30 April 1990 Internal T.I. 59649 F - Transfer of Deferred Leasing 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.

April 30, 1990

Dear Sirs:

Re: Transfer of Deferred Leasing Costs pursuant to subsection 85(1) of the Income Tax Act (the "Act")

We are writing in response to your letter of February 20, 1990 wherein you requested our comments on whether deferred leasing costs can be transferred pursuant to subsection 85(1) of the Act in the following hypothetical fact situation which was described in your letter.

Situation

1.     Tenant inducements were granted by Aco to various tenants to facilitate the leasing or releasing of space.  Such inducements included:

(a)     rent-free periods at the commencement of the lease

(b)  c     ash payments to the tenant at the commencement of the lease; or

(c)       reduced rents over the term of the lease.

2.     For accounting purposes, Aco defers and amortizes the cost of initial tenant inducement payments over the life of the related buildings under the Sinking Fund method.  The cost of subsequent tenant inducements in excess of the initial tenant inducements are amortized over the life of the buildings.  All other tenant inducements are written off in the year incurred.

3.     For tax purposes, Aco generally defers and amortizes the cost of such tenant inducement payments over the terms of the relevant leases because the tenant inducement payments relate to specific identifiable leases and future income streams.

4.     Aco will transfer to Newco all of its assets and Aco and Newco will jointly file an election pursuant to subsection 85(1) of the Act within the time referred to in subsection 85(6) of the Act in respect of each property which is an eligible property within the meaning of subsection 85(1.1) of the Act.  The agreed amount pursuant to the subsection 85(1) election will be the cost amount of the transferred property to Aco immediately before the transfer. Cost amount has the meaning assigned by subsection 248(1) of the Act.

5.     Aco wishes to transfer, as part of the transferred property mentioned in 4 above, the deferred leasing costs associated with the transferred rental property.  The agreed amount will be Aco's unamortized tax balance of such deferred leasing costs.

Our Comments

To date the Department has not addressed the issue of whether deferred leasing costs constitute property which would be eligible for transfer under section 85 of the Act and, therefore, has not established a position on the subject matter of your request. Furthermore, in our view, it would not be appropriate to adopt a position on this issue without undertaking a thorough review of all relevant facts.  For this reason, we believe that it would be more appropriate to consider this matter in the context of an advance income tax ruling request wherein all of the facts of a particular situation can be considered.

If the situation outlined in your letter involves actual proposed transactions, we would, therefore, suggest that you submit a request for an advance income tax ruling.  The procedures for requesting an advance income tax ruling are outlined in Information Circular 70-6R dated December 18, 1978 and the related Special Release thereto.

Yours truly,

for DirectorReorganizations and Non-Resident DivisionSpecialty Rulings DirectorateLegislative and Intergovernmental Affairs Branch