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.
Principal Issues: (1) Whether grant of conservation easement constitutes disposition of taxable Canadian property by non-resident?
(2) Whether a capital gain will arise if the conservation easement is given for perpetuity to a United States charity other than the Nature Conservancy?
(3) Whether a capital gain will arise if the gift of the conservation easement is described in the definition "total ecological gifts"?
Position: (1) It depends on the agreement between the grantor and the holder.
(2) It depends on whether or not subsection 110.1(3) of the Act (where the donor is a corporation) or subsection 118.1(6) of the Act (where the donor is an individual) applies. Where the US charity is not The Nature Conservancy, these subsections will not apply if the US charity is not a charitable organization outside Canada to which Her Majesty in right of Canada has made a gift during the donor's taxation year or the 12 months immediately preceding that taxation year.
(3) Subsection 110.1(5) of the Act (where the donor is a corporation) or subsection 118.1(12) of the Act (where the donor is an individual) will apply to determine the fair market value. If the gift is described in the definition "total ecological gifts", subsection 110.1(3) of the Act or subsection 118.1(6) of the Act will apply. The taxable capital gain will be 1/4 of the donor's capital gain, if any.
Reasons: (1) Terms of agreement will have to be reviewed
(2) and (3) If subsection 110.1(3) of the Act or subsection 118.1(6) of the Act applies to a particular situation, the donor designates an amount not greater than the fair market value and not less than the adjusted cost base as proceeds of disposition and as the fair market value of the gift. If subsection 110.1(3) of the Act or subsection 118.1(6) does not apply, the proceeds of disposition is equal to the fair market value pursuant to subparagraph 69(1)(b)(ii) of the Act.
XXXXXXXXXX 2004-006383
September 13, 2005
Dear XXXXXXXXXX:
Re: Conservation Easements and Capital Gains
New Brunswick "Conservation Easement Act"
We are writing in response to your letter regarding the above matter. You ask whether a disposition of Canadian real estate that is a capital property occurs where a non-resident who owns land in New Brunswick, grants a conservation easement pursuant to the New Brunswick "Conservation Easement Act" Chapter C-16.3 (the "CEA") and the prescribed Regulation 98-58 made thereunder. You also ask whether capital gains arise if a non-resident donor grants a conservation easement to a United States charity other than the Nature Conservancy and whether our conclusion would be different in the case of an ecological gift.
Written confirmation of the tax implications inherent in real transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5. However, we are prepared to provide you with the following general comments.
Disposition of Canadian real estate
Pursuant to the CEA and the prescribed Regulation 98-58 made thereunder, a "conservation easement" is a voluntary agreement entered into between the grantor of the conservation easement and the holder of the conservation easement that grants rights and privileges to the holder respecting land that relates to the purposes for which the conservation easement is granted (positive covenants) and may impose obligations on the holder, the grantor or any subsequent owner of the land (negative covenants). Subject to the CEA, a conservation easement runs with the land to which the conservation easement relates for perpetuity or a fixed term as set out in the conservation easement and is enforceable by the holder against the grantor or any subsequent owner of the land. A conservation easement has no effect under the CEA until it has been registered in accordance with the CEA and with the appropriate land registry office. Under the CEA, only certain persons described therein can be the grantor or holder of a conservation easement. As there has been no regulation to date that prescribe any person, body or group or class of persons, bodies or groups eligible to hold an interest in land, the following are the only possible donees: (a) the Crown in right of the province or agency of the Crown in right of the province, (b) the Crown in right of Canada or any agency of the Crown in right of Canada, (c) a municipality or any agency of a municipality, (d) a non-profit corporation that has as one of its primary purposes a purpose mentioned in section 3 of the CEA (which includes the conservation of ecologically sensitive land). Only an owner of land in fee simple may grant a conservation easement.
As the provisions of the CEA suggest, the agreement between the holder and grantor of a conservation easements can vary greatly. The Canada Revenue Agency (CRA) would have to review the relevant agreement to determine whether or not a partial disposition of the land has occurred in a particular case, within the meaning of the term "disposition" in subsection 248(1) of the Income Tax Act (the "Act") and may have to obtain a legal opinion as that question is mostly a question of provincial law that must be determined on a case-by-case basis. The CRA does not provide legal advice or legal opinions. However, the gift for perpetuity of a conservation easement, that qualifies as an ecological gift, as defined in the Act, by the owner of land is generally considered to be a disposition of part of real property situated in Canada.
