October 1, 2026

How Tenant Improvement Allowances Work in Ontario in 2026

A tenant improvement allowance is money the landlord agrees, in the lease, to put toward building out your space. In Ontario it is usually paid after the work is done, against invoices and paperwork the landlord asks for, and it rarely covers the whole cost of the fit-out. The lease sets the amount, what it can be spent on, when you can claim it and what you have to hand over to get it.

Most of what’s written about the allowance is about negotiating the number. This article is about the construction side: how the money actually moves, what it tends to cover, where the gap between the allowance and the real cost comes from, and how the allowance fits the schedule, the contractor and Ontario’s rules on holdback, HST and permits. It is not legal advice, and your lawyer should read the lease. This covers the construction questions that sit alongside it.

How a tenant improvement allowance is paid

The lease or the offer to lease will describe the allowance as a dollar figure, usually per square foot, and then say how and when it is paid. That second part matters more than most tenants expect, because it decides who carries the cost of the build while it’s under way. There are four common arrangements.

Paid after the work is done

The most common arrangement in our experience is reimbursement. You hire the designer and the contractor, you pay them as the work progresses, and once the space is finished and you’ve opened, you submit a package to the landlord and they pay you the allowance. The landlord’s risk is low: they pay only for work that is built and in place. Yours is higher, because you fund the whole fit-out up front and wait for the allowance to come back.

If you’re financing the build, this is the arrangement to plan cash flow around. The allowance arrives weeks or months after your contractor needs paying, so the full construction cost has to come from somewhere in the meantime.

Paid in draws as the work progresses

Some landlords will pay the allowance in instalments, tied to stages of the work or to your contractor’s monthly progress claims. Each draw usually needs the same kind of backup as a final claim: invoices, proof you paid them, and sometimes a letter from your architect confirming the work is in place. This eases your cash flow, but it adds administration every month, and it tends to be offered on larger leases where the landlord has a property management team set up to process it.

Paid by the landlord directly to your contractor

Occasionally the landlord pays the contractor’s invoices up to the allowance, and you pay anything above it. This keeps your cash out of the build until the allowance is used up, but it puts the landlord in the approval chain for every invoice, which can slow payment down. It also raises a question under Ontario’s Construction Act about who counts as the “owner” of the improvement, which we come back to below.

Taken as free rent or rolled into the rent

Some landlords offer the inducement as a rent-free period instead of cash, or offer a larger allowance and recover it through a higher rent over the term. Neither is wrong, but they are different deals. Free rent doesn’t pay a contractor, so you still need to fund the build. An allowance recovered through rent is closer to a loan than a gift, and it’s worth asking what rate the landlord has used to spread it.

What the landlord will ask for before paying

Whichever method is used, the lease will list what you have to deliver before the money is released. The list varies, but most include some version of these:

Final invoices from the contractor and consultants, with proof of payment.
A statutory declaration from the contractor that its trades and suppliers have been paid.
Evidence that no liens are registered against the property, and that the lien period has passed.
The building permit closed, or at least the occupancy inspections passed.
As-built drawings and, for mechanical and electrical work, the commissioning or balancing reports.
An architect’s or engineer’s letter confirming the work was built to the approved drawings.
Your lease in good standing: rent paid, no defaults, and often the business open and trading.

Two things about that list catch tenants out. The first is time: gathering it takes weeks once the work is done, and some items (the lien period in particular) can’t be rushed. The second is that many leases set an outside date for claiming the allowance. Miss it and the money can be lost. Put that date in the project schedule on the day the lease is signed.

What the allowance covers, and what it usually doesn’t

The lease decides what the allowance can be spent on, and leases differ. Some allow any cost of the fit-out; others limit it to permanent improvements that stay with the building when you leave. The distinction usually follows ownership: the landlord is paying for things that become part of their building, not for things you’ll take with you.

The table below shows how items commonly fall. Treat it as a checklist of questions for your lease, not as a rule.

Item	Commonly covered?	What to check in the lease
Walls, doors, ceilings, flooring, millwork	Usually yes	Nothing, unless millwork is loose or movable
Mechanical, electrical, plumbing and sprinkler changes	Usually yes	Whether landlord-required trades are named
Washroom and accessibility upgrades inside the unit	Usually yes	Whether it’s landlord’s work or yours
Architect, engineer and interior design fees	Often, sometimes capped	A percentage cap on “soft costs”
Building permit and application fees	Often	Included in the soft-cost cap or not
Landlord’s supervision or review fee	Sometimes paid out of the allowance	The fee, and whether it comes off the top
Data and phone cabling	Varies	Whether cabling counts as an improvement
Security, access control and AV	Varies	Fixed equipment vs movable equipment
Furniture, fixtures and equipment	Usually no	Whether any portion can be used for it
Exterior signage	Usually no	Separate approval and cost
Moving costs	Usually no	Sometimes negotiable as a separate allowance
HST on the work	Depends on the wording	Whether the figure is “plus HST”

Three lines on that table deserve a second look.

