4 October 1990 Ministerial Correspondence 51154 F - Tenant Improvement and Acquisition Allowance Received by Partnership

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.

October 4, 1990

Dear Sirs:

Re:  Receipt by a Partnership of a Tenant Improvement and Acquisition Allowance

We are writing in reply to your letter of June 7, 1990 wherein you requested a technical interpretation of the provisions of subsections 96(1), 13(7.4), 53(2.0) and 53(2.1) and paragraph 12(1)(x) of the Income Tax Act (the "Act") as they relate to the receipt by a partnership of a tenant improvement and acquisition allowance.

Scenario

You have requested this interpretation based on a hypothetical situation in which a partnership (the "tenant") enters into an agreement to lease premises from a landlord in a commercial business complex. As a lease inducement, the landlord agrees to pay to the partnership a "tenant improvement and acquisition allowance" which is to be applied against the tenant's cost of acquiring improvements to the leased premises. The allowance may also be applied to the cost of new furniture, fixtures computer equipment and computer software. As a condition precedent to the landlord's obligation to pay the allowance, the tenant must execute the lease take occupancy of the premises and make a claim in writing for the allowance within one year of the commencement of the lease. In accordance with generally accepted accounting principles ("GAAP"), for financial statement purposes the partnership will report the receipt of the allowance as a reduction in the cost base of the assets acquired. Alternatively, the partnership may report receipt of the allowance as revenue. You have requested a technical interpretation of the above-noted provisions of the Act as they apply to the two alternative methods of accounting for the receipt of the allowance.

Our Comments

While we are unable to provide confirmation of the income tax effects of the particular situations outlined in your letter, we can offer the following general comments related to the application of subsections 96(1), 13(7.4), 53(2.0), and 53(2.1) and paragraph 12(1)(x) of the Act as they relate to tenant inducements provided in the form of tenant improvement and acquisition allowances.

1.     Subparagraph 12(1)(x)(iv) will apply to include in income tenant inducements received in the form of tenant improvement and acquisition allowances in respect of the cost of property unless one of the exclusions in subparagraphs 12(1)(x)(v) through (viii) applies.

2.     Subparagraph 12(1)(x)(vi) of the Act does not allow a taxpayer to reduce the cost or capital cost of property for which they have received an amount which would be brought into income under 12(1)(x). Subparagraph 12(1)(x)(vi) refers to adjustments to the cost or capital cost which have been made under other provisions of the Act. If amounts received have not already reduced the cost or capital cost under other provisions of the Act then paragraph 12(1)(x) will apply to include applicable amounts in income unless one of the other exemptions in paragraph 12(1)(x) applies.

3.     Subsection 13(7.4) allows taxpayers to elect to reduce the capital cost of depreciable property by the amount of any related inducement, reimbursement, contribution, allowance, or other assistance which would otherwise be included in income by virtue of paragraph 12(1)(x).

4.     Subsection 53(2.1) allows taxpayers to elect to reduce the cost of any non-depreciable property by the amount of any related amount received which would otherwise be included in income by virtue of paragraph 12(1)(x).

5.     Subparagraph 12(1)(x)(v) provides that 12(1)(x) of the Act will not apply to an amount that was otherwise included in computing a taxpayer's income for the year or a preceding taxation year under some other provision of the Act, such as subsection 9(1). Accordingly, where amounts are included in income be virtue of subsection 9(1) of the Act pursuant to generally accepted accounting principles, elections under subsection 13(7.4) and 53(2.1) will not be available because the amounts are not included in income by virtue of paragraph 12(1)(x).

Based on the above, inducements which specifically relate to the cost of leasehold improvements or depreciable property would be included in the tenant's income under subparagraph 12(1)(x)(iv) unless the tenant elects to reduce the cost of leasehold improvements or depreciable property pursuant to subsection 13(7.4) of the Act. In the above scenario, this is the only applicable exception because you have indicated that GAAP does not include the amounts in income for tax purposes and because there is no other provision in the Act which requires the reduction in cost base for tax purposes. If the tenant elects under subsection 13(7.4), the inducement would be excluded from income by virtue of subparagraph 12(1)(x)(vii) and would be applied to reduce the capital cost of the leasehold improvements or depreciable property. Administratively the Department will accept an election made by a designated partner on behalf of all the partners where the designated partner has authority to act on behalf of all the partners.

We trust that these comments will be of assistance.

for DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch