Capital Leasing Pilot Project

Section B

Registration, Administration and Reporting Under the Capital Leasing Pilot Project

This section provides lessors with the procedures involved to register and administer a lease under the Regulations. It also includes the procedures lessors must follow to maintain the eligibility of registered capital leases and outlines reporting requirements.

section 11, section 12

1 Capital Lease Registration

If the capital lease is to be registered, the lessor must register it within 4 months from the date it is entered into (date that the capital lease is signed by the lessee and the lessor) and must submit to the Administration the following:

• the Capital Lease Registration form (see Forms Section), signed by a responsible officer of the lessor and by the lessee;
• the Capital Lease Cost form (see Forms Section), signed by the lessor; and
• a cheque for the registration fee payable to the Receiver General for Canada.

section 11(2)

1.1 Late registration

When the lessor inadvertently fails to register the capital lease within 4 months from the date it was entered into, the registration period is extended by another 2 months provided that the lessor furnishes a full explanation for the inadvertence.

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2 Registration And Administration Fee

section 14(1)

2.1 Registration fee

• The registration fee is 2 percent of the financed cost of the equipment. For example, if the cost of the equipment is $100 000 but only $70 000 is financed, the 2 percent fee is calculated on the $70 000, amounting to $1400.
• Alessor can finance the registration fee (see Section A, Item 6.1).

section 14(2)(8)

2.2 Administration fee

• The administration fee is calculated at the end of each month at the annual rate of 1.25 percent on the net present value of all future payments plus any overdue payments. The fee is remitted quarterly.
• Administration fees must be paid on all capital leases, including those for which an interim claim has been paid (see Section C, Item 6).
• The administration fee can be charged to the lessee only through the annual imputed rate of interest (see Section A, Item 7.2).
• The administration fee is payable by the lessor within 2 months from the end of each quarter.

section 14(7)

2.3 Refund

Any request for refund of registration and administration fees must be submitted in writing by the lessor (not the lessee) within 1 year from the date on which the capital lease is entered into. The following circumstances must apply:

• The lessor has not provided to the lessee all of the equipment required by the capital lease. If so, refund of the 2 percent fee applies to the portion of the equipment not provided to the lessee under the capital lease. The total financing amount of the capital lease will be reduced accordingly.
• The capital lease is determined to be ineligible by the lessor. If so, the registration and administration fees are fully refundable. A full explanation is required of why the capital lease is ineligible, along with proof that the administration fee was paid. Upon refund, the Administration will delete the capital lease from its records.

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section 22

3 Improvements to Equipment

The lessor and the lessee may at any time agree to improve the original equipment financed by a capital lease registered under the Regulations. Costs necessary to improve that equipment can be financed under certain conditions:

• The total aggregate outstanding balance of the capital leases entered into under the pilot project, and of all loans made under the CSBFA and the CSBFP, will not exceed $250 000 (see Section A, Item 5).
• The capital lease term may not be greater than 10 years from the date on which the original capital lease was entered into.
• The annual imputed rate of interest used in the calculation of the scheduled payments remains the same.
• The lessor notifies the Minister in writing of the improvement within 3 months from the day on which the amendment was made and provides the following information:
  • the detailed cost of the improvement;
  • a detailed calculation of the revised payments;
  • the additional cost of the equipment and the amount financed; and
  • the new outstanding balance of the capital lease.

The notification to the Minister must be accompanied by a registration fee in the amount of 2 percent of the additional costs financed. The lessor must inform the Administration if the additional registration fee is financed.

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4 Revision Of Capital Lease Terms

section 21

4.1 Renewal of terms

The lessor and the lessee may agree to renew the term of the capital lease for an additional term or terms, as long as the capital lease is in good standing and the term of the capital lease is within 10 years from the date on which the original capital lease was entered into. The annual imputed rate of interest, as of the date of renewal, must not exceed 13.25 percent plus the rate of interest on Government of Canada bonds on the date of the renewal.

4.2 Revision of payment terms

The lessor and the lessee may agree to revise the payment terms of the capital lease at any time, without notifying the Administration.

