4 December 1990 Ministerial Letter 9025858 F - Lease Inducement Payments Received by Tenant

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:  24(1) v. The Queen Lease Inducement Payments Received by Tenant

This is in reply to your memorandum of September 26, 1990, in which you requested our views on  24(1)

In this memorandum:

(a)     "the first Consumers' Gas case" is a reference to The Consumers' Gas Company Ltd. v. Her Majesty the Queen, 82 DTC 6300 (FCTD), aff'd 84 DTC 6058 (FCA); and

(b)     "the second Consumers' Gas case" is a reference to The Consumers' Gas Company Ltd. (formerly Hiram Walker-Consumers Home Ltd.) v. Her Majesty the Queen, 86 DTC 6132 (FCTD), aff'd 87 DTC 5008 (FCA).

Facts

Our understanding of the facts is as follows:

24(1)

3.     Following the decision of the Federal Court Trial Division in the first Consumers' Gas case

24(1)

23         24(1)

24(1)

Other Information

8.     On January 9, 1989 the Appeals Branch of Head Office issued decision summary #89-4, in which it stated that an appeal to the Federal Court of Appeal regarding the French Shoes case had been withdrawn by the taxpayer. Accordingly the French Shoes case became a leading case on lease inducement payments received by a tenant.

9.     Recently, the Department was unsuccessful in defending its reassessment in Pacific Northern Gas Ltd. v. Her Majesty the Queen, 90 DTC 6252 (FCTD). The issue in that case was whether reimbursements by customers for the costs of extending service pipelines beyond the first 70 feet from Pacific Northern Gas Ltd.'s gas main to the customers' premises, were income to the company. The court held that the fact situation in the first and second Consumers' Gas cases could not be distinguished from the one in the Pacific Northern Gas case. It was held in the Consumers' Gas cases that the costs of pipeline relocations were capital in nature, and that the partially offsetting receipts in respect thereof were also capital in nature. Hence, in the absence of some specific provision in the Income Tax Act (the "Act") bringing them into income they were not income for income tax purposes.  21(1)(b)

21(1)(b)        24(1)       23

23

Your Opinion

24(1)

Our Opinion

24(1)  Our rationale is given in the following paragraphs.

15.     Muldoon J. of the Federal Court Trial Division in the second Consumers' Gas case found that the reimbursements constituted capital receipts. He adopted the reasoning of Walsh J. of the Federal Court Trial Division in the first Consumers' Gas case as follows:

     I have concluded that the plaintiff in the present case was justified in considering that contributions received towards the relocations of its pipelines done, not for its benefit, but for the benefit of the parties making the contributions, can be carried to a contributed capital account without passing through income.

     Speaking for the Federal Court of Appeal, Hugessen J.A. in the judgement of the second Consumers' Gas case stated:

     It is common ground on the present appeal that the expenditures made by Consumers' Gas for pipeline relocations in the circumstances described are for capital account. In the judgement now under appeal, Muldoon J. in the Trial Division held that the partially offsetting receipts from third parties were also for capital account and need not be taken into income for the purposes of the Act. In my view, he was right.

     The Federal Court in both Consumers' Gas cases decided that the receipts from third parties were on capital account based upon the facts in those cases, including the fact that the relocations of the pipeline were not for the benefit of Consumers' Gas but for the benefit of the parties requesting them and making me contributions. In our opinion, our comments in the Round Table of the 1987 Canadian Tax Foundation Conference with respect to the Consumers' Gas cases are still valid. We commented:

     In our view, our position concerning lease inducement payments is not affected by the decisions of the courts in the Consumers' Gas cases noted above.

     Our position on lease inducements, prior to the enactment of paragraph 12(1)(x), is based on the premise that the recipient enjoys a benefit from the payment. The Consumers' Gas cases can be distinguished in this regard in that the expenses incurred by the company did not advance its profits and the payments received were in recovery of such costs. In addition, the payments made to Consumers' Gas were only "for the purpose of advancing the interests of the payor". Lease inducement payments, by contrast, while advancing the interests of the payer, also clearly benefit the recipient.

16.     In the French Shoes case, Teitelbaum, J. reviewed the six criteria for determining whether an amount was a "windfall" gain which had been listed by Cameron J. in Federal Farms Ltd. v. M.N.R. 59 DTC 1050 (Ex. Ct.) and followed by Grant D.J. in J.E. Cranswick v. Her Majesty the Queen, 80 DTC 6057 (FCTD). The six criteria are:

(a)     the payment was entirely voluntary;

(b)     it was given by persons who had no business relations with the taxpayer;

(c)     it was unrelated to the taxpayer's business activities;

(d)     the taxpayer had no legal right to demand any portion of the fund;

(e)     at the time of the loss he had no expectation of being so compensated; and

(f)     it was unlikely to ever happen again.

     Teitelbaum, J. found that the situation in the French Shoes case did not meet the above-noted criteria. In particular he commented:

     It is important, as part of Plaintiff's business activity, to sign leases for stores under the best possible conditions, that is, the cheapest rent, the least amount of expenditures for start-up costs, etc. In the present case, there was an additional benefit, a single payment of $50,000 in addition to the other benefits already described. ...Plaintiff was a very desirable tenant and, as such, could arrange for such an inducement if an owner of a shopping centre really wanted Plaintiff as a tenant... I am satisfied that the $50,000 received by Plaintiff is part of its revenue. When a taxpayer receives an inducement to sign a lease, then those monies received must form part of the taxpayer's revenue for the year in which the inducement was received. An inducement is not a "windfall", it is an incentive, a reason for doing something. Taxpayers and lessors use inducements as a form of doing business. For the Lessor, it rents out space and for the taxpayer it is a benefit received. In the end, the receipt of the benefit helps to make a profit. It is part of the taxpayer's revenue that is derived because of, and is part of, its business activity.

     In the present case, the money, $50,000, received by Plaintiff is part of its business revenue.

     Although each case must be judged on the facts of that particular case, I am of the opinion that incentive payments, inducements, generally form part of the revenue of the taxpayer. The payment is received as a result of the business activity carried on by the taxpayer and would not have otherwise been received.

24(1)  Lord Pearce stated in a Privy Council case, B.P. Australia Ltd. v. Commissioner of Taxation of the Commonwealth of Australia, (1966) A.C. 224, at pp. 264-65:

     "It is a commonsense appreciation of all the guiding features which must provide the ultimate answer".

Accordingly we have to examine all the facts in the case at hand in order to conclude        24(1)

24(1)  In our opinion, generally accepted accounting principles (GAAP) are only relevant in determining inclusions in income to the extent that there is neither a specific applicable provision in the Act nor a governing legal principle.

24(1)

We hope that our opinions are helpful to you.

ChiefLeasing and Financing SectionFinancial Industries DivisionRulings Directorate