Soft costs. Design and engineering fees are real costs of the fit-out, and on a small unit they can be a meaningful share of the total. If the lease caps soft costs at a percentage of the allowance, check the cap against your designer’s actual fee proposal before signing.

The landlord’s own fee. Many landlords charge a fee for reviewing your drawings and supervising the work in their building. Some deduct it from the allowance before you see a dollar. That’s a normal practice; it just needs to be in your budget.

Unused allowance. If the fit-out costs less than the allowance, most leases say the balance is forfeited. Some let you apply it to rent or to a later phase. If you expect to come in under, ask for that in the offer to lease, because it’s rarely granted afterward.

Allowance vs the real cost of the fit-out

The single most useful thing a tenant can do before signing is price the fit-out, even roughly, and compare it with the allowance on offer. The allowance is a number the landlord chose for their own reasons: the market, your covenant, the length of the lease, what the last tenant left behind. It isn’t an estimate of what your space will cost.

What Altus Group’s 2026 figures show

The most widely used public benchmark in Canada is Altus Group’s 2026 Canadian Cost Guide, based on data as at January 31, 2026. For interior fit-out in the GTA it gives:

Fit-out type (GTA, 2026)	Hard cost per sq ft
Interior fit-out, Class B office	$110 to $150
Interior fit-out, Class A office	$160 to $265

Read those figures carefully. Altus states that its unit rates are hard construction costs only, that they assume average-quality finishes unless stated otherwise, and that they exclude GST and HST. Design fees, permits, furniture, IT, moving and contingency all sit outside them.

To see what that means for a real space, take a 5,000 square foot office. At the Class B range, construction alone comes to $550,000 to $750,000. At the Class A range, $800,000 to $1,325,000. Add 13% HST (Canada Revenue Agency), design, permits and everything you’ll bring in, and set that total beside the allowance in your offer. The difference is what you’re funding, and it’s much better to know it now than after the lease is signed.

Where the gap usually comes from

When the allowance falls short, it’s rarely one big item. It’s usually several of these:

Rentable vs usable area. Allowances are often quoted per rentable square foot, which includes your share of common areas. Construction is priced on the area you actually build in. Check which one each number uses.
Base building condition. A unit handed over “as is” may need work on HVAC distribution, sprinklers, electrical capacity or washrooms before your design even starts. Whether that’s landlord’s work or tenant’s work is one of the biggest numbers in the deal.
Landlord’s requirements. Required trades for sprinklers, fire alarm and building automation, after-hours rules for noisy work, and building standards for doors, hardware or ceilings can all cost more than the open market.
Occupied-building work. Work in an operating tower is slower and more expensive than work on an empty floor: elevator bookings, loading dock windows, protection of common areas, and noisy work pushed to evenings or weekends.
Design that grows. The first layout rarely survives the first meeting with the people who’ll use the space. Budget for that.
Everything outside construction. Furniture, IT, AV, security, signage, moving and the rent you’re paying while you build.

If you want to test a contractor’s price against this list, our guide on reading a construction estimate walks through the exclusions and allowances to look for. And because the allowance tends to fix the budget before any design is done, the point we make in the budget that matters most is the first one applies here as much as on a new building.

Landlord’s work, tenant’s work and who runs the build

Most commercial leases split the physical work into two lists, often in a schedule to the lease or a separate work letter.

Landlord’s work is what the landlord will do, at their cost, before handing over the space. It’s usually base building items: the demising walls, a working HVAC system to a stated point, sprinkler mains, a washroom core, an electrical panel of stated capacity, and the space delivered clean and empty.

Tenant’s work is everything else, done by you, to your design, with the landlord’s approval, and paid for by you with help from the allowance.

The wording of landlord’s work is where many shortfalls start. “HVAC in good working order” and “HVAC distributed to suit the tenant’s layout” are very different commitments. So are “washrooms to code” and “washrooms as existing.” Ask your designer or builder to walk the space and read the landlord’s work schedule against what they see, before the lease is final. A walk-through at that stage takes a few hours and tells you which of the big items are yours. If you’re leasing a store, our guide to building out a retail store in Toronto goes through the landlord’s work schedule line by line.

