August 14,
Dear Sirs:
Re: Taxation of Tenant Inducement Receipt Paragraph 12(1)(x)
This is in reply to your letter of February 25, 1991 concerning lease inducement payments.
A taxpayer's business includes the negotiation of leases of property to be used by its chain of retail outlets. Prior to the introduction of paragraph 12(1)(x) of the Act any lease inducements received in the course of negotiating these leases were seen by the Department as earned in the course of the taxpayer's business and the amounts so received were included in income.
Since the introduction of 12(1)(x) of the Act you note that it would be preferable to such taxpayers if the aforementioned lease inducement payments were included in income under the provisions of paragraph 12(1)(x) enabling taxpayers to elect under subsections 13(7.4) and 53(2.1) of the Act. Thus, the cost of assets (assuming the inducement payment is in respect of such assets) would be reduced instead of the inducement amount going directly into income. If the amount is otherwise included in income these elections would not be available.
You mention that if the Department does not take the position that the lease inducement payments are included in income under paragraph 12(1)(x) the result will be that multi-location retailers who include inducements as part of their normal business profits are treated less favourable than persons who can make the elections.
When lease inducements are properly included as business revenue, it cannot be said that they are included in income under paragraph 12(1)(x). Consequently, no elections can be made with respect to these inducement amounts. We note that the purpose of paragraph 12(1)(x) was to include in income payments that would not otherwise have been included in income, have reduced an expense or reduced the capital cost of a property. In this regard, we believe that the Woodward Stores Limited decision (91 DTC 5090) simply continues to support the view that there is a factual distinction to be made between inducements of a capital or income nature along the lines of the decision in French Shoes Ltd. (86 DTC 6359). The judge's comments at page 5100 of the Woodward case appear to us to recognize that paragraph 12(1)(x) was intended to include inducements of a capital nature in income, regardless of the accounting principles applicable. We therefore cannot agree that the case would support the application of paragraph 12(1)(x) to all taxpayers.
While it may appear that including lease inducements under paragraph 12(1)(x) has certain advantages, we note that prior to the introduction of this provision many such amounts were not taxable.
We confirm your view that paragraph 12(1)(x) includes inducements in income in the taxation year they are received regardless of when they are accrued for accounting purposes. We would also agree that some inducement amounts may, depending on the circumstances, reduce the cost of an asset for which the inducement is given even though the asset is not used in the leased premises.
We trust these comments will be of assistance.
for DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch