7 February 1991 Income Tax Severed Letter - Lease 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.

Subject: Lease Inducement Payments

This is in reply to the first part of the question in your memorandum of October 23, 1990. The second part has been replied to in our memorandum dated November 15, 1990 addressed to Publications Division and copied to you.

Following our recent telephone conversation (Fontaine/Laramy) it would appear that it is generally agreed that, for the purposes of an election under 13(7.4) of the Act, the inducement amount should relate to the particular property. However, there is some concern that in a lease negotiation the parties ought to indicate in the agreement that an inducement received should be used to acquire any depreciable (including property to be used in a separate business) to clearly establish the availability of an election under subsection 13(7.4).

Our comments are as follows:

• 1. For the purpose of an election under subsection 13(7.4) we agree that an amount received by a taxpayer as assistance, including an inducement payment, is required to be related to the property by virtue of the words “in respect of” included in subparagraph 12(1)(x)(iv) and subsection 13(7.4) of the Act. This is supported, in our view, by the Supreme Court case of Nowegijick v. The Queen et al [[1983] C.T.C. 20 (83 DTC 5045) in which Dickson, J. said:

“The words “in respect of” are, in my opinion, words of the widest possible scope. They import such meanings as “in relation to”, “with reference to” or “in connection with”. The phrase “in respect of” is probably the widest of any expression intended to convey some connection between two related subject matters”.

• 2. Where, for example, a landlord pays an amount to a lessee as an inducement to enter into a lease and the payment may be used at the sole discretion of the lessee (such as to reduce the cost of a capital or current expenditure), the funds would be included in the lessee's income in the year received pursuant to subparagraph 12(1)(x)(iii). Technically, it is our view that an election would not be available to the lessee under subsection 13(7.4) since the amount was not “... received ... in respect of ... a depreciable property acquired by him ...”. (Underlining is ours). However, where an inducement amount can be determined to be in respect of depreciable property it is our opinion that the lessee will qualify for the election under subsection 13(7.4) in respect of such property, whether or not the depreciable property was acquired in a separate business. Subsection 13(7.4) does not require that depreciable property be acquired for use in any particular business or that the property acquired must be used in the same business in which the inducement amount was received.
• 3. The Department does not have any authority under subsection 13(7.4) to impose restrictions on the format of, or dictate the terms to be included in, an agreement entered into between taxpayers in respect of their business affairs. It is a question of fact, in any given set of circumstances, whether an inducement amount received was “in respect of” a particular property acquired by the taxpayer. Unquestionably, the onus would be on the taxpayer to substantiate that fact and based on the evidence provided, the Department may, in any given situation, accept or reject that the requirements of subsection 13(7.4) are met.

We hope our comments will be of assistance to you.