How approvals work

In almost every multi-tenant building the landlord approves your drawings before you apply for a permit, and may approve your contractor as well. Expect a design criteria manual or tenant handbook describing the building’s standards, a list of trades you must use for work on building systems, and rules about insurance, working hours and site conduct. Build a round of landlord review into the design schedule. It’s usually shorter than a permit review but it isn’t instant, and a set of comments can send drawings back to the designer.

Three ways to deliver the fit-out

You hire a designer, then tender to contractors. The usual route for tenants who want to control the design and the price. It needs someone on your side to run the tender, compare the bids and manage the work.
The landlord builds it (turnkey). The landlord designs and builds to an agreed standard and hands you a finished space. Simple for you, but you have less control over the design, the price and the timing, and the cost is often built into the rent.
Design-build. One firm designs and builds. It can be quick on a straightforward fit-out, but you give up the independent check a separate designer provides, so the scope needs to be written down clearly at the start.

Our guide to planning an office renovation in Toronto compares these routes in more detail. None of these is right for every tenant. The choice depends on how much control you want, how much time you have, and how much of your own time you can give the project. Our team has worked on both sides of the lease, on tenant fit-ups across Cadillac Fairview’s downtown office towers and on Mattamy Homes’ headquarters fit-up, and the smoothest projects were the ones where the tenant had decided early who would run the build.

Tax, permits and the Construction Act in Ontario

This is the part of the allowance that’s specific to Ontario, and the part generic guides leave out.

Holdback and liens

Under Ontario’s Construction Act, the “owner” of an improvement is anyone with an interest in the property at whose request, and for whose benefit, the work is done. On a fit-out that’s usually you, the tenant. That means the Act’s obligations sit with you:

You must hold back 10% of the value of the work as it’s supplied, until the lien period has passed (section 22).
Once a proper invoice arrives from your contractor, you have 28 days to pay it, unless you give a notice of non-payment within 14 days (section 6.4).
Since January 1, 2026, holdback must also be released each year on contracts that run past their first anniversary (Ontario Bar Association, 2026).

The Act also reaches the landlord. Section 19(1), in force since July 1, 2018, says that where the owner’s interest is a lease and the payment for the improvement is accounted for under the lease, the landlord’s own interest is subject to liens up to 10% of that payment. So on every $100,000 of allowance, the landlord’s title is exposed to $10,000 of potential liens from your contractor’s trades. That’s why landlords want statutory declarations and a clear lien search before they pay, and why many hold back part of the allowance until the lien period has run. It’s a routine step for them, and one worth expecting rather than resisting.

The practical point for you is that the allowance usually can’t be claimed in full until your own holdback is released. Plan your cash flow on that basis.

HST on the allowance

The Canada Revenue Agency’s GST/HST Memorandum 19.4.1 says that where a landlord gives a tenant a cash inducement to carry out improvements, the tenant is considered to have made a taxable supply to the landlord. In plain terms, if you’re an HST registrant, you may need to charge HST on the allowance when you claim it, and the landlord would generally claim that back as an input tax credit. Make sure the lease says whether the allowance is “plus HST”, and ask your accountant how to invoice it before your first claim.

Income tax

Under paragraph 12(1)(x) of the federal Income Tax Act, an inducement received in the course of earning business income is generally included in income, unless it’s instead applied to reduce the cost of the property it paid for. How your business treats the allowance is a question for your accountant, and it’s worth asking before year-end, not after.

Permits in Toronto

Most interior fit-outs need a building permit. The City of Toronto’s guide to interior alterations in non-residential buildings lists what an application needs: floor plans showing existing and proposed uses, reflected ceiling plans, construction details, finish schedules, a designer information form and a form describing the building’s existing life safety systems.

Fees are charged on the area of work. From January 1, 2026, the City lists $12.45 per square metre for Group A, B and D occupancies (offices are Group D) and $11.53 per square metre for Group C, E and F (retail is Group E). For a 5,000 square foot office, about 465 square metres, that’s roughly $5,800. The time the permit takes deserves more planning than the fee: drawings, landlord review, the permit application and any comments that come back all happen before the contractor can start, and often while your fixturing period is already running.

If the fit-out changes the use of the space, for example an office becoming a clinic or a shop becoming a restaurant, expect more review, more drawings, and possibly zoning questions. Raise it with your designer before signing a lease for a use the space hasn’t had before.

Timing: when the allowance clock starts

A lease sets several dates that sound similar and aren’t. Getting them straight is how you avoid paying rent on a space you can’t use yet.

