Question 1

For a lease to be deemed valid by the CRA for tax purposes, the lease should NOT contain a
payment schedule wherein the initial payments are very high and the latter payments are very low.

Accepted Answer

The CRA does not invalidate leases based solely on the structure of the payment schedule, whether the initial payments are very high and the latter payments are very low or vice versa. The validity of a lease for tax purposes depends on the genuine intent, terms, and conditions of the lease agreement, ensuring it reflects a true lease and not a financing arrangement or a purchase in disguise.

Question 2

When the lessee automatically acquires title to the property after payment of a speciﬁed amount in
the form of rentals, then the CRA will disallow the lease.

Accepted Answer

This is known as a finance lease, and if structured in this way, it would be treated as a sale by the lessor and disallowed by the CRA.

Question 3

A characteristic of an operating lease is that the lessee maintains the asset.

Accepted Answer

In an operating lease, the lessor retains ownership and typically maintains the asset, not the lessee.

Question 4

A characteristic of an operating lease is that the lessee has the right to cancel the contract before
expiration.

Accepted Answer

One of the main characteristics of an operating lease is that the lessee has the option to terminate the lease agreement before its scheduled expiration date. This provides flexibility and allows for changes in business operations or equipment needs. However, early termination may result in penalties or fees, depending on the terms of the lease agreement.

Question 5

Whizzo Manufacturing needs a new computer-operated lathe. Both ABC Corp. and XYZ Corp. will
lease the equipment to Whizzo. All lease terms are identical, except the lease payment and the
cancellation option. ABC will allow cancellation after two years while XYZ allows for cancellation of
the lease contract at any time. All else equal, Whizzo should be willing to make a higher lease
payment for the ABC lease.

Accepted Answer

Whizzo should be willing to make a higher lease payment for the XYZ lease because it offers more flexibility with the option to cancel at any time, which is generally more valuable.

Question 6

A leveraged lease must be disclosed on the ﬁrm's balance sheet, according to generally accepted
accounting principles.

Accepted Answer

According to generally accepted accounting principles, a leveraged lease must be disclosed on the firm's balance sheet.

Question 7

When a manufacturer of jumbo jets sells its jets to a lessor ﬁrm which, in turn, leases it to an airline
in need of jets, a direct lease is created.

Accepted Answer

When a manufacturer of jumbo jets sells its jets to a lessor firm which, in turn, leases it to an airline in need of jets, a direct lease is created.

Question 8

According to the CRA, for a lease to be valid for tax purposes, then the lease must be primarily for
business purposes.

Accepted Answer

The Canada Revenue Agency (CRA) states that for a lease to be valid for tax purposes, it must be primarily for business purposes. Personal uses or benefits should not be the main reason for the lease.

Question 9

According to the CRA, for a lease to be valid for tax purposes, then the term of the lease must be
less than 90% of the economic life of the asset.

Accepted Answer

The CRA (Canada Revenue Agency) does not specify that for a lease to be valid for tax purposes, the term of the lease must be less than 90% of the economic life of the asset. This concept is more closely related to accounting standards for distinguishing between a capital lease and an operating lease, rather than tax validity criteria set by the CRA.

Question 10

A conditional sales agreement lease must be disclosed on the ﬁrm's balance sheet, according to
generally accepted accounting principles.

Accepted Answer

According to GAAP, a conditional sales agreement lease is considered a financing arrangement and must be disclosed on the balance sheet.

Question 11

In an operating lease, the lessor is typically required to maintain the asset.

Accepted Answer

In an operating lease, the lessor retains ownership of the asset and is typically responsible for maintaining it throughout the lease term.

Question 12

For a lease to be deemed valid by the CRA for tax purposes, the lessee must NOT be required to
purchase the asset from the lessor during or at the termination of the lease.

Accepted Answer

This is because if the lessee is required to purchase the asset from the lessor during or at the end of the lease, it is considered a financing arrangement rather than a true lease, and may be treated differently for tax purposes.

Question 13

If the lease term is at least 70% of the estimated economic life of the asset, this would cause a lease
to be declared a capital lease for accounting purposes.

Accepted Answer

The answer of If the lease term is at least...

Question 14

According to the CRA, for a lease to be valid for tax purposes, then the lease must have a bargain
purchase option, transferring the residual value to the lessee.

