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Income tax — capital gains vs. income

My client was a large corporation in the leasing business. It purchased, from a receiver, a large portfolio of equipment that was leased out. Some of the equipment was on "funded leases", where the monthly rental payments had already been sold off to a third party. At the end of the lease period, my client sold the equipment for a substantial gain.

Revenue Canada reassessed my client on the basis that the gain on selling the equipment from the funded leases was fully taxable as income, instead of only 3/4 taxable as capital gains. The difference in tax amounted to over $200,000.

I was retained after the reassessment had already been issued. I filed a Notice of Objection, providing detailed analysis, reference to Revenue Canada policy, and case law to show that the gain should be treated as a capital gain.

The Appeals Officer initially disagreed, and I sent her further analysis and submissions in response to her oral comments. Eventually, when she sent me her written reasons for disagreeing with my position, it was clear that, not being legally trained, she did not fully understand the issues and was not able to reply to my detailed submission.

I wrote to senior management to insist that Revenue Canada obtain a legal opinion and respond in detail to the points I had raised, indicate what facts the Department accepted as true, and justify its position based on the case law.

Six months later, the Appeals Officer called to advise that they had obtained a legal opinion and that I was correct. The objection was allowed and the extra tax eliminated.

Problem solved!

(1998)