However, to extend the term of the capital lease beyond 10 years the lessor must obtain prior approval from the Administration by submitting a written request during the last 2 years of the capital lease. The lessor must provide the grounds for the request and the appropriate supporting documentation. Approval will be given if the extension is likely to decrease the risk of default on the capital lease.

Any such revisions must comply with:

• the maximum term of 10 years; and
• the maximum imputed interest rate.

When renewing or extending the terms of the capital lease, the lessor must continue to apply the same due diligence and business procedures as those that would be applied for a capital lease not subject to the Regulations.

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section 16(e)

5 Prepayment

If the lessee requests to make full or partial prepayment of the scheduled payments and the lessor agrees, the lessor may impose a fee in the same amount as the lessor would charge for a conventional capital lease under similar circumstances.

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section 25

6 Substitution and Release of Additional Security

The lessor may substitute or release any additional security in the assets of the small business if the capital lease is in good standing. When substituting or releasing any additional security, the lessor must continue to apply the same due diligence and business procedures as would be applied for a conventional capital lease.

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section 28, section 29

7 Substitution and Release of Guarantees and Suretyships

The lessor may release a guarantor or surety only if the capital lease is in good standing and the lessee has paid at least 50 percent of the total financing amount of the capital lease.

With the lessor's consent, a lessee may at any time replace a guarantee or suretyship with security in any assets of the small business or with another guarantee or suretyship. The value of the replacement security, guarantee or suretyship will be equal to or greater than the value of the original guarantee or suretyship. However, in the case of personal guarantees, it must not exceed 25 percent of the original total financing amount of the capital lease plus interest and costs (see Section A, Item 8.3).

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8 Change in Name of the Lessee

When a lessee changes the name under which it operates but retains the same legal status (e.g. sole proprietorship, partnership of individuals or corporation), it is important that the lessor obtain from the lessee a formal notice and a copy of the pertinent legal documents, such as registration, articles of amendment or incorporation, or letters patent. It is not necessary for the lessor to immediately inform the Administration of the lessee's change of name. However, the change should be reflected in the report on capital leases outstanding at year-end. In the event of a claim for loss, these documents will be required.

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section 6, section 7, section 8, section 9

9 Minister's Liability

For the 5-year duration of the Capital Leasing Pilot Project, the Minister's liability is calculated as follows:

• In favour of each lessor:
  1. 90 percent of the first $250 000 of the total financing amount of capital leases registered in that period;
  2. 50 percent of an additional $250 000 of the total financing amount of capital leases registered in that period; and
  3. 10 percent of the total financing amount of capital leases registered in excess of the $500 000 indicated in (a) and (b) above.
• In favour of a lease funder: 10 percent of the aggregate of the original total financing amount of all capital leases acquired by the lease funder.

The Minister's liability in favour of a lessor represents the "funds" from which the Administration reimburses the lessor 85 percent of the eligible loss of each capital lease for which a claim is paid.

The Minister's liability to a lessor may be terminated at any time by providing a notice to this effect to the lessor. Note that the Minister's liability for capital leases entered into before the date specified in the notice is not affected by the termination.

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section 39

10 Transfer of Leases Between Lessees

The purpose of this provision is to facilitate, where appropriate, the sale of a business, allowing the purchaser to assume the outstanding capital lease and the original lessee to be released of its obligation.

When (1) all assets of the small business are sold by a lessee, or (2) there is a change of partners in a partnership, or (3) an outgoing partner is not replaced, the lessor may release the existing lessee or the outgoing partner provided that:

• the lessor, exercising due diligence, approves as the new lessee the purchaser, the new partner or the remaining partners;
• the aggregate outstanding balance of the new lessee, or of the new partner and related lessee(s)/borrower(s), is not greater than $250 000;
• the lessor validly registers or maintains a security interest, or publishes its rights in the leased equipment;
• the lessor maintains or replaces additional security in the assets of the small business; and
• any existing guarantee or suretyship is maintained or replaced with one of equal or greater value.

