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 lease inducements should be expensed in the year of payment or amortized over the life of the lease.

Position TAKEN:

Amortized over the life of the lease.

Reasons FOR POSITION TAKEN:

      Consistent with previous position and recent    jurisprudence.

                  March 22, 1995

      TORONTO DISTRICT OFFICE HEAD OFFICE
      Section 453-1-8   Income Tax Rulings and
      Phillip Krakower & Martin Burns   Interpretations                   Directorate
      Large File Case Auditor/Manager     Allan Nelson
(613) 957-2745

                  950440

Tenant Allowances/Inducements Paid by Developers

This is in reply to your memorandum to us dated February 14, 1995, and our subsequent telephone conversation (Nelson/Burns) regarding the tax treatment of lease inducement payments made by developers.

Background

Prior to 1991, the major developers, which you audit, amortized most of their tenant inducements payments over the term of their leases (the "Amortization Method"). For the 1991 and subsequent taxation years, these developers commenced deducting the full amount of these lease inducement payments all in the year of payment (the "Running Expense Method"). This change in reporting methods was prompted by recent Court decisions in cases such as Toronto College Park Ltd. v. The Queen (94 DTC 6172) and Canderel Limited v. The Queen (94 DTC 1133). In both of these cases, the Court ruled that the Running Expense Method was appropriate in the circumstances.

Audit's Query

What is the department's position concerning the current deductibility of tenant inducement payments made, in the ordinary course of a landlord's business of property rental, to non-anchor tenants?

Rulings' Position

Our position has not changed. Lease inducement payments made, in the ordinary course of a landlord's business of property rental, to non-anchor tenants, are considered to be on income account. Such lease inducement payments relating to the initial lease of space in a project or building are to be deferred and amortized to income over the term of the related lease (i.e. the Amortization Method). This position is supported by the Judgment rendered by the Federal Court of Appeal on February 13, 1995, in the case of Her Majesty the Queen v. Canderel Limited. Therein, the decision of the Tax Court of Canada was reversed and the matching principle (i.e. referred to in this memorandum as the Amortization Method) was applied, as opposed to treating the lease inducement payments as running expenses.

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If you have additional queries on this matter, please contact us.

Chief
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch