7 May 2014 Internal T.I. 2014-0528251I7 - Surface Rentals for Wind Farms

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 income received from a wind farm developer by a self-employed farmer for the lease of the farmer's land is considered incidental farming income or a separate source of income.

Position: Question of fact.

Reasons: Whether or not income from non-farming activities could be regarded as farming income would generally depend on whether the other activities are incidental to the farming operations or are, in fact, a separate business.

May 07, 2014

Taxpayer Services Directorate HEADQUARTERS
Business Programs Section Income Tax Rulings
Field Support and Communications Directorate
750 Heron Road, Canada Post Place, E07-2006 T. Posadovsky
Ottawa ON K1A 0L5
Attention: Hanna Barysenka
2014-052825

Surface Rental of Farmer's Property for Wind Farm

We are writing in response to your email of April 15, 2014, with which you forwarded an email inquiry you received from Ms. Jacqueline Kosichek, a Senior Business Enquiries Agent with the Toronto East Tax Services Office concerning the tax treatment of rental income received by a self-employed farmer.

Specifically, Ms. Kosichek wishes to know whether income received by the farmer for the rental of land to a wind farm developer for the purpose of constructing and operating a wind farm would be properly included in farming income for the purposes of the Income Tax Act (the "Act").

Background

Guide T4003, Farming Income (the "T4003 Guide"), states that if a farmer rents out his or her land (such as for sharecropping), the Canada Revenue Agency considers the payments received, whether in kind or cash, to be rental income for tax purposes. However, payments on income account for leasing farmland for petroleum or natural gas exploration, such as land rental, severance, or inconvenience from a surface rental agreement, is included in the taxpayer's income from farming. Ms. Kosichek reports that based on the above, many farmers are similarly including rental payments received from wind farm developers as incidental farming income on their T2042 Statement of Farming Activities.

Our Comments

It is our understanding that wind turbines convert kinetic energy from the wind into electrical energy. Such turbines may be employed individually, but are often placed in groups to form "wind farms". An essential part of the project development of a new wind farm involves the acquisition of the land on which to place the turbines that has both favourable weather patterns and that is in proximity to existing electrical grids. Where a wind farm developer cannot purchase the land, it will negotiate and enter into a lease agreement to obtain certain surface rights from the landowner. For greater certainty, the business of generating electricity from a "wind farm" does not meet the definition of "farming" in subsection 248(1) of the Act. Compensation received by the landowner in return for surface rights varies from lease to lease and is generally dependent on a number of factors. However, landowners will often receive payments for the value of the land leased as well as for severance, adverse effect, nuisance and inconvenience, crop loss and loss of use. As explained in Interpretation Bulletin IT-200, Surface Rentals and Farming ("IT-200"), amounts paid to landowners in return for the surface rights to a property will be either on income or capital receipt. In general, recurring payments received from the rental of land being used for petroleum or natural gas exploration constitutes income under subsection 9(1) of the Act. Paragraph 4 of IT-200 states that any income payments to a farmer actively engaged in farming the land, part of which is the subject of the lease, and including payments in respect of damaged crops, is considered income from the business of farming. Alternatively, paragraph 2 explains that any compensation received for property injuriously affected, damaged or destroyed, constitutes "proceeds of disposition" within the meaning of paragraph 54(h) of the Act and may result in a capital gain or loss, as the case may be.

In response to your inquiry, it is our view that where a taxpayer is actively involved in a farming business and also derives income from other activities that, if considered alone, would not constitute "farming", whether or not the income from the other activities can be included in the taxpayer's farming income generally depends on whether the other activities are considered to be incidental to the taxpayer's farming operations, or are, in fact, a separate business. If the other activities constitute a separate business, the income from these activities would not be included in the taxpayer's farming income. Please refer to paragraph 7 of Interpretation Bulletin IT-433R, Farming or Fishing – Use of Cash Method.

The determination of whether income received from a wind farm developer is incidental to the taxpayer's farming activities is ultimately a question of fact that can only be determined on a case-by-case basis. The expression "incidental" implies a subordinate relationship or "having a minor role in relation to". Factors that may be relevant in the determination of whether particular activities are incidental to the farming operation would include the quantum of income generated, the scale of operations and the relative capital or labour invested in the non-farming activity.

We hope that these comments will be helpful.

Michael Cooke, C.P.A., C.A.
Manager
Business Income and Capital Transaction Section
Business and Employment Division
Income Tax Rulings Directorate