October 27, 2026

How Leasehold Improvements Work in Ontario in 2026

Leasehold improvements are the permanent work done to a rented space to suit the tenant: walls, ceilings, lighting, flooring, washrooms, ductwork, built-in millwork. In Ontario they’re usually paid for by the tenant, with help from any allowance the landlord gives, and they usually become the landlord’s property once they’re installed. At the end of the lease, most leases let the landlord either keep them or ask you to take some out and restore the space. For tax, the tenant writes them off under the Canada Revenue Agency’s Class 13, spread over the lease term plus one renewal.

This article is the detail behind each of those points, for a tenant about to build out an office, clinic, store or restaurant, including how to settle the restoration clause before you sign. It isn’t legal, tax or accounting advice. Your lawyer should read the lease and your accountant should set up the tax treatment; these are the construction questions that sit alongside theirs.

What counts as a leasehold improvement

A leasehold improvement is a change to the leased space that’s attached to the building and is meant to improve the premises rather than serve one piece of equipment. Partition walls, a new ceiling grid, light fixtures wired into the ceiling, washrooms, flooring glued to the slab, supplementary ductwork and millwork built into the walls are all typical examples.

Two other categories sit beside it, and the difference between them decides what you can take with you when you leave.

Fixtures and chattels in Ontario law

The legal labels behind that table are fixtures and chattels. Chattels are loose personal property: your furniture. Fixtures are things attached to the building, and the law divides them again into tenant’s (or trade) fixtures and landlord’s fixtures, which is what a lease means by leasehold improvements.

Toronto commercial leasing firm Daoust Vukovich summarizes the rules in its article on removal and restoration (2023): unless the lease says otherwise, landlord’s fixtures become the landlord’s property once they’re installed, while a tenant generally has the right to remove its own trade fixtures as long as removal doesn’t materially damage the premises. Which category an item falls into depends on whether it was installed to improve the premises or to make the item itself work. The article cites an Ontario Court of Appeal case, 859587 Ontario Ltd. v. Starmark Property Management Ltd. (1998), in which a spray paint booth bolted to the floor and vented through the roof was held to be a tenant’s fixture, because it was installed for the tenant’s business and to keep the booth stable.

The grey areas

The items that don’t sort easily are usually the expensive ones, and they’re worth naming in the lease:

• Supplementary HVAC, such as a dedicated unit for a server room or a kitchen.
• Data and power cabling run through the ceiling.
• Kitchen equipment that’s built in, along with hoods, grease interceptors and walk-in coolers.
• Specialty rooms: vaults, X-ray shielding, sound-rated rooms, raised floors, an internal stair cut between two floors.
• Signage, which is usually a trade fixture but leaves holes, wiring and sometimes a damaged façade behind.

Who pays for leasehold improvements

Most commercial leases split the physical work into two lists. Landlord’s work is what the landlord builds at their cost before handing over the space, usually base building items like demising walls, HVAC to a stated point, sprinkler mains and a washroom core. Tenant’s work is everything else, done by you, to your design, with the landlord’s approval. Most leasehold improvements are tenant’s work.

The landlord often contributes to the tenant’s work through a tenant improvement allowance. How that money is paid, what it can be spent on and how much of the fit-out it really covers is a subject of its own, and our article on how tenant improvement allowances work in Ontario goes through it in full. The short point here is that the allowance is a fixed contribution, and whatever the work costs beyond it comes out of your budget.

Who pays for repairs once they’re built

The lease also decides who maintains the improvements during the term. Most commercial leases in Ontario are net leases, and in a net lease the tenant usually repairs and maintains the premises, including the improvements, while the landlord looks after the structure and the base building systems. So the light fixtures, ceiling tiles and finishes you install are typically yours to keep in repair, even after they’ve become the landlord’s property. Read the repair clause alongside the ownership clause, because the two don’t always line up the way you’d expect.

Who owns leasehold improvements, during the lease and at the end

Most leases say it plainly: leasehold improvements become the landlord’s property as soon as they’re installed, or at the latest when the lease ends. Some leases make them the tenant’s property until expiry and the landlord’s after. Either way, the practical position during the lease is much the same.

During the lease

You use and maintain the improvements, but you can’t remove or substantially change them without the landlord’s consent, so a renovation partway through a long lease goes through the same approvals as the first build.

Many leases also require you to insure your leasehold improvements, even though they belong to the landlord, because you’re the party that would have to rebuild them after a fire or flood. Check what your insurance covers before the build starts, not after, and send your broker the construction value of the fit-out so the limit is set from a real number.

