http://decision.tcc-cci.gc.ca/tcc-cci/decisions/en/item/110145/index.do 
GMAC Leaseco Corporation v. The Queen (June 11, 2015 – 2015 TCC 146, Graham J.).
Précis: This decision involves four sources of income which were assessed by CRA against GMAC Leasco (“GMAC”) [para. 2 of the Reasons].
(a) Excess Kilometre Charges: In its taxation periods ending December 31, 2005, November 30, 2006, December 31, 2006 and December 31, 2007, GMAC charged certain customers additional charges for driving more kilometres than their leases permitted (“Excess Kilometre Charges”). When GMAC received an Excess Kilometre Charge in respect of a vehicle it treated those charges as proceeds of disposition which reduced the undepreciated capital cost (“UCC”) of its Class 10 assets in the year in which the charge was received. The Minister of National Revenue reassessed those taxation years to treat the Excess Kilometre Charges on income account. The Minister included additional income of more than $90 million in GMAC’s income in the periods in question in respect of this issue but allowed a similar increase in GMAC’s UCC pool for its Class 10 assets and corresponding increase in the CCA that it was entitled to claim in respect of that increased UCC. GMAC has appealed that decision.
(b) Residual Value Support Payments: In its taxation years ending November 30, 2006, December 31, 2006 and December 31, 2007, GMAC received certain payments from [General Motors of Canada (“GM”)] known as “residual value support payments”. GMAC treated those payments as reducing the undepreciated capital cost (UCC) of its Class 10 assets in the year in which a lease in respect of which a payment had been received ended. The Minister reassessed those taxation years to include the residual value support payments in GMAC’s income in the year in which they were received. The Minister included additional income of more than $235 million in GMAC’s income in the periods in question in respect of this issue but allowed a similar increase in GMAC’s UCC pool for its Class 10 assets and corresponding increase in the CCA that it was entitled to claim in respect of that increased UCC. GMAC has appealed that decision.
[The residual value support payments are further broken down by the Court into two sub-categories: those received when GMAC was wholly owned by General Motors Corporation of the United States(“GMUS”) (i.e., prior to December 1, 2006); and the period thereafter when it was not wholly owned by GMUS.]
(c) Ontario Capital Tax: The Minister has denied a deduction claimed by GMAC in its taxation year ending December 31, 2007 for Ontario capital tax that GMAC paid in respect of that taxation year but which was not assessed until 2011. GMAC has appealed that decision.
In a careful decision the Court held that:
1. The excess kilometre charges were taxable income, thus upholding the Minister’s assessment.
2. The residual value support payments relating to the period when GMAC was wholly owned by GMUS were taxable income, thus upholding the Minister’s assessment.
3. The residual value support payments relating to the period after GMAC ceased to be wholly owned by GMUS were taxable income, but were only taxable at the end of the relevant lease, thus modifying the Minister’s assessment.
4. The 2007 Ontario capital tax that was not assessed until 2011 was still deductible for the GMAC taxation year ending December 31, 2007, thus vacating the Minister’s reassessment.
The Court stated that it was not inclined to award costs but gave the parties 30 days to make submissions should they wish to do so.
Decision: As a preliminary matter the Judge outlined the nature of GMAC’s business:
[4] When a customer went into a GM dealership, he or she had the option of either purchasing or leasing a vehicle. If the customer chose to lease the vehicle, there were three factors that were relevant to determining a customer’s lease payments:
(a) Purchase price: GMAC imposed a ceiling on what it was willing to pay a dealer for a leased vehicle. The dealer and customer could negotiate any price below that ceiling. The lower the vehicle purchase price, the lower the customer’s lease payments.
(b) Interest rate: Interest rates were set by either GMAC or GM and communicated to the dealers. Customers could not negotiate interest rates with the dealers. The higher the interest rate, the higher the lease payments.
(c) Contract residual value: The “contract residual value” is the price at which a customer is entitled to purchase the vehicle at the end of the lease. Contract residual values were set by GMAC and communicated to the dealers. Customers could not negotiate contract residual values with the dealers. The higher the contract residual value, the lower the lease payments. The contract residual value is affected by a number of sub-factors. Two key sub-factors are directly correlated to the contract residual value:
i.
Maximum kilometres: The contract residual value is directly correlated to the maximum number of kilometres permitted under a lease. The greater the maximum number of kilometres permitted under the lease, the lower the contract residual value and, thus, the higher the lease payments.
ii.
Term: The contract residual value is also directly correlated to the term of a lease. The longer the term, the lower the contract residual value and, thus, the higher the lease payments.