If there is a disposition of real property situated in Canada by a non-resident of Canada, the resultant taxable capital gain, if any, would be relevant to the calculation of the non-resident's "taxable income earned in Canada" under subparagraph 115(1)(a)(iii) of the Act. A non-resident, by virtue of subsection 2(3) of the Act, is subject to tax under Part I of the Act on "taxable income earned in Canada" for the year determined in accordance with section 115 of the Act.
Section 39 of the Act provides the rules to compute the capital gain of a taxpayer. In general, a capital gain is the amount by which the proceeds of disposition of a capital property exceed the adjusted cost base immediately before the disposition and any outlays and expenses that were incurred or made by the taxpayer for the purposes of making the disposition.
With respect to your second and third questions, assuming that the particular grant of a conservation easement is a disposition of land by way of gift inter vivos by a corporation, we can say that the donation by a non-resident to a US charity (other than the Nature Conservancy) of a conservation easement would generally be expected to give rise to a taxable capital gain for the non-resident. This is because such a donation could give rise to a taxable capital gain from the disposition of a taxable Canadian property, and because the donation of a conservation easement by a non-resident corporation to a US charity would not qualify under paragraph 110.1(1)d) as an "ecological gift". To qualify, the US charity would need to be a registered charity, i.e., a charity resident in Canada. As noted earlier, taxable capital gains realized by non-residents from the disposition of taxable Canadian property (which includes real property situated in Canada) are taxable in Canada pursuant to subsection 2(3) and 115(1) of the Act.
The characterization of a donation as an ecological gift within the meaning of paragraph 110.1(1)(d) is generally beneficial for taxpayers, as explained in greater detail below. It entitles taxpayers to be taxed on the capital gain from the disposition of the property at the rate of 25% instead of 50% pursuant to paragraph 38(a.2) of the Act. In addition, a corporation that makes an ecological gift can claim a deduction for the amount of the gift in computing its taxable income under paragraph 110.1(1)(d) of the Act. Also, a corporation that donates capital property to a charity may designate a value between the adjusted cost base and the fair market value of the donated property to be treated both as the proceeds of disposition for the purpose of calculating its capital gain and the amount of the gift for the purpose of the deduction allowed for charitable donations under subsection 110.1(1) of the Act in computing taxable income if the donation is an "ecological gift".
It should be noted that a donation to a charity that is not an "ecological gift" can also qualify for a deduction in computing the taxable income of a corporation as a charitable gift pursuant to paragraph 110.1(1)(a) if it is made to one of the entities listed under paragraph 110.1(1)(a), including a charitable organization outside Canada to which
Her Majesty in Right of Canada has made a gift in the year or in the 12-month period preceding the year.
The following comments provide greater details concerning the tax consequences related to the gift of a property by an individual or a corporation.
Capital gain on a gift
For the purpose of the following comments, we assume that the grant of a conservation easement is a disposition of land by way of gift inter vivos. Where a taxpayer has disposed of anything to any person by way of gift inter vivos, the taxpayer is generally deemed to have received proceeds of disposition therefor equal to the fair market value pursuant to subparagraph 69(1)(b)(ii) of the Act. The determination of the fair market value of a property is a question of fact. However, subsection 110.1(5) (if the non-resident is a corporation) and subsection 118.1(12) (if the non-resident is an individual) of the Act provide particular rules to determine the fair market value of a gift where the gift is described in the definition "ecological gifts" in paragraph 110.1(1)(d) or in the definition "total ecological gifts" in subsection 118.1(1) of the Act. Furthermore, subsection 110.1(3) or subsection 118.1(6) may apply under certain circumstances so that the proceeds of disposition will be different than the ones provided for in subparagraph 69(1)(b)(ii). Subsection 110.1(3) of the Act provides that under certain circumstances, a corporation can designate, as proceeds of disposition of a capital property and as the fair market value of the gift for the purpose of subsection 110.1(1) of the Act, an amount not greater than the fair market value and not less than the adjusted cost base of the property. Subsection 118.1(6) is a similar provision applying to an individual. Thus, the corporation or the individual can reduce the capital gain otherwise computed.
