Capital idea

ONLY A DOCTOR can deliver worse news than your accountant. But last fall, TFS Group, a firm in Waterloo, Ont., that specializes in accounting and business advice for owner-operators and small fleets, discovered a change in Canada’s Income Tax Act that could radically alter the way you manage your truck purchases. In a good way.
TFS Group general manager Chris Bennett explains:

Last year, the Canada Customs and Revenue Agency (CCRA) quietly pulled an Income Tax Act interpretation bulletin that deals with the way it handles equipment leases. Typically, a capital lease will contain a bargain purchase option, or BPO, which states what you’ll pay for the truck in order to take title at the end of the lease term. You may immediately trade the vehicle, but it’s assumed that you’ll exercise that option.

What CCRA has always done with this industry is to say to the leasing company, OK, fellas, if we look at the agreement and the residual value and see that it’s clearly a BPO, then the contract is not a true operating lease but a conditional sales contract. The leasing company is holding back title and owns the equipment, while you the trucker have agreed to make payments on the equipment over a certain period of time at a certain rate in anticipation of one day taking title and doing whatever the heck you want to do with it.

So for 20-odd years we’ve been taking these leases, which CCRA has identified as capital leases, and we’ve been setting up the truck for depreciation purposes on our clients’ financial statement and running amortization on the interest as if the lease were more of a loan.

Well, the interpretation bulletin that was pulled was intended to affect multinational corporations with equipment coming on and off the balance sheet every day. But if you’re a single guy, leasing a single tractor, and disposing of it every four years, the change means we can, for tax purchases, treat your lease as an operating lease. The payments are a straight business expense we can write off. And you, Mr. Trucker, can still exercise your BPO. Say it’s a dollar. You take title of the truck, and it’s worth $25,000 on the street, so you sell it. You have a capital gain. That’s good, because your gain will be taxed at one-half your normal business rate.

So it’s a significant tax savings for our clients and a whole new capital gains strategy. It changes not having to track the capital cost allowance, and not having to set the truck up with a purchase price and then looking at a recapture situation or rolling the truck into a trade.

What we’re looking at is a straightforward operating-style lease–simple to handle with potentially a sweet little capital gain at the end of three, four, or five years.