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: Whether an amount received as compensation is taxable as ordinary income under the Act, or whether it is included in the calculation of the capital gain on the disposition of the farmland.
Position: Question of fact
Reasons: On the basis that the farmland disposed of is on account of capital, the compensation received is part of the proceeds of disposition as defined in section 54 and therefore, is included in the calculation of the capital gain resulting from the disposition.
XXXXXXXXXX 2004-006741
Kathryn McCarthy, CA
June 17, 2004
Dear XXXXXXXXX ,
Re: Compensation for Land Injuriously Affected
We are writing in response to your letter of March 9, 2004, concerning the above-noted issue.
You described a situation in which you sold farmland for less than its fair market value because it is beside a landfill site. The owner of the landfill site agreed to compensate you for the difference between the proceeds of disposition that you received and the fair market value of the farmland. You inquired whether this amount received as compensation is taxable as ordinary income under the Income Tax Act (the Act), or whether it is included in the calculation of the capital gain on the disposition of the farmland.
Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. We are, however, prepared to provide the following comments.
Generally, when a taxpayer receives a compensation payment it is either a capital or an income receipt for income tax purposes. Interpretation Bulletin IT-365R2, Damages, settlements, and similar receipts, discusses the income tax treatment of compensation payments from the point of view of the recipient. Paragraph 8 states that "if the receipt relates to the loss of an income-producing asset, it will be considered to be a capital receipt; on the other hand, if it is compensation for the loss of income, it will constitute business income."
The income tax treatment of compensation received is always a question of fact, which can only be determined after a careful examination of the particular situation. However, on the basis that the farmland you disposed of is on account of capital, we are of the view that the compensation received is part of the proceeds of disposition as defined in section 54 of the Act and therefore, is included in the calculation of the capital gain resulting from the disposition.
The publications described herein are available on our website at www.cra-arc.gc.ca. We trust our comments will be of assistance to you.
Yours truly,
Randy Hewlett, B. Comm.
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Planning Branch
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