When a capital lease is transferred to a sole proprietor or to a partnership, the lessor must obtain confirmation from the new lessee that it accepts personal responsibility for 25 percent of the original total financing amount of the capital lease.

When a lease is transferred from a sole proprietor or a partnership to a corporation, and when the lessor releases the initial lessee, then the lessor will replace the personal liability of the sole proprietor or partners with a personal guarantee or suretyship (e.g. by the shareholders of the corporation), and the guarantee shall be limited to 25 percent of the original total financing amount of the capital lease plus interest and costs.

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section 35

11 Transfer of Capital Leases Between Lessors

At the request of the lessee, it is possible to transfer a capital lease from one lessor to another lessor provided that:

• the transferee (acquiring lessor) is a lessor under the Regulations;
• the Minister's liability resulting from the transfer, calculated in favour of the transferor (original lessor), does not exceed the amount already paid by the Minister; and
• the total number of capital leases transferred by the transferor (original lessor) during the duration of the pilot project does not exceed the greater of 20 capital leases or 1 percent of the number of capital leases entered into by the transferor (original lessor) during that period.

When a capital lease is transferred to another lessor at the request of the lessee, the Administration deducts from the transferor (original lessor) the total financing amount of the original capital lease for the purpose of calculating the Minister's liability. This amount is then transferred to the transferee (acquiring lessor) as part of its new portfolio.

Where the transferee (acquiring lessor) finds it necessary to complete new documentation for the transfer of a capital lease, the lessor may make a new capital lease to finance the equipment. The capital lease must be made with the same payment terms as the original capital lease. The lessor must also maintain the interest and rights of security published as existing on the transferred capital lease at the time of transfer. If the capital lease was secured by a guarantee or suretyship, either personal or corporate, then the transferee (acquiring lessor) should maintain those securities.

It is the responsibility of the transferee (acquiring lessor) to satisfy itself that the transferor (original lessor) has met all of the terms and conditions of the Act and Regulations. Furthermore, the transferee (acquiring lessor) is responsible for payment of the administration fee accrued from the beginning of the quarter in which the transfer is made (see Item 2.2 of this section), and for reporting the outstanding balance of the lease at yearend. In the event that a claim for loss is submitted, non-compliance by the transferor (original lessor) with any program conditions, if not corrected within the stipulated time frame, can constitute reason for the refusal or reduction of the claim for loss. The transferee (acquiring lessor) is required to submit all documentation to substantiate the capital lease in the event that a claim for loss is made.

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section 36

12 Transfer of Capital Leases for the Purpose of Lease Funding

A lease funder may acquire a capital lease from a lessor provided that:

• the Minister's liability resulting from the transfer, calculated in favour of the transferor (original lessor), does not exceed the amount already paid by the Minister;
• the transferor (original lessor) and the transferee (lease funder) notify the Minister by submitting to the Administration a completed and signed Request for Transfer form (see Forms Section); and
• the transfer of the capital lease is registered or published in accordance with the applicable provincial law.

It is the responsibility of the transferee (lease funder) to satisfy itself that the transferor (original lessor) has met all of the terms and conditions of the Act and Regulations. Any non-compliance with all these terms and conditions, if not corrected within the stipulated time frame, can result in a refusal or reduction of the claim for loss. The lease funder is required to submit all documentation to substantiate the capital lease in the event that a claim for loss is made. The transferee (lease funder) is responsible for payment of the administration fee from the beginning of the quarter in which the transfer is made (see Item 2.2 of this section), and for reporting the outstanding balance of the lease at yearend. In the event that a claim for loss is submitted, non-compliance by the transferor (original lessor) with any program conditions, if not corrected within the stipulated time frame, can constitute reason for the refusal or reduction of the claim for loss. The transferee (acquiring lessor) is required to submit all documentation to substantiate the capital lease in the event that a claim for loss is made.

When a transfer is approved by the Administration, the original total financing amount of the capital lease is deducted from the transferor's account, and the Minister's liability to the transferor is recalculated accordingly. The Minister's liability to the transferee is increased by an amount equal to 10 percent of the original total financing amount.

