41 Victoria SENC v. ARQ, No. 500-80-040518-202, 22 June 2026 (Court of Quebec)

A Quebec general partnership (“SENC”) with three related individual partners agreed with a prospective tenant (“Brookfield”) that it would:

• erect a new building on its lands at its own cost;
• construct the tenant improvements needed by Brookfield (amounting to $17 million) at Brookfield’s cost; and
• pay a tenant improvement allowance of $4.6 million to Brookfield, on being invoiced therefor upon Brookfield taking possession (which occurred in 2015).

The lease agreement stated that reimbursement by Brookfield of the allowance would be accomplished by being “amortized over the [15-year] Lease Term and added to the Basic Rent, interest-free.”

The ARQ reassessed the partners on the basis that the allowance, rather than being currently deductible in computing SENC’s income when invoiced to it by Brookfield, constituted an interest-free loan by SENC to Brookfield (and also assessed gross negligence penalties). It did not reassess their subsequent taxation years to reduce their share of the reported rental income on account of principal repayments under the alleged loan.

Davignon JCQ rejected the ARQ's position that the allowance was a loan to Brookfield, indicating (at paras. 102 and 106) that this was inconsistent with the parties’ agreement being one of lease and with the rejection in Shell of an “economic realities” approach, and further stated (at paras. 107 and 110, Tax Interpretations translation):

In this case, the TIP was payable only on the condition, and only after, Brookfield had incurred the costs of fitting out its premises and had issued an invoice to SENC in connection with those costs. Since the TIP was not paid in advance, it did not constitute an advance. The TIP was intended to be, and was in this case, a financial incentive at the outset of the lease in connection with the significant costs that Brookfield was required to incur in setting up its business in new premises. …

Brookfield approached SENC for the purpose of leasing premises and not in order to obtain an interest-free loan. SENC did not intend to grant Brookfield an interest-free loan, but rather to induce it to commit to a long-term lease by offering it an allowance, among other advantages also provided for in the Lease.

In finding that the allowance was currently deductible by SENC, Davignon TCJ stated (at para. 154):

In this case, as in Canderel, the TIP generated at least one immediate benefit to SENC that materialized in the 2015 taxation year, namely the avoidance of the “hole in income” that the company would have continued to sustain had the mortgaged building remained vacant.

A Quebec general partnership (“SENC”) with three related individual partners agreed with a prospective tenant (“Brookfield”) that it would:

• erect a new building on its lands at its own cost;
• construct the tenant improvements needed by Brookfield (amounting to $17 million) at Brookfield’s cost; and
• pay a tenant improvement allowance of $4.6 million to Brookfield upon Brookfield taking possession.

The lease agreement stated that reimbursement by Brookfield of the allowance would be accomplished by being “amortized over the [15-year] Lease Term and added to the Basic Rent, interest-free.”

Davignon JCQ rejected the ARQ's position that the allowance was a loan to Brookfield, stating (at para. 110, Tax Interpretations translation):

SENC did not intend to grant Brookfield an interest-free loan, but rather to induce it to commit to a long-term lease by offering it an allowance, among other advantages also provided for in the Lease.

In finding that the allowance was currently deductible by SENC when paid in 2015 (and after having noting accounting evidence that the current deduction of the allowance was not inconsistent with generally accepted accounting principles), Davignon TCJ stated (at paras. 149 and 154):

The tax treatment of TIPs has been the subject of consistent case law that culminated in the Canderel trilogy. The rule is simple: a taxpayer may deduct a TIP from its business income as a current expense, and the deduction may be claimed in full in the year of payment where the TIP generates both immediate benefits and benefits relating to future income. …

In this case, as in Canderel, the TIP generated at least one immediate benefit to SENC that materialized in the 2015 taxation year, namely the avoidance of the “hole in income” that the company would have continued to sustain had the mortgaged building remained vacant.