CRA discusses the treatment of additional government compensation paid to owners who had consensually sold a portion of their lands to the government

A governmental authority was to acquire a number of residential, commercial, forestry, agricultural and undeveloped properties for a construction project for negotiated purchase prices, and also would agree to pay the owners additional compensation for losses sustained by them from the sale. CRA comments included:

• Compensation received for loss of value to (capital property) lands retained by the owners could be compensation in respect of injuriously affected property and, therefore, could be “proceeds of disposition” pursuant to para. (e) of the definition, in which case a reasonable portion of the ACB of the remainder would be required to be allocated to the disposed of portion pursuant to s. 43(1).
• Compensation received for expenses incurred for the purpose of earning income from the taxpayer's business or property (e.g., compensation for the time taken to restore the remainder or for clearing or levelling the land or installing a drainage system) would be included in computing income pursuant to s. 12(1)(x), except to the extent an election was made pursuant to s. 12(2.2) respecting a related expenditure.
• Although compensation for damage to property that, within a reasonable time after the damage occurred, has been expended to repair the damage is excluded from “proceeds of disposition” pursuant to para. (f) of the definitions in ss. 54 and 13(21), such compensation could be included in income pursuant to s. 12(1)(f) - and expenses made or incurred to repair damage to depreciable property (e.g., to fences) would be deducted in computing income.

Neal Armstrong. Summaries of 16 July 2020 Internal T.I. 2019-0817271I7 F under s. 54 – proceeds of disposition – (e), s. 12(1)(x) and s. 12(1)(f).