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section 37

13 Amalgamation of Lessors

Lessors intending to amalgamate are required to notify the Administration in writing in advance of the date of amalgamation. Upon amalgamation all capital leases made and claims paid to the amalgamating lessors cease to exist, and are considered to have been entered into by the new lessor. More importantly:

• If the amount already paid to the amalgamating lessors is greater than the Minister's liability to the new lessor, the liability of the Minister will be deemed to be equal to the amount already paid.
• The Minister's liability to the new lessor will continue accumulating at the appropriate percentage (either 90 percent, 50 percent or 10 percent) depending on the total amount of capital leases considered to be made by the new lessor (see Item 9 of this section).

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section 38

14 Discontinuance Of Capital Leasing Business

The Administration must be notified in writing if a lessor discontinues its commercial capital leasing business and sells all of its outstanding capital leases to another lessor. The capital leases thus acquired will not be included in the calculation of the Minister's liability to the lessor acquiring those capital leases. In effect, each lessor's portfolio will continue to be administered separately. This will also apply when a lessor acquires another lessor.

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15 Reporting

The lessor must provide two types of reports:

• an administration fee statement; and
• an annual report on the total amount outstanding on all capital leases.

section 14(3)(4)(5)(6)

15.1 Administration fee statement

For capital leases entered into under the Regulations, lessors must remit the administration fee on a quarterly basis. The fiscal year for the pilot project is the same as that of the Government of Canada, i.e., April 1 to March 31.

The administration fee is payable within 2 months after the end of each quarter, as follows:

• the fee for the quarter ending on June 30 is to be remitted by August 31;
• the fee for the quarter ending on September 30 is to be remitted by November 30;
• the fee for the quarter ending on December 31 is to be remitted by February 28; and
• the fee for the quarter ending on March 31 is to be remitted by May 31.

The administration fee is calculated at the end of each month at the annual rate of 1.25 percent on the net present value of all future payments plus any overdue payments, and is remitted quarterly (see Item 2.2 of this section).

With the quarterly payment of the fee, a statement must be submitted substantiating the basis on which the fee was calculated. If a lessor is unable to provide such a statement, the quarterly payment may be made on the basis of an estimate of the amount payable. In this case, a statement substantiating the amount of the administration fee must be provided by the lessor with the final quarterly payment of the year (i.e. by May 31).

Any overpayment must be claimed or deficiency paid by May 31, that is, within 2 months of the end of the fiscal year (March 31).

section 40, section 41

15.2 Total outstanding balance report of capital leases under the Regulations

Lessors will provide to the Administration a report on each capital lease. The report must include the following information:

• the registration number assigned to the capital lease by the Administration;
• the lessee's name; and
• the outstanding balance of each capital lease as of the previous March 31.

The outstanding balance of the capital lease is defined as the aggregate of:

• the amount of any overdue payments;
• the net present value of all future payments due under the capital lease, discounted at the imputed rate of interest used in the calculation of the scheduled payments; and
• the present value, discounted at the annual imputed rate of interest used in the calculation of the scheduled payments, of the lesser of:
  • the residual value of the equipment set out in the registration form; and
  • the bargain purchase option price of the equipment set out in the capital lease.

The report is due by May 31 of each year.

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section 47

16 On-Site Audit or Examination

The Regulations permit an on-site audit or examination of a lessor's documents, records and books of account to verify compliance with the Regulations of any capital lease. The Administration must give 21 days' notice in writing prior to any such audit or examination.

Lessors will provide all reasonable assistance as well as the documents, records and books of account, and will cooperate fully in the audit or examination. Should a lessor refuse full cooperation, the Minister will cease to be liable for payment of any loss sustained by that lessor.

Once the report of the audit or examination is completed, a copy is to be provided by the Administration to the lessor within 21 days.

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17 Environmental Risk

If it is suspected that an environmental problem does or may exist during the administration of a capital lease, the lessor is advised to apply the same policies and procedures used in the normal course of business for such cases.

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18 Offences

Fraudulent activities in respect of capital leases under the pilot project could be subject to sanctions under the Criminal Code.