8 November 1989 Ruling 59011 F - Tax Executive Institute Conference

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.

Subject:  Question and Answer for Meeting with Tax Executive Institute Conference

Attached is question which we have edited, and our suggested response to the above meeting. If we can be of further assistance please call.

R.J. Kauffman Chief Leasing & Financing Section Financial Industries Division Rulings Directorate

Question:

Could you please summarize the Department's position on the treatment to the recipient of lease cancellation payments? It appears that the Department is taking a very narrow perspective on this issue especially in light of subparagraph 12(1)(x)(viii) and IT-359R2 as an interpretation in general of the entire IT bulletin although in fact "renting property forms a part or all of a business being carried on" for many companies. Why then does the IT bulletin expand and explain capital treatment approaches in subsequent paragraphs if the Department does not considered such approaches valid?

It would seem that one must look at the basic premise of any operation in determining "the business being carried on" and if leasing activities are not primary objectives of operations but rather secondary or supportive of other operations, capital treatment would seem appropriate especially where leaseholds are recognized as being capital in nature.

It would seem that the Gateway Lodge decision on this issue provides more appropriate guidelines on the proper treatment.

Answer

The Department's position on the proper treatment of a lease cancellation payment received by a tenant depends on whether the renting property forms part or all of a business carried on by the recipient. If it does then the lease cancellation payment will be considered to be business income and included in income under section 9 of the Act. The Department has not established specific guidelines when and to what extent the rental of property will constitute a part of a business.

IT-359R2 is currently under revision as a result of the enactment of paragraph 12(1)(x). However, paragraph 12(1)(x) would not have application where the payment results in an acquisition by the landlord of and interest in the tenant's property. The determination of whether paragraph 1 or paragraph 7 of IT-359R2 is applicable in such situations will depend on the particular facts of each case. Among other factors the Department will consider the principles set out in both the Gateway Lodge and French Shoes cases, as they relate to those facts.