21 June 2012 External T.I. 2011-0430901E5 - Leasing Commission Costs

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.

Principal Issues: Whether an amount which a tenant reimburses a landlord with respect to leasing commission costs is a capital cost or a current expense?

Position: Question of fact.

Reasons: Depends on the specific facts of the lease agreement.

XXXXXXXXXX              2011-043090
                        Gillian Godson
                        613-957-8981

June 21, 2012

Dear XXXXXXXXXX:

Re: Leasing Commission Costs

We are writing in reply to your email of December 7, 2011, regarding whether an amount that a tenant reimburses a landlord with respect to leasing commission costs can be deducted in the year incurred or if the amount is required to be capitalized as a part of the tenant’s leasehold interest.

In your inquiry you have stated that you have recently moved into a new office space and the landlord provided a tenant improvement allowance to you. However, you have exceeded the amount of the tenant improvement allowance, and have stated that the excess relates to a leasing commission cost. You have also stated that the landlord incurred the leasing commission cost. However, you are required to reimburse the landlord with respect to these costs. You wish to clarify whether the amount of the costs which exceed the tenant improvement allowance are required to be capitalized over the term of the lease as part of your leasehold improvement, or whether these costs are current and should be deducted in the year they were incurred.

The determination of the income tax treatment of amounts such as those described in your inquiry involves a question of fact that can only be determined after reviewing all of the relevant documentation, such as the terms of the lease agreement you entered into with your landlord. However, for general information related to your question you may wish to refer to Interpretation Bulletin IT-359R2 – Premiums and Other Amounts With Respect to Leases available on Canada Revenue Agency’s website at http://www.cra-arc.gc.ca/E/pub/tp/it359r2/it359r2-e.html, and Interpretation Bulletin IT-464R Capital Cost Allowance - Leasehold Interests (http://www.cra-arc.gc.ca/E/pub/tp/it464r/it464r-e.html). In addition, we are prepared to offer the following comments, which may be of assistance.

In general, as a lease inducement a landlord may provide a tenant with a leasehold improvement allowance, which is an amount applied against the tenant’s costs of acquiring improvements to the leased premises. However, where a tenant pays an amount to the landlord to obtain or extend a lease or sublease, the amount is considered as a capital expenditure to acquire property that is a leasehold interest. Consequently a tenant may be entitled to claim capital cost allowance on the payments either under Class 13 of Schedule II of the Regulations, or if applicable, under Class 3, 6, 31, or 32 where the conditions of subsection 1102(5) of the Regulations are met, provided the leasehold interest was acquired for the purposes of gaining or producing income.

We trust that these comments will be of assistance.

Yours truly,

Terry Young, CA
Manager, Administrative Law Section
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch