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) Can a landowner use the $750,000 lifetime capital gains exemption for dispositions of qualified farm property to offset the capital gain realized from the disposition of a pipeline easement? (2) Where the pipeline easement is for a term of 5 or 10 years, does a subsequent pipeline easement qualify as a disposition of qualified farm property?
Position: (1) Yes. The granting of an easement or right of way by a landowner is considered to be a disposition of a part of the property in respect of which it is granted. Provided that the whole property to which the easement or right of way pertains meets the definition of "qualified farm property" under subsection 110.6(1), the landowner may be entitled to utilize the capital gains deduction under subsection 110.6(2) in respect of the easement or right of way. (2) Where a subsequent easement or right of way is granted following the expiration of the 5 or 10-year term of an earlier easement or right of way, it is a question of fact whether a subsequent payment to extend, renew or renegotiate the terms of a pipeline easement contract or right of way is on account of income or capital, and whether a disposition has occurred that would be eligible for the capital gains deduction for qualified farm property.
Reasons: Review of the legislation, interpretation bulletins and previous technical interpretations.
XXXXXXXXXX 2009-031270
T. Lanzer
(613) 946-5357
June 4, 2009
Dear XXXXXXXXXX :
Re: Payments for a Right of Way or Easement
We are writing in response to your fax of March 6, 2009, wherein you requested additional information about the comments in our letter to you dated February 17, 2009 (our reference 2008-029705) on the tax treatment of payments to a landowner for an easement or right of way over their property.
In our previous letter, we stated that, generally, the granting of an easement or right of way by a landowner is considered a disposition of a part of the property in respect of which it is granted, and a reasonable portion of the adjusted cost base ("ACB") of the whole property attributable to the part disposed of is required to be allocated to the disposition pursuant to section 43 of the Income Tax Act (the "Act"). This could result in a capital gain or loss. However, we directed your attention to paragraph 2 of Interpretation Bulletin IT-264R, Part Dispositions, dated December 29, 1980, as amended by the Special Release dated October 19, 1984, which states that the Agency will normally consider the ACB of the easement or right of way to be equal to the proceeds of disposition for granting it, provided that: (a) the area of the portion of the property in respect of which an easement or right of way was granted is not more than 20% of the area of the total property, and (b) the amount of the compensation received is not more than 20% of the amount of the adjusted cost base of the total property.
Your enquiry relates to situations where the granting of an easement or right of way will result in a capital gain. You note that each landowner is entitled to claim a $750,000 lifetime capital gains exemption for dispositions of "qualified farm property". You ask whether, in these circumstances, the landowner can allocate a nominal amount of the ACB of the entire property, or none at all, to the easement or right of way to calculate the capital gain on the disposition, and then utilize the capital gains exemption for qualified farm property.
Secondly, you enquire about the tax treatment of payments to a landowner for a pipeline easement contract where the term of the easement is for 5 or 10 years.
Our Comments
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 of an advance income tax ruling request, as described in Information Circular 70-6R5, dated May 17, 2002. The review of fact situations involving specific taxpayers and transactions or events that have already taken place is the responsibility of the local tax services office where the taxpayer resides and it is not the practice of the Canada Revenue Agency (the "Agency") to comment on such situations when the identity of the taxpayers is unknown. We can, however, provide the following general comments which we hope will be of assistance to you.
Whether or not any portion of the payments made to a landowner in respect of an easement or right of way is on account of income or capital is a question of fact that can only be determined after reviewing all of the facts in a particular situation.
Provided that the whole property to which the easement or right of way pertains meets the definition of "qualified farm property" under subsection 110.6(1), the landowner may be entitled to utilize the capital gains deduction under subsection 110.6(2) in respect of the easement or right of way. However, the landowner must allocate a reasonable portion of the ACB of the qualified farm property to the easement or right of way.
Our previous letter also referred to the Agency's position regarding the tax treatment of payments to landowners for certain surface rights set out in Interpretation Bulletin IT-200, Surface Rentals and Farming Operations, dated February 24, 1975. The Bulletin states that where the capital portion of a lease payment is compensation for property injuriously affected, damaged or destroyed, the capital portion constitutes "proceeds of disposition" within the meaning of section 54 and may result in a capital gain. Provided that the whole property meets the definition of "qualified farm property", the landowner may be entitled to use the capital gains deduction under subsection 110.6(2) in respect of a disposition of a part of that property. As noted above, the landowner must allocate a reasonable portion of the ACB of the qualified farm property to the part that is disposed.
In the case where a subsequent easement or right of way is granted following the expiration of the 5 or 10-year term of an earlier easement or right of way, it is a question of fact whether a subsequent payment to extend, renew or renegotiate the terms of a pipeline easement contract or right of way is on account of income or capital, and whether a disposition has occurred that would be eligible for the capital gains deduction for qualified farm property.
We trust that our comments, provided in accordance with paragraph 22 of Information Circular 70-6R5, will be of assistance.
Yours truly,
for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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