[5] If the customer and the dealer could agree on the terms of a lease, the customer would then sign a standard lease contract that had been prepared for the dealer by GMAC. The contract spelled out each of the above factors and sub factors and showed how they impacted the monthly lease price. The remaining terms of the contract were non-negotiable.
[6] The calculation of the monthly lease price was relatively straight forward. The following is a somewhat simplified version of calculation:
(net purchase price of the vehicle - contract residual value) x (1 + interest rate)
# of months in term
[7] From this formula one can see that, in essence, GMAC was receiving two amounts over the term of a lease. The first was the difference between the purchase price and the contract residual value (the “Anticipated Loss of Value Amount”). The second was interest on the Anticipated Loss of Value Amount (the “Interest Amount”). GMAC reported both of these amounts on income account.
[8] When a lease ended the customer had the choice of either purchasing the vehicle for the contract residual value or returning it to GMAC by dropping it off at a dealership. GMAC would immediately sell any vehicles that were returned. When it enters into a lease, GMAC accepts what it calls “residual value risk”. If GMAC ultimately sells a returned vehicle for less than the contract residual value, it takes a loss. Conversely, if it sells the vehicle for more that the contract residual value, it makes a profit. There are a number of factors that can affect the market value of a vehicle following a lease. The number of kilometres driven is a very significant factor but it is not the only factor. Such things as consumer demand for the particular make, model and colour of the vehicle, the condition of the vehicle and the current supply of such vehicles in the relevant market also impact the market price.
[Footnotes omitted]
With that background in mind the Judge first concluded that the excess kilometre charges were a form of income:
[17] In reassessing GMAC, the Minister assumed that the Excess Kilometre Charges exceeded the impact that the extra kilometres had on the value of the vehicle at the end of the lease. GMAC has failed to demolish that assumption. The best way to understand why is to contrast a customer who purchased additional kilometres and used all of them with one who did not purchase additional kilometres but drove the same number of kilometres and thus was faced with an Excess Kilometre Charge. Both customers returned a vehicle which had the same market value. The former customer had already paid for his additional kilometres using a rate of $0.08/km plus interest. The latter customer had to pay an Excess Kilometre Charge calculated by multiplying the excess kilometres driven by $0.10. Since the vehicles both had the same market value at the end of the lease, the $0.02 difference between the $0.08/km rate and the $0.10/km rate must have been designed to compensate GMAC not for damage to the vehicle but rather for something else. The logical inference is that the difference was compensating GMAC for its lost interest income. Because the lease has already ended when the Excess Kilometre Charges are calculated, there is no interest component factored into the charge. Thus, GMAC would have lost out on interest income due to the customer’s failure to buy additional kilometres up front. With the permission of counsel, I asked GMAC’s witness whether the difference between the $0.08/km rate and the $0.10/km rate was designed to compensate GMAC for lost profits. He said nothing that would convince me that my inference is wrong. Based on the foregoing comparison, GMAC has not convinced me that the $0.02/km component of the Excess Kilometre Charges is not simply replacing lost interest income and has thus failed to demolish the Minister’s assumption.
[18] What then of the remaining $0.08/km component of the $0.10/km Excess Kilometre Charge? Whether the customer paid the $0.08/km up front by purchasing additional kilometres or at the end of the lease by paying an Excess Kilometre Charge, the effect was the same. The customer was paying for an anticipated decrease in the market value of the vehicle at the end of the lease. If the customer paid for that amount up front by purchasing additional kilometres, GMAC considered it to be on income account. How then could it be on anything other than income account when the customer paid the same amount at the end of the lease?
[19] Based on all of the foregoing, I find that GMAC incorrectly treated the Excess Kilometre Charges as being on capital account. It should have treated them as being on income account.
[Footnote omitted]
He then turned to the residual value support payments relating to the period when GMAC was wholly owned by GMUS and concluded that they were taxable income:
[30] Looking at how the residual value support payments were actually calculated and what they actually did makes it clear that they were designed to replace lost income. Had the contract residual value been set where it should have been, the customer’s monthly lease payments would have been higher. The residual value support payments had the simple effect of replacing that lost income. As described above, GMAC reported all of a customer’s monthly lease payments as income. Those lease payments were made up of two components: the Anticipated Loss of Value Amount and the Interest Amount. Inflating the contract residual value reduced both of these amounts. The Anticipated Loss of Value Amount is the difference between the purchase price of the vehicle from the dealer and the contract residual value. An inflated contract residual value therefore resulted in a lower Anticipated Loss of Value Amount and a lower monthly payment. The Interest Amount is the interest on the Anticipated Loss of Value Amount. Thus a lower Anticipated Loss of Value of Amount would necessarily lead to a lower Interest Amount. The effect of the residual value support payments in the Wholly Owned Period was that GMAC was paid the difference in the Anticipated Loss of Value Amount (i.e. the difference between what that amount would have been if the contract residual value had been correctly set and what it was with the inflated contract residual value) up front instead of over the term of the lease. Because GMAC had use of the money from the beginning, there would have been no need to compensate it for any lost interest.
