True Lease Vs. "Disguised Security Interest"/ Financial Or Capital Lease

"Subject to subsection 4 (1), this Act applies to,
(a) every transaction without regard to its form and without regard to the person who has title to the collateral that in substance creates a security interest including, without limiting the foregoing,
(i) a chattel mortgage, conditional sale, equipment trust, debenture, floating charge, pledge, trust indenture or trust receipt, and
(ii) an assignment, lease or consignment that secures payment or performance of an obligation;
(b) a transfer of an account or chattel paper even though the transfer may not secure payment or performance of an obligation; and
(c) a lease of goods under a lease for a term of more than one year even though the lease may not secure payment or performance of an obligation. R.S.O. 1990, c. P.10, s. 2; 2006, c. 34, Sched. E, s. 2.

"A ""true lease"", where the lessee strictly pays for use for a certain time period, is not subject to the Act. A lease will be characterized as a ""disguised security"" if the financing arrangement results in a transfer of ownership. Generally, where there is no intention by the lessor to transfer or sell rights of ownership and no obligation on the lessee to take title, the transaction will more likely be characterized as a lease.

For PPSA purposes, all leases other than true leases must be registered. Furthermore, if the lessor of the true lease is more akin to a finance company than in the business of leasing a specific type of equipment (such as a captive lessor) then registration is strongly recommended. There is no penalty or downside for registering an interest that is later characterized as a true lease.

The concept of a precautionary filing is different in Ontario and as such should not be utilized."