Motter – Court of Quebec finds that a purported “tenant inducement payment” was a capital expenditure

An individual in the business of constructing and renting commercial real estate, entered into a lease agreement with Téléglobe respecting a building which he was to construct, that provided Téléglobe with “an initial Improvement Allowance” of $25.00 per square foot (or $2M). After construction, this was paid by way of partial set-off against the $2.7M cost of tenant improvements made by him in the course of constructing the building that he invoiced to Téléglobe. The $2.7M apparently was included in his income, but he sought to deduct what he styled as a $2M “tenant inducement payment” on income account.

After noting that in Canderel and Toronto College Park, the landlords made tenant inducement payments respecting already-constructed buildings in a market where there was a high vacancy rate, and in finding that the leasehold improvement payment of the taxpayer was a capital expenditure rather than deductible in computing his income, Lareau JCQ noted that the “lease provides that the budgeted amount must be devoted to the construction of the tenant improvements and consequently be assimilated to the building” and also that there was “no evidence that this amount was intended to deal with competition in a particularly difficult market,” and then concluded:

[T]here is no proof that links this expense to anything other than the construction of the building with a view to a future benefit arising from the collection of rents over the term of the lease.

Neal Armstrong. Summary of Motter v. Agence du revenu du Québec, 2018 QCCQ 3483 under s. 18(1)(b) – improvements v. repairs/running expense.