Accepted Answer

According to the CRA, for a lease to be valid for tax purposes, it must meet certain conditions such as being an arms-length transaction, having a fixed term, and requiring the lessee to assume the risks and obligations of ownership. A bargain purchase option is not mandatory, but it can be a factor in determining whether the lease is a finance lease or an operating lease.

Question 15

A characteristic of an operating lease is that the payments are enough for the lessor to recover the
cost of the equipment.

Accepted Answer

A characteristic of an operating lease is that the payments are not usually enough for the lessor to recover the full cost of the equipment. The lessor retains ownership of the equipment and is able to lease it out again at the end of the lease term, allowing for a continuous stream of income. The lessee benefits from lower monthly payments compared to a finance lease, but has no option to purchase the equipment at the end of the lease term.

Question 16

Bondo Manufacturing has just signed a lease agreement with MIPS Computers. Bondo agreed to
pay $15,000 per month for 12 months. The purchase price of the equipment is $400,000. According
to the lease agreement, MIPS will pay property taxes and insurance on the equipment. This lease is
most likely a ﬁnancial lease.

Accepted Answer

A financial lease typically involves the lessee assuming responsibilities like property taxes and insurance, which is not the case here.

Question 17

When the lessee has a bargain purchase price option, then the CRA would disallow the lease.

Accepted Answer

The answer of When the lessee has a bargain purchase...

Question 18

When the lease term is less than ﬁve years, then the CRA will disallow the lease.

Accepted Answer

The CRA will not automatically disallow leases with a term of less than five years. However, they may scrutinize such leases more closely to ensure they are legitimate and not merely an attempt to claim tax deductions.

Question 19

For a lease to be deemed valid by the CRA for tax purposes, the lease should NOT include an
option permitting the lessee to purchase the asset at the end of the lease term at a price that is less
than the fair market value at that time.

Accepted Answer

Including an option to purchase the asset at a price below fair market value could be considered a form of disguised financing, which would lead to tax implications for the lessor and lessee. Therefore, to be deemed valid by the CRA, a lease should not include such an option.

Question 20

An operating lease must be disclosed on the ﬁrm's balance sheet, according to generally accepted
accounting principles.

Accepted Answer

Generally accepted accounting principles (GAAP) require that an operating lease be disclosed in the footnotes of a firm's financial statements, but it does not have to be recorded on the balance sheet. This is in contrast to a finance lease, which is required to be recorded on the balance sheet.

Quiz 22: Behavioral Finance: Implications for Financial Management

For a lease to be deemed valid by the CRA for tax purposes, the lease should NOT contain a payment schedule wherein the initial payments are very high and the latter payments are very low.

When the lessee automatically acquires title to the property after payment of a speciﬁed amount in the form of rentals, then the CRA will disallow the lease.

A characteristic of an operating lease is that the lessee maintains the asset.

A characteristic of an operating lease is that the lessee has the right to cancel the contract before expiration.

A leveraged lease must be disclosed on the ﬁrm's balance sheet, according to generally accepted accounting principles.

When a manufacturer of jumbo jets sells its jets to a lessor ﬁrm which, in turn, leases it to an airline in need of jets, a direct lease is created.

According to the CRA, for a lease to be valid for tax purposes, then the lease must be primarily for business purposes.

According to the CRA, for a lease to be valid for tax purposes, then the term of the lease must be less than 90% of the economic life of the asset.

A conditional sales agreement lease must be disclosed on the ﬁrm's balance sheet, according to generally accepted accounting principles.

In an operating lease, the lessor is typically required to maintain the asset.

For a lease to be deemed valid by the CRA for tax purposes, the lessee must NOT be required to purchase the asset from the lessor during or at the termination of the lease.

If the lease term is at least 70% of the estimated economic life of the asset, this would cause a lease to be declared a capital lease for accounting purposes.

According to the CRA, for a lease to be valid for tax purposes, then the lease must have a bargain purchase option, transferring the residual value to the lessee.

A characteristic of an operating lease is that the payments are enough for the lessor to recover the cost of the equipment.

When the lessee has a bargain purchase price option, then the CRA would disallow the lease.

When the lease term is less than ﬁve years, then the CRA will disallow the lease.

For a lease to be deemed valid by the CRA for tax purposes, the lease should NOT include an option permitting the lessee to purchase the asset at the end of the lease term at a price that is less than the fair market value at that time.

An operating lease must be disclosed on the ﬁrm's balance sheet, according to generally accepted accounting principles.