Commercial Leasing Bulletin: Tips For Tips: Deductibility Of Tenant Inducement Payments

• Published date: 25 May 2021
• Subject Matter: Real Estate and Construction, Insolvency/Bankruptcy/Re-structuring, Insolvency/Bankruptcy, Landlord & Tenant - Leases
• Law Firm: Minden Gross LLP
• Author: Minden Gross LLP

Update RE: Fuller Landau Group Inc. in its capacity as trustee in bankruptcy of 7636156 Canada Inc. v. OMERS Realty Corporation, 2020 ONCA 681

In October 2020, the Ontario Court of Appeal (ONCA) released its decision in 7636156 Canada Inc. (Re), 2020 ONCA 681 (reviewed in greater detail in our Bulletin here). The ONCA held that a landlord's entitlement to draw on a bankrupt tenant's line of credit is not limited to the landlord's preferred claim for three months' worth of accelerated rent under the Bankruptcy and Insolvency Act. On April 22, 2021, the Supreme Court of Canada (SCC) dismissed the application for leave to appeal, upholding the Ontario Court of Appeal decision.

Tips for TIPs: Deductibility of Tenant Inducement Payments?

Commercial landlords have long competed to attract new tenants, often going to great lengths to induce tenants to choose a unit in their building. This is where the concept of tenant inducement payments comes into play. A tenant inducement payment ("TIP") is an instrument, most often a payment, used by a landlord to attract prospective commercial tenants to their premises. Given the often significant value of these payments, their tax treatment can substantially impact the landlord's finances.

In 1997, the SCC simultaneously released three rulings ("SCC Trilogy"), which had significant tax consequences for landlords who pay and for tenants who receive TIPs. In Canderel Ltd. v. R. ("Canderel") and Toronto College Park Limited v. R. ("Toronto College Park"), the SCC was called upon to determine the appropriate manner in which a landlord may deduct a TIP from its business income. In the third case Ikea Ltd. v. R. ("Ikea"), the SCC was called upon to determine how a TIP was to be treated in the hands of a tenant. The SCC Trilogy established a set of principles to determine how to draw the most accurate picture of a landlord's profit in a given year, including how it chooses to deduct its TIPs.

The SCC Trilogy

SCC Trilogy Quick Summary

In Canderel and Toronto College Park, the SCC concluded that the primary purpose of the payments in question were to induce the tenants to enter into leases and provide immediate benefits to the landlord. In both cases, the landlord was entitled to deduct the TIPs in the year in which they were paid, rather than amortizing the TIPs over the term of the lease to which it relates. In both of these cases, the TIPs yielded immediate benefits for the landlords and, perhaps more importantly, they were not...