[31] Based on all of the foregoing, I find that during the Wholly Owned Period the residual value support payments were received on income account and should have been included in income in the year in which they were received.
He reached a different conclusion however in the case of the residual value support payments in the post- GMUS control period:
[36] GMAC conceded that, if I found that the residual value support payments received during the Wholly Owned Period were received on income account, then they were taxable when received. GMAC did not make that same concession for residual value support payments received during the Arm’s Length Period. GMAC submits that if I find, as I have, that the residual value support payments received during the Arm’s Length Period were received on income account, then they should be included in income at the end of the lease after any true up occurred. The Respondent did not make any submissions on this issue.
[37] I accept GMAC’s position that the residual value support payments were earned at the end of the lease. Although GMAC had use of the money at the beginning of a lease, it did not have any entitlement to keep it until the lease ended and GM and GMAC knew whether GMAC had had to sell the vehicle and, if so, what price it had been sold for.
…
[39] GMAC submits that had the residual value support payments been earned in the year that they were “received” (i.e. at the beginning of the lease), then subparagraph 12(1)(x)(v) would have excluded the payments from being taxed under paragraph 12(1)(x) and left them to be taxed under section 9. However, GMAC submits that because the residual value support payments were “received” at the start of the lease but only earned at the end of the lease, then subparagraph 12(1)(x)(v) does not apply to make paragraph 12(1)(x) inoperable. Instead, GMAC submits, paragraph 12(1)(x) applies and that GMAC is free to make an election under subsection 13(7.4). The Respondent did not make any submissions on this issue.
[40] While I accept GMAC’s interpretation of subparagraph 12(1)(x)(v), I do not accept that the residual value support payments were “received” in the first year of the leases. In my view, the word “received” in paragraph 12(1)(x) must mean something more than merely accepting possession of an amount and using it for a period of time. The recipient must have a legal right to keep the amount. GMAC is trying to have it two ways. It is arguing that the residual value support payments are not taxable because it did not have a right to them when they came into its possession but, in the same breath, arguing that it has “received” the payments despite the fact that it has no right to keep them. GMAC cannot have it both ways.
[41] Based on all of the foregoing, I find that during the Arm’s Length Period the residual value support payments were received on income account and were not required to be included in income until the end of the relevant lease. However, at the end of the lease, the residual value support payments were taxable under section 9. The Minister will need to reassess the periods in question in accordance with the foregoing.
[Footnotes omitted]
Thus this was a mixed result; the amounts were taxable income but the taxation was deferred until the end of the leases at issue.
Finally the Court turned to the question of 2007 Ontario capital tax that was not assessed until 2011and GMAC managed a clear win on this point:
[46] The Respondent relies on the Federal Court of Appeal decision in Canada v. Burns. With respect, I cannot see the relevance of that case. Burns dealt with the question of whether merely having an obligation to backfill a gravel pit was sufficient for the taxpayer to claim a deduction in the year the obligation arose, despite the fact that the taxpayer did not actually hire anyone to backfill the pit until after the taxation year. The Federal Court of Appeal stated that an “expense cannot be said to be incurred by a taxpayer who is under no obligation to pay money to anyone. …an obligation to do something which may in the future entail the necessity of paying money is not an expense.” I do not think that GMAC would dispute that point. However, Burns says nothing about how expenses that are statutorily deemed to have accrued should be treated.
[47] Based on the foregoing, it appears to me that GMAC’s liability to pay the additional capital tax accrued in 2007 rather than 2011. Since GMAC reported its income on an accrual basis, it was appropriate for GMAC to claim a deduction in its income taxation year ending December 31, 2007 for the additional capital tax that subsection 78(1) deemed GMAC to have accrued.
[Footnotes omitted]
Thus the Crown was the clear winner on two issues and a partial winner on a third. GMAC was however completely successful on the Ontario capital tax issue.
As a result the Court was disinclined to award costs but allowed the parties 30 days to make submissions on costs should they wish.