paid or payable for the use of, or for the right to use, the property, the lease is deemed not to be a lease;

(b)  the lessee is deemed to have acquired the property from the lessor at the particular time at a cost equal to its fair market value at that time;

(c)  the lessee is deemed to have borrowed money from the lessor at the particular time, for the purpose of acquiring the property, in a principal amount equal to the fair market value of the property at that time;

(d)  interest, capitalized semi-annually, not in advance, is deemed to accrue on the principal amount of the borrowed money outstanding from time to time, at the prescribed rate in effect at the beginning of the period for which the interest is being calculated, where the lease provides that the amount payable by the lessee for the use of, or the right to use, the property varies according to prevailing interest rates in effect from time to time, and the lessee so elects, in respect of all of the property that is subject to the lease, in his fiscal return under this Part for his taxation year in which the lease commenced, or at the prescribed rate in effect on the earlier of the particular time and the time, before the particular time, at which the lessee last entered into an agreement to lease the property;

(e)  the amounts paid or payable by or on behalf of the lessee for the use of, or the right to use, the property in the year are deemed to be blended payments, paid or payable by the lessee, of principal and interest on the borrowed money outstanding from time to time, calculated in accordance with paragraph d, applied firstly on account of interest on principal, secondly on account of interest on unpaid interest and thirdly on account of unpaid principal, if any, and the amount by which the aggregate of such amounts paid or payable exceeds the aggregate of the amounts so applied is deemed to be paid or payable on account of interest, and any amount deemed by reason of this paragraph to be a payment of interest is deemed to have been an amount paid or payable, as the case may be, pursuant to a legal obligation to pay interest in respect of the year on the borrowed money;

(f)  at the time of the expiration or cancellation of the lease, the assignment of the lease or the sublease of the property by the lessee, the lessee is deemed, except where section 125.4 applies, to dispose of the property at that time for proceeds of disposition equal to the amount by which the aggregate of the amount referred to in paragraph c and the amounts received or receivable by the lessee in respect of the cancellation or assignment of the lease or the sublease of the property exceeds the aggregate of the amounts deemed under paragraph e to have been paid or payable, as the case may be, by the lessee on account of the principal amount of the borrowed money and the amounts paid or payable by or on behalf of the lessee in respect of the cancellation or assignment of the lease or the sublease of the property;

(g)  for the purposes of sections 97.2 to 97.4, each amount paid or payable by or on behalf of the lessee that would, but for this section, have been an amount paid or payable for the use of, or the right to use of, the property is deemed to have been deducted in computing the lessee’s income as an amount paid or payable by the lessee for the use of, or the right to use, the property after the particular time;

(h)  any amount paid or payable by or on behalf of the lessee in respect of the granting or assignment of the lease or the sublease of the property that would, but for this paragraph, be the capital cost to the lessee of a leasehold interest in the property is deemed to be an amount paid or payable, as the case may be, by the lessee for the use of, or the right to use, the property for the remaining term of the lease;

(i)  where the lessee has made an election under this section in respect of a property and, at any time after the lease was entered into, the owner of the property is a person not resident in Canada who does not hold the lease in the course of carrying on a business through an establishment in Canada any income from which is subject to tax under Part I of the Income Tax Act, the lease is deemed, for the purposes of this section, to have been cancelled at that time.

1991, c. 25, s. 42; 1993, c. 16, s. 70; 1994, c. 22, s. 96; 1996, c. 39, s. 45; 2001, c. 53, s. 39; 2005, c. 1, s. 54; 2005, c. 23, s. 40.