The specified leasing property rules, introduced originally to eliminate the after-tax advantages of leasing as a source of financing, effectively recharacterize a lease as a loan, and limit the lessor’s capital cost allowance claim to deemed repayments of principal on the loan.  The specified leasing property rules do not apply to “exempt property,” generally property commonly leased for operational purposes and for which the capital cost allowance rate approximates the economic depreciation.

In reaction to a perceived exploitation of the specified leasing property rules – involving the lease of “exempt property” to lessees not subject to tax - the 2010 Budget proposed to extend the application of the specified leasing property rules to otherwise exempt property that is the subject of a lease to a government or other tax-exempt entity or a non-resident.  Under the proposal, leases of otherwise exempt property will continue to be exempt even if leased to non-taxable lessees if the total value of the subject property is less than $1 million.  An anti-avoidance rule applies if it may reasonably be considered that one of the purposes of dividing the property among separate leases is to meet the $1 million exception.  The proposed amendment applies to leases entered into after March 4, 2010.  Legislation for this proposed amendment was first tabled in August 2010 and has not been changed in this Notice of Ways and Means Motion.