When the lease ends

At expiry, most leases give the landlord a choice for each improvement: keep it, or require you to remove it and restore the space. The landlord usually makes that choice near the end of the term, years after approving your drawings, so a tenant who didn’t settle it at the start finds out late what has to come out. That’s the main reason to agree it before you build.

Your trade fixtures and furniture are yours to take, and the lease will normally require you to remove them and repair any damage. Anything left behind may become the landlord’s, or be removed at your cost.

Restoration and removal clauses: what to negotiate

A restoration clause, sometimes called a reinstatement clause, is the part of the lease that says what condition the space must be in when you hand it back.

What a typical restoration clause says

The wording varies, but most clauses do some version of three things:

1. Give the landlord the right to require removal of some or all of the improvements, usually by notice before the end of the term.
2. Set a standard for the space you hand back: “base building condition”, “the condition the premises were in at commencement”, or “good repair, reasonable wear and tear excepted”.
3. Let the landlord do the work and charge you if you don’t, sometimes with an administration fee on top.

Daoust Vukovich notes that these obligations often seem clear when the lease is signed and become disputed as the term ends. It gives two common examples of items leases spell out: cabling, which office landlords often require tenants to remove because it’s hard to cut out and remove later, and built-in ovens and refrigerators, which restaurant tenants often want the freedom to take or leave. It also warns that a “first-class” standard may be one a tenant can’t meet at the end of the term, and that “reasonable wear and tear”, though a common exception, has proven to have an unreliable meaning. Both are reasons to describe the hand-back condition in plain terms.

How courts have read these clauses

Courts in Ontario don’t always read a restoration or repair covenant at its most literal. A March 2026 post from Bennett Jones reviews the cases. In Walker Office Complex Inc. v. BJC Architects Inc. (2010 ONSC 5534), an office tenant whose carpets and walls had worn out from long commercial use wasn’t required to replace all the carpet and repaint every wall. The courts also look unfavourably on repairs that would hand the landlord something close to new, which the post calls a windfall.

That’s useful if a dispute ever happens, but the same post points out that the more specifically a restoration covenant is drafted, the less room a tenant has to argue for a different outcome.

What to ask for before you sign

These are the restoration points we’d want settled in the offer to lease or the lease itself. Your lawyer drafts the wording; the construction content behind each one is ours to help with.

1. The landlord decides at drawing approval, not at expiry. When the landlord approves your drawings, they state in writing which improvements they’ll require you to remove at the end. Anything not on that list stays. This single change removes most of the uncertainty.
2. Building-standard work is exempt. Ordinary office or retail improvements that a future tenant could reuse (partitions, ceilings, lighting, washrooms) shouldn’t need to come out. Restoration applies only to specialty items.
3. Cabling is named. Either you remove it, or you leave it labelled and in place. Office landlords often want cabling removed, as Daoust Vukovich notes; some will accept it left in place if it’s tested and labelled.
4. Specialty rooms are named. Vaults, server rooms, kitchens, shielding, raised floors and internal stairs are where restoration costs concentrate. Agree each one at the start.
5. The standard is defined. “Base building condition” should be described: what the floor, ceiling, walls, lighting and HVAC look like when you hand back. A photo record at handover helps both sides.
6. Reasonable wear and tear is excepted from both the repair and the restoration obligations.
7. Time to do the work. Whether you get time after expiry to complete removal, and what you pay during that time. Make sure the clause doesn’t turn that period into an overholding tenancy at a penalty rate.
8. An option to pay instead of build. Some landlords plan to demolish the space for the next tenant anyway, and an agreed cash amount in place of restoration can suit both sides.
9. Renewals and expansions. If you renew, the restoration obligation should move to the end of the renewal, not be triggered at the first expiry.
10. Hazardous materials. You’re responsible for what you brought into the space, not for what was already in the building when you arrived.

What restoration costs, and how to budget for it

There’s no published figure for restoration costs in Toronto, and it varies too much from space to space to give one honestly. What drives the cost is predictable, though, and it’s worth knowing at the start:

• How much is on the removal list. A few signs and some cabling is a small job. Taking a restaurant back to a shell is a construction project with its own permit.
• Demolition and disposal. Labour, bins and haulage, and in many office towers the restriction that noisy demolition happens after hours, which costs more.
• Making good the base building. Capping plumbing, patching slab penetrations, reinstating ceiling grids and lighting to the base building standard, and moving sprinkler heads back for an open floor.
• Mechanical and electrical work. Disconnecting supplementary HVAC and returning the base building system to its original zoning often needs the landlord’s required trades.
• Permits and designated substances. Demolition of interior work may need a building permit, and if the building contains asbestos, Ontario’s O. Reg. 278/05 applies to the removal just as it did to your original fit-out.
• Timing. Restoration usually happens while you’re still paying rent, often while you’re also building your next space.

