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.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
Principal Issues:
Whether the method advocated by the CICA for deducting rent expense should be followed for income tax purposes
Position TAKEN:
No
Reasons FOR POSITION TAKEN:
The GAAP treatment involves the deduction of expenses in a year prior to the year to which the expenses relate pursuant to the lease agreement. Under 9 and 18(1)(a), this is not allowable for income tax purposes.
950168
XXXXXXXXXX F. Francis
Attention: XXXXXXXXXX
April 27, 1995
Dear Sirs:
Re: Timing of deductions of rentals following renegotiation of lease
This is in reply to your letter of January 18, 1995, wherein you requested our comments concerning the timing of deduction of lease payments made by a tenant in circumstances where, prior to the expiration of the original lease term, a renegotiated lease agreement is entered into which provides for a reduced rate of rent for a period which comprises the balance of the original lease term plus a 5 year extension.
You have advised that the Emerging Issues Committee of the CICA has concluded that the tenant should continue to deduct rental payments in accordance with the schedule contained in the original lease until the original lease term would have expired notwithstanding that the tenant will make rent payments pursuant to the renegotiated lease agreement. You contend that this method should be acceptable for income tax purposes.
In our view, under section 9, and subject to paragraph 18(1)(a) of the Income Tax Act (the "Act"), an expense should be deducted from income for the period in which it was incurred.
It is therefore our position that, under the terms of the renegotiated lease, the tenant incurs an expense based on the reduced rent and should limit his deduction to this amount. Even if the tenant could somehow be considered to have incurred an expense in light of the promise to pay rent for subsequent periods, subparagraph 18(9)(a)(ii) of the Act denies a deduction in respect of an expense " to the extent that it can reasonably be regarded as having been ... incurred as .. rent... in respect of a period after the end of the year."
We trust our comments will be of assistance to you.
Yours truly,
for Director
Financial Industries Division
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