18 January 2000 External T.I. 9926715 - INCONVENIENCE PAYMENT

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

An individual farmer receiving an inconvenience payment from a public authority because he must travel 30 km farther, the roadway will be flooded and a dam will be built.

The issue is the income tax treatment of the payment.

Position TAKEN:

We do not have all the facts but it appears that the inconvenience payment will not be taxable.

Reasons FOR POSITION TAKEN:

It 334R2 paragraph 3 "windfall" and 12(1)(x) requires an outlay or expense

XXXXXXXXXX 1999-000530
C. Tremblay
January 18, 1999

Dear XXXXXXXXXX:

This is in reply to your letter of September 20, 1999, wherein you seek our opinion in determining the tax consequences of a payment received by a farmer from the Department of Public Works.

In your letter, you describe a situation where, a farmer, who owns two pieces of land is required to travel two kilometers and proceed over a bridge which crosses a small river when he goes from one parcel to the other. The Department of Public Works is going to build a dam which will back up the stream, cover the bridge, and make it impossible for the farmer to travel that route. The Department of Public Works will award the farmer an amount (the "inconvenience payment") because he will no longer be able to use the current roadway and bridge to gain access to his property and will have to travel a distance of some thirty kilometers whenever he needs access to his property. The farmer does not own the land that will be flooded nor has he any ownership interest in the bridge.

Our Comments:

Written confirmation of the consequences inherent in particular transactions are given by this Directorate only where the transactions are proposed and are the subject matter of an advance tax ruling request submitted in the manner set out in Information Circular 70-6R3. In our previous telephone conversation of October 20, 1999 (Tremblay/XXXXXXXXXX), you were considering an advance income tax ruling request on behalf of your client. On January 13, 2000, you stated that at this time only general comments are required and that you may request a specific ruling later. Accordingly, we offer the following general comments which are of a general nature.

Generally, the tax treatment of damages depends on the nature of the loss for which damages are compensation. Damages which replace lost income are generally taxed as income under subsection 9(1) of the Income Tax Act (the "Act") while certain damage payments that would otherwise be non-taxable receipts may be taxed under paragraph 12(1)(x) of the Act. Generally, where lost income is not being replaced, subsection 9(1) of the Act would not apply. Paragraph 12(1)(x) of the Act applies to, among others, payments received in the course of earning income from a business or property, from a government, municipality or other public authority, where the particular amount can reasonably be considered to have been received as a refund, reimbursement, contribution or allowance or as assistance, whether as a grant, subsidy, forgivable loan, deduction from tax, allowance or any other form of assistance in respect of an amount included in, or deducted as, the cost of property or an outlay or expense.

Interpretation Bulletin IT-334R2, Miscellaneous Receipts, discusses various tax treatments which would be taxable under section 3 of the Act and paragraph 3 of the bulletin describes factors in respect of when a particular receipt should be considered a "windfall" and not subject to tax unless there is a specific statutory provision such as paragraph 12(1)(x) of the Act.

The factors that consider a receipt a "windfall" and not subject to tax are as follows:

(a) the taxpayer had no enforceable claim to the payment,

(b) the taxpayer made no organized effort to receive payment,

(c) the taxpayer never sought after nor solicited the payment,

(d) the taxpayer had no customary or specific expectation to receive the payment,

(e) the taxpayer had no reason to expect the payment would recur,

(f) the payment was from a source that is not a customary source of income for the taxpayer,

(g) the payment was not in consideration for or in recognition of property, services or anything else provided by the taxpayer, and

(h) the payment was not earned by the taxpayer as a result of any activity or pursuit of gain carried on by the taxpayer and was not earned in any other manner.

In the situation described, the assistance does not appear to be in respect of the acquisition or disposition of property as the farmer did not own the bridge or any of the lands that will be flooded. Accordingly, the inconvenience payment would likely not have to be reported as a capital gain nor as a reduction to the adjusted cost base of the two parcels of land.

However, we have not been given all the particular facts, and, as indicated above, we cannot provide a definitive comment with respect to the specific tax issues described herein. Should you wish to provide a copy of all relevant documentation, we would be glad to respond in the form of an advance income tax ruling.

The above comments are only expressions of opinion on the application of the Act and, as such, should not be construed as advance income tax rulings, nor are they binding on the Canada Customs and Revenue Agency.

We trust our comments are of assistance.

Your truly,

Jim Wilson
for Director
Business and Publications Division
Income Tax Rulings Directorate
Policy and Legislation Branch

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