How to Account for Rent-Free Periods in Canada

December 30, 2014 Published by
Post Categories: Tax AccountingAdvice For You

Whether you’re a tenant or landlord who is taking advantage of a rent-free period to secure a new lease on a building or other asset, such as business equipment, you probably have questions on how to account for this rent-free period when it comes time for income reporting to the Canadian Revenue Agency (CRA).

What is a rent-free period?

Landlords of commercial rental space may offer a rent-free period to attract tenants or secure a new lease. This is usually done when there are more available rental units than there are renters in an area or when the landlord or tenant needs time to get the building ready for occupancy. This is also known as a rent holiday.

How is a rent–free period treated for accounting purposes?

Typically, a rent-free period is seen as a deferred liability. This means that the rent-free period still needs to be recorded on both the lessee’s and lessor’s balance sheets. To do this, simply straight-line the rent-free period over the entire length of the lease that is not cancellable.

For example, if Company A is renting office space from Company B with a lease term of one year as follows:

  • 1-3 months: rent-free (3 rent-free months of payments)
  • 4-12 months: $1,250 per month (9 months of payments)

For reporting purposes, the rent will actually be spread evenly across the year of the non-cancelable lease as follows:
$1,250 X 9 = $11,250. For a one-year lease, the lessee is paying a total of $11,250. Therefore, take $11,250 / 12 to get $937.50. This is the actual figure the tenant is paying monthly for the overall 12 months of the lease.

Put simply, the first three months of rent for the tenant is deferred. However, for accounting purposes, the rent amount is spread across the term of the lease in equal parts for both the tenant and the landlord.

Rent-Free Period Accounting

At Hogg, Shain, and Scheck we offer our professional tax accounting services to better help you understand these and other non-traditional business dealings that must be properly reported to the CRA. Contact us today to schedule an appointment and relax, because we can handle it all for you and your business.

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