Motter – Quebec Court of Appeal 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 also presumably was offset with substantial expenses of paying for the work. He sought to deduct what he styled as a $2M “tenant inducement payment” on income account, so that the effect of the arrangement might have been similar to the taxpayer (the building owner) deducting the cost of building-finishing work on income account.

In affirming that the leasehold improvement payment of the taxpayer was a capital expenditure rather than deductible in computing his income, Gagné JCA stated:

The payment was made for work which, at first glance, was of a capital nature ("Stairs and metal works", "Modification of sprinklers", "Engineering of bathrooms", "Structural support for stairs including engineering", etc.). As in … Développement Iberville … the appellant did not establish that the work was related to the specific needs of Teleglobe and, therefore, was of no use to other tenants, and that it did not add any value to the building. …

[T]he form of the expenditure (…one-off), its effect (an enduring benefit) and the purpose or rationale underlying it, all incline to the capital nature of the payment … .

Neal Armstrong. Summary of Motter v. Agence du revenu du Québec, No. 500-09-027452-184 (500-80-029040-145) (Quebec Court of Appeal, 19 January 2021) under s. 18(1)(b) – improvements v. repairs/running expense.