7 May 1990 Income Tax Severed Letter ACC9089 - Revision of IT-359R2

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.

May 7, 1990

FROM - Financial Industries Division Kevin J. Donnelly 957-3500

TO - Publications Division Roy C. Shultis Director

Attention: J. Leigh

SUBJECT: Revision of 
IT-359R2
         Paragraph 11 of draft version 11

We have reviewed the revisions to paragraph 11 of draft IT-359R3 which accompanied your memorandum dated April 18, 1990. We have inserted some suggested wording changes on the attached copy of your draft.

Subparagraph 11(c) reads in part as follows:

"...provided that practice is consistent with that which is legally permissible."

This statement first appeared in the answer to Question 49 at the 1985 Round Table. We have been unable to ascertain its origin or intended significance. In the absence of such information, we see no reason why these words need be retained.

We have no further comments.

C.B. Darling Director Financial Industries Division Rulings Directorate

IT-359R3 VERSION 11

11. The Department's general position with respect to an amount paid by a landlord to induce a taxpayer to enter into a lease of the landlord's property is that such payment will, in the landlord's hands, be treated as a capital expenditure, an eligible capital expenditure or a current expenditure, depending upon the circumstances, as follows:

a) capital expenditure:

Where it can be established that the amount paid yields a benefit of an enduring nature to the landlord, the payment is considered to be a capital expenditure. If such a payment was not incurred for the purpose of gaining or producing income from a business, it would be considered a non-deductible capital expenditure.

b) eligible capital expenditure:

Where a capital expenditure was incurred for the purpose of gaining or producing income from a business, it may qualify as an eligible capital expenditure (see the current version of IT-143 , "Meaning of Eligible Capital Expenditure"). Where an amount paid in the course of a landlord's property rental business to obtain the lead or anchor tenant(s) for a project yields a benefit of an enduring nature to the landlord, it is considered to be an eligible capital expenditure. A lead or anchor tenant is so characterized on the basis of such factors as square metres (feet) leased, the duration of the lease and its financial or marketing importance to the project.

c) current expenditure:

An amount paid in the course of a landlord's property rental business to obtain a non-anchor tenant is considered to be on income account. An amount paid to a lead or anchor tenant is also considered to be on income account where the payment does not yield an enduring benefit. In both instances, the payment is to be deducted in accordance with accepted commercial practice as used in computing income for financial statement purposes

PROVIDED THAT PRACTICE IS CONSISTENT WITH THAT WHICH IS LEGALLY PERMISSIBLE.* The Department's view is that such practice is as outlined by the Canadian Institute of Public Real Estate Companies (CIPREC) in their publication "Recommended Accounting Practices for Real Estate Companies". Specifically, payments relating to the initial lease of space in a project or building are to deferred and amortized to income over the term of the related lease. Payments made to facilitate the re-leasing of that space, whether to the same tenant or a new tenant, may be either deducted in the year in which the expense is incurred, or deferred and amortized to income over the term of the related lease. (* What law? The Income Tax Act or some other Act?)