Possession date: the day you get the keys and can start work.
Fixturing period: the time after possession when you’re building but not paying base rent. It’s often shorter than tenants hope.
Rent commencement date: the day base rent starts, whether you’ve opened or not.
Outside date for the allowance: the last day you can submit a claim.

The trouble usually starts when the fixturing period is measured from possession, but the design and permit aren’t ready at possession. Every week spent on drawings and approvals after you get the keys is a week of the rent-free period gone. A realistic sequence for a tenant fit-out looks like this:

Walk the space with a designer or builder and read the landlord’s work schedule against it.
Get a budget from a preliminary layout and compare it with the allowance.
Sign the offer to lease with the construction terms settled (see the checklist below).
Complete the design and submit it for landlord review.
Apply for the building permit.
Tender the work and sign a contract.
Order long-lead items: rooftop units, electrical gear, specialty lighting or storefront glazing.
Take possession and build.
Pass inspections, move in and open.
Assemble the allowance package and submit it before the outside date.

Where you can, get steps 4 and 5 moving before possession, so the fixturing period is spent building rather than waiting. Some landlords will allow early access for measuring and investigation even before the lease starts, and it’s worth asking. The same thinking runs through our article on what developers get wrong about schedules: set the dates in the lease after someone has worked out how long the design, approvals and build will take.

What to settle before you sign the lease

Once the lease is signed, the allowance and the landlord’s work are fixed. Everything below is easier to settle in the offer to lease than to argue about later. This isn’t legal advice, and your lawyer should draft the wording, but these are the construction questions we’d want answered first.

The amount, and the area it’s measured on. Per rentable or per usable square foot, and the total in dollars.
What it can be spent on. Whether soft costs, cabling, security and any furniture are eligible, and any cap on each.
How and when it’s paid. Reimbursement, draws or direct payment, the documents required, and how many days the landlord has to pay once the package is complete.
HST. Whether the allowance is “plus HST”.
The outside date. Long enough to allow for the lien period and the paperwork after you open.
Unused balance. Whether it can go to rent or a later phase.
Landlord’s work, in specific terms. HVAC capacity and distribution, sprinklers, electrical service, washrooms, and the condition of the floor and ceiling at handover.
The landlord’s fees. Review and supervision fees, and whether they come off the allowance.
Required trades and building rules. Which trades are mandatory, and the rules on working hours, elevators and the loading dock.
The fixturing period. Measured from when, and whether it extends if the landlord’s work or approvals are late.
Restoration at the end of the lease. What you may be asked to remove when you leave, since that’s a cost at the far end of the lease that the allowance won’t cover.

For the commercial side of the contract you then sign with your builder, our five questions to ask before you sign a construction contract covers changes, schedule and payment in the same plain terms. For sizing the money you hold back for surprises, see how much contingency is enough.

Frequently asked questions

What is a tenant improvement allowance?

It’s an amount the landlord agrees in the lease to contribute toward building out your space, usually stated per square foot. It’s typically paid once the work is finished and documented, and it’s limited to the costs the lease allows. It’s an inducement to sign the lease, so its size reflects the market, the length of the lease and your business, not the cost of your particular fit-out.

Who pays for tenant improvements in Ontario?

Usually both. The landlord does the landlord’s work and contributes the allowance; the tenant designs, builds and pays for the rest, and funds the whole build until the allowance is paid. On a turnkey deal the landlord builds everything, but the cost is often recovered through the rent. The lease decides the split, so read the landlord’s work schedule closely.

Can I keep the allowance if the fit-out costs less?

Usually not. Most leases say any unused balance is forfeited. Some allow the balance to be applied to rent or to a later phase of work, and a few allow part of it to go toward furniture or cabling. If you expect to come in under the allowance, negotiate what happens to the balance in the offer to lease, because landlords rarely agree to it afterward.

Who owns the improvements at the end of the lease?

In most commercial leases the permanent improvements become the landlord’s property, and you remove your furniture and equipment. Many leases also give the landlord the right to ask you to remove some improvements and restore the space when you leave. That restoration can be expensive, so find out before signing which improvements the landlord may ask you to take out.

Where to start

If you’re looking at a space now, the most useful step is a walk-through with someone who can read the landlord’s work schedule against what’s actually there, and a first budget to set against the allowance. That tells you what you’re really signing up to pay, while there’s still time to change the deal.

Our construction project management work for tenants starts at exactly that point: reviewing the space and the lease’s construction terms, building the budget, and then running the design, tender and build so the allowance is claimed on time. We’ve been doing this for more than 20 years, with experience built at PCL Constructors and Oxford Properties, and we’re glad to have the first conversation about your space.