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:
What is the CCRA's assessing practice and how are tenant inducement payments deductible for tax purposes as a result of the Supreme Court decisions in Canderel and Toronto College Park.
Position: Question of fact.
Reasons: The Supreme Court set out six principles for calculating profit for purposes of the Act. These will be applied to each case to determine the deductibility of tenant inducement payments.
Question #31 --- Tenant Inducement Payments
The Supreme Court's decisions in Canderel Limited v. The Queen (98 DTC 6100) and Toronto College Park Limited v. The Queen (98 DTC 6088) provide guidance about the deductibility of tenant inducement payments. Would the Agency comment on its current assessing practice in light of these decisions? Will IT-359R be amended to take into account the Canderel and Toronto College Park decisions?
CCRA's Comments
One of the main features of the Canderel and Toronto College Park cases is the affirmation by the Supreme Court that the goal of computing profit for income tax purposes is to obtain an accurate picture of a taxpayer's income for the year. These Supreme Court decisions do not mean that all tenant inducement payments will be deductible in the year in which they were paid.
When the facts are identical to those in Canderel or Toronto College Park(Endnote 1) particularly in situations where the expenses gave rise to sufficient "running expenses", the tenant inducement payments will be deductible in the year paid and not subject to the matching principle.
In situations that differ from these cases, such as when the expense was incurred with the specific purpose of producing an identifiable future income, the CCRA will apply the matching principle with respect to the deductibility of inducement payments. Although the matching principle is not a rule of law, the matching principle remains a factor to be taken into consideration in establishing as accurate as possible a picture of profit for income tax purposes.
The issue of whether a tenant inducement payment is a "running expense" or an expense incurred for the specific purpose of producing identifiable future income can only be resolved after examining each specific situation.
Running Expenses
In applying the Canderel principles (Endnote 2), the Supreme Court held that the tenant inducement payments in question were running expenses not subject to the matching principle. The Court ruled that the deduction of these payments gave an accurate picture of profit for the year and that it had not been proven to the Court that matching these payments with income over the term of the leases would have yielded a more accurate picture of profit in the particular circumstances of this case. The Court referred to the conclusions of Brûlé J. of the Tax Court of Canada, who found that the payments made by Canderel created significant and numerous benefits immediately in the year of the payment.
Capital Expenses
When the tenant inducement payments take the form of interior fit-up expenses incurred by the lessor, we are of the opinion that it must first be determined whether these payments constitute running expenses or instead an amount to be added to the capital cost of a property of the lessor.
This line of cases has introduced one very important change to the CCRA. It has established that the onus of proof is now placed on the CCRA to show that the method it uses to calculate income for tax purposes provides a more accurate picture of income than the taxpayer's method. If the method used by the taxpayer and the CCRA can each be interpreted to equally reflect an accurate picture of income, the taxpayer's method will generally prevail and, with respect to tenant inducement payments, the payment will generally be considered to be a running expense.
The CCRA will be amending IT-359R2. In the mean time, the CCRA's comments with respect to the decisions in the Canderel and Toronto College Park cases are outlined in the CCRA publication "Income Tax Technical News - Issue No. 16".
A. Seidel
December 6, 2000
File 2000-005604
ENDNOTES:
ENDNOTE 1:
In the Canderel case, the Supreme Court made the following comment:
"In circumstances where an expenditure is incurred principally for the specific purpose of earning a discrete and identifiable item of revenue, it will generally yield a more accurate picture of profit to deduct that expenditure from taxable income in the year in which the revenue is realized."
ENDNOTE 2:
In the Canderel case, the Supreme Court set out six principles for calculating profit for the purposes of the Act that must be applied to each specific case in order to determine whether income was calculated according to the current legal framework and whether this income provides an accurate picture of the taxpayer's profit for the year in question.
These principles are as follows:
1. The determination of profit is a question of law;
2. The profit of a business for a taxation year is to be determined by setting against the revenues from the business for that year the expenses incurred in earning said income;
3. In seeking to ascertain profit, the goal is to obtain an accurate picture of the taxpayer's profit for the given year;
4. In ascertaining profit, the taxpayer is free to adopt any method which is not inconsistent with the provisions of the Income Tax Act, established case law principles or "rules of law" and well-accepted business principles;
5. Well-accepted business principles, which include but are not limited to the formal codification found in GAAP, are not rules of law but interpretative aids on a case-by-case basis. To the extent that they may influence the calculation of income, they will do so only on a case-by-case basis, depending on the facts of the taxpayer's financial situation; and
6. On reassessment, once the taxpayer has shown that he has provided an accurate picture of income for the year, which is consistent with the Act, the case law, and well-accepted business principles, the onus shifts to the Minister to show either that the figure provided does not represent an accurate picture, or that another method of computation would provide a more accurate picture.
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