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 the donation of a conservation easement by a landowner would be considered a gift for tax purposes?
Position: Question of fact. Provided general comments.
Reasons: See below.
XXXXXXXXXX
2013-051325
March 4, 2014
Dear XXXXXXXXXX:
Re: Conservation Easement
This is in response to your letter dated November 18, 2013, in which you ask whether the donation of a conservation easement by a landowner in a particular situation would be considered a gift for the purposes of the Income Tax Act (the "Act").
You advise that the province of Nova Scotia has a policy of no net loss for wetlands. Under this policy, approval from the provincial government must be obtained before wetland can be altered and compensation by restoring, enhancing or creating wetland is required for the lost wetland. There is the option of transferring the compensation obligation to a suitably qualified consultant and the consultant then assumes the wetland restoration/creation obligation. In discharging this obligation, the consultant would identify former wetlands that have been ditched and drained for agricultural purposes and approach the landowners to enquire if they are willing for their land to be restored back to a functioning wetland. The consultant would then design and undertake the wetland restoration. In voluntarily providing land for restoration, the landowner is forgoing future agricultural production on the property, with a conservation easement signed and registered with the property deed. You note that this would result in a decline in the fair market value of the property. If the conservation easement is transferred by the landowner to a provincial body or a registered charity, your question is whether the landowner would be considered to have made a gift for tax purposes. If so, an application will be made to the Minister of the Environment to have the gift of the easement certified as ecologically sensitive land.
This technical interpretation provides general comments about the provisions of the Income Tax Act (the "Act"). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings.
Our comments
Sections 118.1 and 110.1 of the Act provide that within specified limits, and if supported by official receipts, individual taxpayers may claim a credit against taxes payable and corporations may claim a deduction in computing taxable income, respectively, for the eligible amount of a gift made to a qualified donee.
The term "gift" is not defined in the Act and therefore assumes its common law meaning. Under common law, a bona fide gift is a voluntary transfer of property from a donor, who must freely dispose of his or her property, to a donee, who receives the property given with no right, privilege, material benefit or advantage conferred on the donor or any person designated by the donor in exchange for the donor making the gift. Subsections 248(30) to (32) of the Act allow for the recognition of a gift for tax purposes in certain situations where a donor, or a person or partnership who does not deal at arm's length with the donor, receives consideration or other advantages for the property transferred. Pursuant to subsection 248(31) of the Act, the eligible amount of a gift is the excess of the fair market value of the property transferred to a qualified donee over the amount of the advantage provided. A "qualified donee" is defined in subsection 149.1(1) of the Act and includes a registered charity as well as a province.
For a donation of land (including a covenant or an easement to which land is subject or, in the case of land in the province of Quebec, a real servitude) to qualify as an ecological gift within the meaning of subsection 118.1(1) and paragraph 110.1(1)(d) of the Act, the gift must be made to:
- Her Majesty in right of Canada or of a province,
- a municipality in Canada,
- a municipal or public body performing a function of government in Canada, or
- a registered charity one of the main purposes of which is, in the opinion of the Minister of the Environment, the conservation and protection of Canada's environmental heritage, and that is approved by that Minister in respect of the gift.
Further, the land must be certified by the Minister of the Environment to be ecologically sensitive land, the conservation and protection of which is, in the opinion of that Minister, important to the preservation of Canada's environment heritage. The Minister of the Environment also determines the fair market value of the land. Pursuant to subsections 110.1(5) and 118.1(12) of the Act, where the gift is a servitude, covenant or easement to which land is subject, the fair market value of the gift is deemed to be the greater of:
- the fair market value otherwise determined of the gift; or
- the amount by which the fair market value of the land is reduced as a result of the making of the gift.
Unlike other charitable gifts, there is no limit to the eligible amount of ecological gifts in a year that is eligible for a tax credit or deduction in computing taxable income. However, as with other charitable gifts, amounts not claimed for a year may be carried forward for up to five years. We note that Budget 2014 proposes to extend to ten years the carry-forward period for donations of ecologically sensitive land. This measure will apply to donations made on or after February 11, 2014.
Where a capital gain results from the donation of ecologically sensitive land to eligible qualified donees (as listed above), paragraph 38(a.2) of the Act provides that no portion of the capital gain is included in computing a taxpayer's taxable capital gains.
It is a question of fact whether a gift has been made to a qualified donee in a particular situation and whether there is any advantage associated with the gift. In the situation described, it would be necessary to review the terms and conditions of the agreement between the party transferring the compensation obligation and the consultant accepting the obligation, the conservation agreement between the landowner and the eligible recipient as well as any other relevant documents in connection with this arrangement. Further, since some provinces have legislation governing the creation of conservation easements, provincial legislation may need to be considered.
We would add that the Canada Revenue Agency generally does not recognize temporary transfers of property as gifts and a frequent consideration in determining whether a gift has occurred is whether the subject of the gift could revert to the donor. In this regard, we have taken the view that a gift of land only occurs in circumstances where a real property interest is permanently granted to the donee. Accordingly, it is our view that a conservation interest created for a specified term is not a gift of land within the meaning of an ecological gift in subsection 118.1(1) and paragraph 110.1(1)(d) of the Act.
As noted above, if you wish to apply for an advance income ruling with respect to your particular situation, you should provide us with all of the relevant details and documentation.
We trust these comments are of assistance.
Yours truly,
Jenie Leigh
Section Manager
for Division Director
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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