October 07, 2011

Ikea Limited (Appellant) v. Her Majesty the Queen (Respondent)

98 DTC 6092
Supreme Court of Canada
February 12, 1998

(Court File No. 25674.)

Income or capital receipt — Tenant inducement payments received prior to enactment of paragraph 12(1)(x) of the Act — Corporate taxpayer receiving tenant inducement payment without any obligation to use the money for any particular purposes — Whether such payment capital or income in nature — Whether the whole of such payment to be included in taxpayer’s income for the year of receipt — Income Tax Act, R.S.C. 1985 (5th Supp.), c. 1, as amended, ss. 9(1), 12(1)(x) and 20(1)(n).

The corporate taxpayer received a tenant inducement payment from its lessor without any obligation to use the money for any particular purposes. In computing its income for 1986, the taxpayer included no portion of such payment in its income, characterizing the entire amount as a capital receipt. On reassessment, the Minister included the whole of such payment in the taxpayer’s income for 1986. In dismissing the taxpayer’s appeal (94 DTC 1112), the Tax Court of Canada characterized such payment as income to be included in its entirety in the taxpayer’s income for 1986, (i.e., the year of receipt), and not as a capital receipt. In dismissing the taxpayer’s further appeal (96 DTC 6526), the Federal Court of Appeal affirmed the findings of the Tax Court of Canada. The taxpayer appealed to the Supreme Court of Canada.

Held: The taxpayer’s appeal was dismissed. At the outset it was to be observed that paragraph 12(1)(x) of the Act (which had been enacted subsequent to 1986) clearly required payments such as the one in issue to be included in a taxpayer’s income for the year of receipt. Equally clearly, however, paragraph 12(1)(x) was not relevant to the taxpayer’s situation. That said, it was to be noted that the Tax Court judge had found that the payment in issue was not capable of being linked to any capital expenditure or purpose, and that it had been received on income account because it constituted a reimbursement of expenses on income account (i.e., payment of rent or assumption of other obligations incident to carrying on business in the rented premises). These findings were correct. The payment in issue had clearly been received as part of the taxpayer’s ordinary business operations, and it was inextricably linked to such operations. On the question of timing, it was to be noted: (1) that, under the “realization principle” set out in the case law (see, for example, M.N.R. v. Benaby Realties Limited (67 DTC 5275)), the taxpayer was clearly required to include the entire payment in its income for the year of receipt (i.e., 1986), since it had had the free use thereof in that year; (2) that the “matching principle” is not an overriding rule of law to be applied paramount to, or in lieu of, the “realization principle”; and (3) that problems of asymmetry are of no real concern in situations where taxpayers are required under the realization principle to include entire amounts in income in the year of receipt, whereas payors of the same amounts may conceivably be able to amortize the deduction thereof over several taxation years in particular fact situations. In light of the foregoing, the Minister’s original reassessment was affirmed.