Have your contractor or cost consultant price the removal list when they price the fit-out, so the restoration cost is known from day one. Keep the as-built drawings and the landlord’s approval letter where you’ll find them in ten years. Then revisit the estimate about a year before expiry, while there’s still time to negotiate, renew or plan the work.

Tax and accounting for leasehold improvements in Canada

This is how the rules work, for a better conversation with your accountant, who decides the treatment based on how your business is structured and how the lease is written.

Capital cost allowance: Class 13

A tenant can’t deduct the cost of leasehold improvements as a current expense. Instead they’re capital, and the tenant claims capital cost allowance (CCA) on them as a leasehold interest, which the CRA puts in Class 13.

Class 13 isn’t a fixed percentage like most CCA classes. The yearly maximum comes from Schedule III of the Income Tax Regulations (current to September 30, 2026), and for each improvement it’s the lesser of two amounts:

• one-fifth of the cost, and
• the cost divided by the number of years in the lease, counted from the start of the year the cost was incurred to the end of the lease, including the first renewal period if you have a right to renew, and capped at 40 years.

In practice that means the cost is spread over the remaining lease term plus one renewal, but never faster than five years and never slower than forty. Two simple examples show how it works:

Those figures are simplified. First-year rules have changed more than once in recent federal budgets, so your accountant will apply the ones in force for the year you incur the cost. Each round of improvements is tracked separately, so a renovation in year six starts its own schedule against the lease term remaining at that point.

When the improvement is really a building

There’s an exception worth knowing about if your fit-out is large. Under subsection 1102(5) of the Income Tax Regulations, where a tenant erects a building or structure on leased land, adds to a leased building, or alters it so much that the nature of the property substantially changes, that leasehold interest is treated as a building for CCA rather than going into Class 13. Most interior fit-outs won’t get near this, but a tenant who adds a mezzanine, an addition or a new storefront should raise it with their accountant.

The allowance and income tax

A landlord’s allowance is generally income to the tenant under paragraph 12(1)(x) of the Income Tax Act, unless it’s instead applied to reduce the cost of the improvements it paid for, which then lowers the Class 13 claim. Which way to go is a decision for your accountant, and our tenant improvement allowance article covers it alongside the HST on the allowance itself.

HST on the work

Your contractor and consultants charge HST at 13% in Ontario on the fit-out. If you’re an HST registrant using the space for taxable commercial activity, you can generally claim that back as an input tax credit. If your business is HST-exempt, as many medical and dental practices are, the HST is a real cost and belongs in the budget. Ask your accountant which applies before you set the budget: on a $500,000 fit-out, 13% HST is $65,000.

Your financial statements

Depreciation in your financial statements is a separate question from CCA, set by the accounting standards your business reports under, and it often won’t match the tax schedule. Your accountant sets the policy. The useful thing you can give them is a breakdown of the fit-out cost by item, which is easy to get from your contractor during the build and hard to rebuild afterwards.

Property tax

Property tax is assessed on the property, not on your lease, and in a multi-tenant building it usually reaches you as additional rent. The Municipal Property Assessment Corporation’s commercial property fact sheet (2026) says commercial properties are typically valued on the cost approach, that in the GTA, where there are plenty of sales, it uses direct comparison, and that a multi-tenanted commercial property is valued on the income approach. The income approach works from the rents the property earns, so in a multi-tenant building one tenant’s fit-out isn’t what sets the value. If you lease a whole single-tenant building, ask your lawyer and the landlord how a large fit-out might affect the assessment you’ll be paying.

Building leasehold improvements: permits, contractors and holdback

Approvals and permits

In almost every multi-tenant building, the landlord approves your drawings before you apply for a building permit, and often approves your contractor too. That approval is the right moment to get the removal list agreed, as described above, because it’s the one point where the landlord is looking at exactly what you plan to build.

Most interior fit-outs need a building permit, applied for by your designer once the landlord has approved the drawings. In Toronto, interior alterations to offices, stores and restaurants (under 30 seats) up to 600 square metres, with no change of use or patron area and no active permit for the shell, can go through the City’s Express Services stream with a three-business-day review. Larger or more complex work goes through the standard review streams. Our guides to planning an office renovation in Toronto and building out a retail store in Toronto cover the permit side, fees and timelines in detail.

