21 February 1989 Income Tax Severed Letter 7-3082 -  

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.

February 21, 1989

TO VANCOUVER DISTRICT OFFICE R.L. McGuire Chief of Audit

     Att: Philip White
          Business Audit
          144-24

FROM HEAD OFFICE Ruling Directorate B.G. Dodd (613) 957-9769

SUBJECT:  Treatment of Rental Rebate/
          Inducement in the Hands of the Lessor

This is in reply to your memorandum of July 12, 1988, concerning the above-noted issue as it pertains to a file you have under audit. We apologize for the delay.

We understand the facts to be as follows:

1. The taxpayer's business and prime source of income is from the leasing of an office building.

XXXX

You indicate that you do not agree with the taxpayer's treatment of the rent rebates. It is your view, based on paragraph 14 of IT-359R2 and the Department's reply to question 49 of the 1985 Canadian Tax Foundation Round Table, that the amounts should be treated by the lessor as eligible capital expenditures. The taxpayer also points to paragraph 14 of IT-359R2 but argues that the first sentence thereof in fact supports his position. The first sentence of that paragraph of the IT is as follows:

"The granting of a rebate of rent for a period of the lease will represent a reduction in what would otherwise have been the rental income of the landlord."

Our Comments

For 1983, 1984 and 1985 (at least until the time of the 1985 Round Table) the Department's position with respect to lease inducements from the lessor's perspective was as set out in paragraph 14 of IT-35R2 . That position was a general presumption that inducement payments were on capital account (but also a recognition that this was not necessarly the case). However, in view of the decision in Jack L. Cummings v. The Queen 81 DTC 5207, the trend in recent Canadian jurisprudence, and the fact that such payments seem to be a necessary and integral part of the business operations of real estate developers, the Department concluded in late 1985 that this position would be difficult to sustain. The revised position was set out in the 1985 Round Table.

We note that in the present case the lease was executed, and two of the three inducement payments were (scheduled to be) made prior to any public indication of a revised position. It is our understanding that in such cases the taxpayer is entitled to rely on the Department's officially published position as reflected at that time in paragraph 14 of IT-359R2 . In our view is likely that in this case and others taxpayers relied on the first sentence of paragraph 14 as evidence of the Deparment's position that rental rebates would reduce the landlord's rental income.

Accordingly, in view of they foregoing and based on the facts provided it is our opinion that the taxpayer's treatment of the rent rebates in this case is appropriate.

for Director Financial Industries Division Rulings Directorate Legislative and Intergovernmental Affairs Branch