21 July 1999 Internal T.I. 9913367 - DEDUCTION OF TENANT INDUCEMENT PAYMENTS

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 ISSUE:

Whether the taxpayer is entitled to deduct a tenant inducement payment (TIP) as a running expense given the decision of the Supreme Court in Canderel Limited V. The Queen, 98 DTC 6100 SC

Position TAKEN:

None. Question of fact.

Reasons FOR POSITION TAKEN:

It is a question of fact as to whether the expenditure is incurred for the specific purpose of earning an identifiable item of revenue which results in the application of the matching principle or whether there are sufficient current benefits from the expenditure to justify treatment as a running expense.

								July21, 1999

	XXXXXXXXXX Tax Office				HEADQUARTERS
	Audit Division						Income Tax Ruling and
								  Interpretations Directorate
	Attention: XXXXXXXXXX				P. Diguer
	Large File Case Manager				(613) 957-8953

7-991336

Subject: Deduction of a tenant inducement payment
XXXXXXXXXX

We are writing in response to your memorandum dated May 7, 1999 in which you request our comments with respect to whether the above referenced taxpayer may deduct a tenant inducement payment ("TIP") in the year of payment given the decision rendered by the Supreme Court of Canada in Canderel Limited V. The Queen 98 DTC 6100 (SC) ("Canderel”) and comments concerning this judgement as set out in the Appeals Branch Decision #95-32R ("Appeals Decision #95").

The comments set out in your memorandum centre on the argument that the decision in Canderel and Toronto College Park Limited. V The Queen 98 DTC 6088 (SC) ("TCPL") can be distinguished from this particular case. In the interest of brevity they are not restated herein. Moreover, you raise several interpretative questions concerning the meaning of certain words as they appear in the Canderel judgement.

The relevant facts of your case are set out in a letter to you from XXXXXXXXXX dated April 22,1999 (the "Request") (copy attached with your submission) and restated in your memorandum. Briefly, the relevant facts are as follows.

• XXXXXXXXXX owns and develops commercial income producing properties.
• XXXXXXXXXX receives income from its commercial properties and offers TIPs to prospective and existing tenants. The purpose of offering TIPs is to entice tenants (both prospective and existing) to sign new or renewal leases, as the case may be, in its commercial income producing properties.
• Lease terms are generally between five and ten years.
• XXXXXXXXXX amortizes a TIP, for accounting purposes, over the term of the lease.

Our comments

The Directorate does not interpret the words contained in a judgement rendered by a court. However, the Department has on several occasions and in various forums, in light of the Supreme Court decision in Canderel and the TCPL set out its views on the deductibility of TIPs under the Act. In this regard reference is made to the presentation at the 1998 annual conference of the Canadian Tax Foundation and the subsequent presentation of the text of this presentation in Technical News No.16 dated March 8, 1999. This matter was also dealt with in a round table presentation (question #4) at the 1998 APFF Congress.

In the Canderel judgement the Supreme Court affirmed that the determination of profit is a question of law and the objective of computing profit for income tax purposes is to obtain an accurate picture of a taxpayer's income for the year.

In light of the decision in Canderel we agree that the matching principle is not a rule of law. It nevertheless remains an important consideration in establishing as accurately as possible a picture of profit.

In the Canderel judgement, the Supreme Court set out six principles for the computation of profit for the purposes of the Income Tax Act which must be applied to each particular case in order to determine whether the income was computed in accordance with the existing legal framework and whether this income yields an accurate picture of the taxpayer's profit for the year in question. The three conditions, set out in Appeals Decision #95, which must be met in order to consider a TIP to be a running expense and which you refer to at page 1 of your memorandum are based upon the six principles set out in the Canderel decision.

Thus the decisions in Canderel and TCPL do not mean that all instances of TIPs would be deductible up front.

Running expenses

In applying these six principles to the decision handed down in the Canderel case, the Supreme Court held that the tenant inducement payments in question were running expenses not subject to the matching principle. The Court ruled that the deduction of these payments gave an accurate picture of profit for the year and that it had not been proven to the Court that matching these payments with income over the term of the leases would have yielded a more accurate picture of profit in the particular circumstances of this case. The Court referred to the conclusions of Brulé J. of the Tax Court of Canada, who found that the payments made by Canderel created significant and numerous benefits immediately in the year of the payment.

When the facts are identical to those of the Canderel or Toronto College Park cases, the Department accepts that tenant inducement payments are deductible as running expenses. However, as was mentioned earlier, the basic question in any specific situation is to establish as accurate as possible a picture of a taxpayer's profit, and in situations different from the Canderel case it might be appropriate to apply the matching principle in respect of the deductibility of inducement payments. There are no criteria offered in the Canderel and Toronto College Park judgements by which this question of "accurate picture" can be decided. However, given the Court's acceptance that "profit" for income tax purposes is the "setting against the revenues from business for that year the expenses incurred in earning said income" it follows that any method used should at least be capable of demonstrating why the expense in question is referable to revenues in that year rather than another year. Given that both decisions are relatively new, the Department has understandably had little experience in applying the principles. Nevertheless, the question of whether a TIP is deductible as a running expense can be resolved only alter an examination of all the pertinent facts in a particular situation.

In the present situation, few facts concerning the TIPs were provided. For example, no information was provided with respect to the nature or type of inducement given. As a consequence our response is limited to general comments.

Capital expenses

Certain forms of TIPs may not constitute running expenses and accordingly may be appropriately added to the capital cost of a property of the lessor. As is the case with running expenses this question can be resolved only after an examination of all the pertinent facts in a particular situation.

Taxpayer requested adjustments

In its Request XXXXXXXXXX is seeking adjustments to its income tax returns for the 1994, 1995 and 1996 taxation years on the basis of the Canderel decision. The Department's policy in this regard is set out in Information Circular 75-7R3. Point (e) of paragraph 4 of this circular specifies that a reassessment for the purpose of creating a refund will not be made if the refund request is based solely on a successful appeal to the courts by another taxpayer. Accordingly, requested adjustments based solely on the Supreme Court decision in Canderel will not be processed.

However the Department is providing relief to taxpayers who filed their 1995 and 1996 returns based on the decision handed down by the Federal Court of Appeal in Canderel. In this regard the Department has stated the following at page 3 in Technical News No.16, dated March 8, 1999.

In these cases, where the facts are identical to those in Canderel, that is, the particular lease inducement payments are more properly regarded as currently deductible running expenses, administratively it would be acceptable to deduct the unamortized balance in the current year's return.

In the present case it remains to be determined whether:

• the facts (once the type and nature of the TIPs have been established) support a finding (using the guidelines set out in Appeals Decision # 95) that the tenant inducement payments are deductible as running expenses; and
• XXXXXXXXXX qualifies for this administrative concession regarding taxpayer requested adjustments.

For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Legislation Access Database LAD) on the Department's mainframe computer. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the LAD version or they may request a copy severed using the Privacy Act criteria which does not remove client identity. Requests for this latter version should be made by you to Jackie Page at 613 957-0682. The severed copy will be sent to you for delivery to the client.

We hope our comments will be of assistance to you. If you have any questions concerning this matter please feel free to contact us.

for Director
Financial Industries Division
Income Tax Rulings &
Interpretations Directorate
Policy and Legislation Branch