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: Tax treatment of costs paid towards the construction of an irrigation pipe on land owned by the farmer, but the farmer does not acquire title to the pipe.
Position: The cost will be deductible under paragraph 20(1)(ee) in the year paid.
Reasons: Meets the requirements of that provision.
2004-008415
XXXXXXXXXX Catherine Bowen
(613) 957-8284
February 18, 2005
Dear XXXXXXXXXX:
Re: Irrigation Pipelines
This is in response to your letter dated June 30, 2004 wherein you requested our comments on the income tax treatment of costs paid to southern Alberta Irrigation Districts by dry land farmers to have a pressurized underground pipeline run across their land, with a secondary pipeline off the main pipeline to take water to the middle section of their land, so that an irrigation pivot can be utilized to irrigate the land. We apologize for the delay in our response.
The above project was established to increase irrigated farmland in southern Alberta and is jointly funded by the federal government, Alberta government and the farm users throughout the Irrigation Districts in Alberta (e.g., the Lethbridge Northern Irrigation District). A farmer's share of the cost of the pipeline can vary, but has been known to be $300/acre with payment in stages over 2.5 to 3 years. A farmer does not own the pipeline that is constructed, the Irrigation District does. The Irrigation District is also responsible for the upkeep and repairs to the pipeline and this is funded from the water rates charged to the farmer by the Irrigation District based on the farmer's actual water use. These payments are regular payments over and above the original cost to install the pipeline. Costs associated with individual irrigation systems, such as sprinkler systems, energy requirements, mainline pumps, and a central pumping station, are not part of the project and are the responsibility of the farmer.
In order to lay and construct the pipelines on a farmer's land and have access to them, an Irrigation District usually acquires an easement interest in the land. The farmer obtains the right to, among other things, deliver and drain the water from the pipeline across the farmer's land.
Written confirmation of the income 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 income tax ruling request as described in Information Circular IC 70-6R5, Advance Income Tax Rulings, dated May 17, 2002 issued by the Canada Revenue Agency. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. Although we cannot provide any comments with respect to the specific situation described in your letter, the following general comments may be of assistance.
The rights, powers and obligations of the Irrigation Districts in Alberta are contained in the Irrigation Districts Act and the Irrigation Districts Amendment Act of Alberta. In summary, each district has a board of directors responsible for the operation, maintenance and administration of the irrigation works of the district. Each Irrigation District owns an extensive system of irrigation works and rights of way and operates those as permitted by licence. It may construct, operate, maintain and replace irrigation works as well as repair, extend, dismantle or abandon any irrigation works. It also carries on the function of a supplier of water for irrigation purposes and is responsible for the supply and distribution of water to water users of the district in accordance with its by-laws.
Where an amount is paid by a taxpayer (e.g., a farmer) to an Irrigation District in Alberta for the purpose of having pipes constructed or installed by that Irrigation District on farm land owned by the taxpayer in order to provide water for irrigation to that land, and
? the taxpayer does not acquire title to that pipe;
? the amount paid is not consideration for the water to be supplied;
? the water will be supplied by that Irrigation District; and
? the farm land is used by the taxpayer in a farming business;
it is our opinion that such an amount will be deductible to the taxpayer under paragraph 20(1)(ee) of the Income Tax Act in the year it is paid. This position is consistent with the comments made in paragraph 10 of Interpretation Bulletin IT-482R, Pipelines.
Our comments are provided in accordance with the practice outlined in paragraph 22 of Information Circular IC 70-6R5. We trust our comments are of assistance.
Yours truly,
for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Policy and Planning Branch
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