Gift to a United States Charity
In the situation where the conservation easement is given to a US charity, the gift would not qualify as an ecological gift for the purposes of paragraph 110.1(1)(d) of the Act or subsection 118.1(1) of the Act because the donee is not a registered charity described in that definition. Therefore, the particular rules to determine the fair market value of the gift provided in subsection 110.1(5) of the Act or in subsection 118.1(12) of the Act would not apply.
The amount of the capital gain resulting from the gift to a US charity would depend on the proceeds of disposition determined under the Act. Normally, the proceeds of disposition would be the fair market value of the gift as provided in subparagraph 69(1)(b)(ii) of the Act, but a taxpayer may designate a different amount under subsection 110.1(3) of the Act or subsection 118.1(6) of the Act. For subsection 110.1(3) or subsection 118.1(6) to apply to a particular situation, the following conditions have to be met: there is a gift of a capital property, the fair market value of the capital property at the time of the gift is greater than the adjusted cost base immediately before the gift and the gift is made to a donee described in those subsections or in proposed subsection 110.1(2.1) or proposed subsection 118.1(5.4).
One of the situations where the condition relating to the donee will be met for the purpose of subsection 110.1(3) or subsection 118.1(6) is where a gift of real property situated in Canada is made by a non-resident to a prescribed donee who provides an undertaking, in a form satisfactory to the Minister, to the effect that the property will be held for use in the public interest. The Nature Conservancy, a charity established in the United States, is a prescribed donee pursuant to section 3504 of the Income Tax Regulations.
In the case of a gift to a US charity other than The Nature Conservancy, the condition relating to the donee will be met for the purpose of subsection 110.1(3) or subsection 118.1(6) only if the US charity is a charitable organization outside Canada to which Her Majesty in right of Canada has made a gift during the donor's taxation year or the 12 months immediately preceding that taxation year.
The taxable capital gain resulting from the gift to a US charity, if any, would be 1/2 of the donor's capital gain under paragraph 38(a) of the Act.
Ecological gift
In order to qualify as an 'ecological gift' under the definition "total ecological gifts" in subsection 118.1(1) of the Act or for purposes of computing the donor's taxable income under paragraph 110.1(1)(d) of the Act, the subject matter must be land including a servitude for the use and benefit of a dominant land, a covenant or an easement, that is certified by the Minister of the Environment, or a person designated by that Minister, to be ecologically sensitive land the conservation and protection of which is, in the opinion of the Minister, or that person, important to the preservation of Canada's environmental heritage. Additionally, the beneficiary of the gift must be Her Majesty in right of Canada
or a province or a municipality in Canada, or a registered charity that, in the opinion of the Minister of the Environment has as one of its main purposes the conservation and protection of Canada's environmental heritage, and that has been approved by that Minister or a person designated by that Minister in respect of the particular gift. Subsection 248(1) defines "registered charity" in part to mean a "charitable organization, private foundation or public foundation" as defined in subsection 149.1(1) that is resident in Canada and was created or established in Canada.
In a situation where the gift of the conservation easement is described in the definition "total ecological gifts", the fair market value would be determined pursuant to subsection 110.1(5) of the Act or to subsection 118.1(12) of the Act. Considering that the gift is a capital property, subsections 110.1(3) of the Act or subsection 118.1(6) of the Act would apply in that situation if the fair market value is greater than the adjusted cost base.
In a situation where the gift of the conservation easement is described in paragraph 110.1(1)(d) of the Act or in the definition "total ecological gifts" in subsection 118.1(1) of the Act and where the donation is to a qualified donee (as defined in subsection 149.1(1) of the Act) but not a private foundation, the taxable capital gain resulting from the gift, if any, would be 1/4 of the donor's capital gain pursuant to paragraph 38(a.2) of the Act.
We trust the above has been of some assistance and we sincerely regret the delay in responding.
Yours truly,
Alain Godin, Manager
for Director
International and Trusts Division
Income Tax Rulings Directorate
Policy and Planning Branch
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