You’re the owner under the Construction Act

Under Ontario’s Construction Act, the owner is a person with an interest in the premises at whose request, and on whose credit, on whose behalf, with whose consent or for whose direct benefit, the improvement is made. On a fit-out that’s usually you, the tenant, even though the landlord owns the building and will end up owning the improvements. So the owner’s obligations are yours:

• Holdback. You hold back 10% of the value of the work as it’s supplied (section 22) until it can properly be released.
• Prompt payment. You pay your contractor’s proper invoice within 28 days, unless you give a notice of non-payment within 14 days (section 6.4).
• Liens. Your contractor and its trades can register liens against your leasehold interest if they aren’t paid.

The Act reaches the landlord too. Section 19(1) says that where the payment for the improvement is accounted for under the lease, as an allowance is, the landlord’s interest is subject to liens up to 10% of that payment. That’s why landlords ask for statutory declarations and a clear lien search before they release an allowance. Our tenant improvement allowance article explains that in one section, and our guide to construction liens and holdback in Ontario covers releasing holdback, annual release and what to do if a lien is registered.

Choosing who builds it

Whichever way you hire, through a tender, design-build or a landlord’s turnkey build, the contract should require as-built drawings and a breakdown of the cost by item at the end, and make the contractor responsible for the landlord’s building rules on hours, loading docks and required trades. The as-builts tell whoever does the restoration what’s in the walls and ceiling. The cost breakdown lets your accountant separate the improvements from trade fixtures and furniture, which are taxed differently. Our five questions to ask before you sign a construction contract covers the commercial terms.

Checklist before you sign the lease

Our tenant improvement allowance article has a checklist for the money side of the deal. This one is about the improvements themselves.

1. Walk the space with someone who builds. Read the landlord’s work schedule against what’s actually there, and list the improvements you’ll need.
2. Get a first budget for the fit-out, including HST if you can’t recover it, and set it against any allowance.
3. Read the ownership and repair clauses together: when the improvements become the landlord’s, and who maintains them in the meantime.
4. Settle restoration using the ten points above, above all that the landlord names what must come out when they approve your drawings.
5. Check the trade fixtures you plan to take with you are recognized as yours.
6. Ask about insurance: whether you must insure the improvements, and for how much.
7. Ask your accountant about Class 13, the allowance and HST before the first invoice arrives, and give them the lease term and renewal options.
8. Price the restoration with the fit-out, so the cost at the far end of the lease is known when you sign.

Frequently asked questions

What is considered a leasehold improvement?

Any permanent change to a leased space that’s attached to the building and improves the premises for the tenant’s use. Typical examples are partition walls, ceilings, lighting, flooring, washrooms, ductwork and built-in millwork. Items attached so the business can operate, like bolted shelving or specialty equipment, are usually trade fixtures instead, and loose furniture and computers are the tenant’s own property.

Who owns leasehold improvements at the end of a lease?

In most Ontario commercial leases, the landlord. Improvements usually become the landlord’s property when they’re installed, or at the latest when the lease ends. The tenant keeps its trade fixtures and furniture, and must usually remove them and repair any damage. The lease is what decides, so read the ownership and restoration clauses together before you sign.

Are leasehold improvements depreciated or amortized?

For tax, tenants in Canada claim capital cost allowance on leasehold improvements under Class 13. The yearly maximum is the lesser of one-fifth of the cost and the cost spread over the lease term plus one renewal, up to 40 years. In your financial statements they’re depreciated under your accounting standards, which can differ from the tax treatment. Your accountant sets both.

Can a landlord make me remove my improvements?

Yes, if the lease gives them that right, and most do. The landlord typically chooses near the end of the term which improvements to keep and which you must remove, restoring the space to a standard the lease sets. You can limit this before signing, most usefully by having the landlord name the items to be removed when they approve your drawings.

Where to start

The cheapest time to deal with leasehold improvements is before the lease is signed, while the ownership and restoration terms can still change and the fit-out is still a drawing.

That’s where our construction project management for tenant fit-outs starts: reviewing the space and the lease’s construction terms, building the budget, and then running the design, permits, tender and build, with the as-builts and cost breakdown handed over at the end. We bring more than 20 years in construction, with experience built at PCL Constructors and Oxford Properties, and we’re glad to have the first conversation about your space.