15 February 2000 External T.I. 1999-0011755 - Matchable Expenditures

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues: Where amounts are paid as tenant inducement to induce a tenant to enter into a lease can the payments of rent to be received be considered a right to receive production and as a consequence the inducement would be a matchable expenditure.

Position: Generally a lease for the use of property would be included in the definition of "right to receive production". Whether a matchable expenditure under any of 18.1(1) (a),(b) or (c) is a question of fact.

Reasons: Plain reading of 18.1.

XXXXXXXXXX 991175
S. Tevlin
Attention: XXXXXXXXXX

Dear Sirs:

Re: Section 18.1 of the Income Tax Act (Canada) (the "Act")

We are writing in response to your letter dated April 27, 1999 wherein you requested our opinion with respect to the application of section 18.1 of the Act to the following situation.

(i) A tenant inducement payment ("TIP") is incurred by a taxpayer to induce another person (the "tenant") to enter into a 10 year commercial property lease.

(ii) The TIP is deductible by the taxpayer under subsection 9(1) of the Act.

(iii) Under the terms of the lease, the tenant will pay the taxpayer a monthly rent composed of a fixed fee and an amount equal to a percentage of the tenant's monthly revenue (the "participating amount").

You have asked whether the Canada Customs and Revenue Agency ("CCRA") would consider the participating amount to be a "right to receive production" and consequently, the TIP to constitute a "matchable expenditure" for the purposes of section 18.1 of the Act.

In this regard we offer the following general comments.

It is our view that a lease for the use of property would generally be included in the definition of "right to receive production" in subsection 18.1(1) of the Act since the taxpayer (the lessor) has a right under the lease in which it is entitled to an amount all or a portion of which is computed by reference to the use of property, or revenue, and the amount is in respect of another taxpayer's (the tenant's) activity.

Whether or not any expenditure made by the lessor is a matchable expenditure under any of (a), (b) or (c) of the definition of "matchable expenditure" in subsection 18.1(1) of the Act is a question of fact, although it is likely that a TIP could well qualify under one of those categories (unless a deduction for the expenditure is provided under section 20).

Where the TIP is a matchable expenditure under (a) of the matchable expenditure definition, the provisions of section 18.1 will apply. If the TIP is a matchable expenditure under either (b) or (c) of that definition then, pursuant to subsection 18.1(15) of the Act, section 18.1 of the Act will not apply if either (a) the expenditure cannot reasonably be considered to relate to a tax shelter or tax shelter investment (as defined in 143.2 of the Act) and none of the main purposes for making the expenditure is obtain a "tax benefit" or (b) the amount included in the taxpayer's income in respect of the right for the taxation year in which the expenditure is made exceeds 80% of the amount of the expenditure.

Therefore, if no portion of a TIP can reasonably be considered to have been paid to a tenant to acquire the rights to receive amounts under the lease and either (i) the TIP cannot reasonably be considered to relate to a tax shelter and none of the purposes for the taxpayer making the TIP is to obtain a tax benefit or (ii) amounts included in income pursuant to the lease in the taxation year exceed 80% of the TIP, then section 18.1 would not apply.

The foregoing comments are given in accordance with the practice referred to in paragraph 21 of IC-70-6R3, and are not binding on the CCRA.

We trust our comments will be of assistance to you.

Yours truly,

Paul Lynch
for Director
Resources, Partnerships and Trusts Division
Income Tax Rulings and Interpretations Directorate
Policy and Legislation Branch