AGFINANCE
THE WESTERN PRODUCER | WWW.PRODUCER.COM | MARCH 3, 2011
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TAXATION | LEASING VS. BUYING
Leasing grain bins has income tax implications
Farmers receiving incorrect information | Producers urged to get professional tax advice when deciding whether to lease
Ve r n P e t e r s i s a c h a r t e r e d
accountant and a partner at Stark &
Marsh Chartered Accountants in
Swift Current, Sask.
BY VERN PETERS
FREELANCE WRITER
Our chartered accounting firm has
become aware of incorrect income
tax information provided by leasing
companies regarding grain bins.
The examples we have seen go
something like this.
A farmer leases grain bins valued at
$100,000 with an option to buy for
$10,000 at the end of the lease. The
farmer subsequently sells the bins
for $100,000 and realizes a capital
gain for $90,000.
If this was an individual, he would
use the capital gains deduction (CGD)
and pay no income tax. Individuals
who had no CGD remaining would
pay tax on only one-half of the gain.
The examples also state that leasing
has succession planning benefits
when transferring the bins to children.
However, none of this is correct.
The Income Tax Act has envisioned
leasing arrangements and the disparity that could exist between buying and leasing an asset. Subsection
13 (5.2) addresses leasing of depreciable property.
When the farmer exercises the
option to buy, $10,000 is added to the
capital cost allowance (CCA) pool for
Class 6. However, subsection 13 (5.2)
also deems that the cost for recaptured CCA purposes will be higher if
the fair market value at the time of
purchase exceeds the purchase price
($10,000 in the above example).
It seems clear from the example
that the grain bins likely had a fair
market value of at least $100,000 at
the time the purchase option was
exercised. Subsection 13 (5.2) deems
the cost added to Class 6 to be the
lesser of the fair market value when
the option is exercised and the total
of previous lease payments expensed
plus the purchase option.
Farmers are warned to think twice
about leasing grain bins if they
hope to get a tax break. | FILE PHOTO
It likely is fair to assume that the
total of the lease payments plus the
purchase option is greater than
$100,000. Therefore, the cost for
recaptured CCA purposes is deemed
to be $100,000. Subsection 13 (5.2)
also deems that $90,000 of CCA has
previously been claimed.
We will assume that grain bins were
the only addition to Class 6 and that the
farmer claimed no CCA on this class.
The farmer will realize recaptured
CCA of $90,000 when the bins are sold
for $100,000. This is not a capital gain.
The entire $90,000 of recaptured CCA
will be taxed as farm income.
Even if the bins were sold for
$120,000 and there was a capital gain
on the sale, this gain likely would not
be eligible for the CGD.
It is generally accepted that grain bins
are movable property , but the CGD is
available only for real or immovable
property. Real property includes land
or buildings affixed to the land. Grain
bins do not meet this definition.
The claim that leasing provides a
benefit for intergenerational rollover
is also erroneous.
Leasing or buying grain bins does not
affect the ability to transfer bins to children on a tax deferred basis. This can
be done during the parent’s lifetime.
Using the facts from the above
example, a parent may want payment from a child only for the final
purchase option of $10,000. Assum-
ing other criteria are met, as contained in section 73, the parent
would show a disposition of $10,000
to Class 6 and the child would show
an addition of $10,000 to Class 6.
The potential recapture of $90,000
will also become the child’s when the
bins are sold.
Let’s say that the bins had originally
been bought and the undepreciated
capital cost of Class 6 was now
$62,329. These bins were the only
assets in that class.
The child pays $10,000 for the bins.
The parent would show a disposition of
$62,329 to Class 6 and the child would
show an addition of $62,329 to Class 6.
The potential recapture of $37,671
would also become the child’s when
the bins are sold.
You must have the best information
available when deciding whether to
lease or buy assets. If you have wrong
information, you may end up with an
income tax surprise later.
Discuss leasing versus buying with
your income tax professional.