2 July 1990 Income Tax Severed Letter 901079 - [900702]

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.

JUL 5 1990

901079 W. C. Bailey 957-2061

Attention:

July 2, 1990

Dear Sirs:

This will reply to your letter of June 7, 1990 requesting our views on the tax consequences to a Canadian farmer of the receipt of proceeds from the granting of a right of access and easement to his vineyard and the receipt of consideration for permanent damages to his vineyard as a result of an underground gas pipeline constructed under the right of way.

In respect of the permanent damages to the land, it would be our view that the proceeds would be a capital receipt in respect to the disposition of land under either of subparagraphs 54(h)(v) or (vi).

With respect to the proceeds for the granting of the right of access and easement, it would seem reasonable to assume that the proceeds would be a disposition of eligible capital property as contemplated under subparagraph 14(5)(a)(iv). Applying the "mirror image" test in clause 14(5)(a)(iv)(A), if the farmer himself had acquired the right of access and easement it would have been an eligible capital expenditure to him (see paragraph 29 of IT-143R2 ). Therefore the consideration received by him for the right of access and easement would be an amount described in subparagraph 14(5)(a)(iv). As a result, any credit balance in the cumulative eligible capital account at the end of the taxation year would be taxable under subsection 14(1), and any portion thereof that does not represent deductions under paragraph 20(1)(b) in prior years (as per subparagraph 14(5)(a)(v)) would be deemed to be a taxable capital gain of the taxpayer from a disposition of capital property in the year pursuant to subparagraph 14(1)(a)(v), to which section 110.6(2) would apply.

You have inquired whether the deemed capital gain would be eligible under subsection 110.6(2) for the increased deduction in respect of qualified farm property. Qualified farm property, as defined in subsection 110.6(1), includes eligible capital property, so the deemed capital gain under subparagraph 14(1)(a)(v) will qualify for the increased deduction under subsection 110.6(2) provided the farmer meets the requirements and conditions set out in paragraph (d) of the definition. While the right of access and easement will technically be created on its granting, we would concede that the farmer has owned the right for as long as he has owned the property for purposes of the required conditions in subparagraphs (a)(vi) or (vii) of the definition.

These comments represent our opinion of the law as it generally applies. However, this opinion is not a ruling and, accordingly, it is not binding on the Department.

Yours sincerely,

Original Signed by Original signé par E. M. WHEELER For Director Business and General Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch