11 June 1998 External T.I. 9730105 - RESTRICTIVE COVENANT ON ECOLOGICAL LAND

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

1- Can a donation receipt be issued by a registered charity in respect of property, a restrictive covenant on ecologically sensitive land, received pursuant to an agreement with a land owner.

2 - How are the components to a capital gain determined with respect to such a transfer (i.e., the adjusted cost base and proceeds of disposition of the restrictive covenant)?

3 - Is the restrictive covenant a taxable Canadian property?

Position:

1 - Yes

2 - The cost of the restrictive covenant is nil or nominal. The deemed proceeds of disposition is the fair market value of the restrictive covenant.

3 - Yes

Reasons:

1 - Providing the transfer of the restricted covenant was made without valuable consideration there would be a gift and a receipt may be issued for the deemed fair market value set out in proposed subsection 110.1(4) or 118.1(12) of the Act.

2 - Since the property comes into existence at the time of the agreement there is likely no cost or a nominal cost. Paragraph 69(1)(b) of the Act applies so the taxpayer is deemed to have received proceeds of disposition equal to the fmv of the restricted covenant at the time of the transfer. Subsection 110.1(4) or 118.1(12) does not apply for this purpose.

3 - The expression “an interest in real property situated in Canada” is sufficiently broad to include a restrictive covenant on such real property. Subsection 248(4) of the Act does not exclude restrictive covenants from "an interest in real property".

XXXXXXXXXX 	973010
		.E. Grisé

Attention: XXXXXXXXXX   

June 11, 1998

Dear Sirs:

Re: Development Rights

This is in reply to your letters of November 4, 1997 and May 14, 1998 requesting a technical interpretation of how some sections of the Income Tax Act (the “Act”) will apply to restricting development rights on land by means of a restrictive covenant.

You describe a situation where an individual or corporation owner (the “land owner”) of ecologically sensitive land (as certified by the Minister of the Environment, or a person designated by that Minister) expresses interest in donating "development rights" in relation to the land owned. The land owner and a registered charity (the “land trust”) described in paragraph (b) of the definition "total ecological gifts" in subsection 118.1(1) of the Act will enter into an agreement whereby the land owner will grant certain rights, privileges and interest respecting the ecologically sensitive land by way of restrictive covenants to be registered in a registry of deeds as an encumbrance against such land. This agreement restricts the development of the land in perpetuity.

Subsection 10(1) of the Heritage Places Protections Act of Prince Edward Island (the “Heritage Act”) permits the land trust to enter into such an agreement. Subsection 10(2) of the Heritage Act, states that subsections 11(3) to (7) of the Museum Act of Prince Edward Island apply to a covenant entered into pursuant to subsection 10(1) of the Heritage Act. Subsection 11(4) of the Museum Act deals with the registration of the covenant while subsection 10(4) states that the agreement shall run with the real property and such an agreement may be enforced against the owner or any subsequent owners of the real property.

The definition of "total ecological gifts" of an individual in subsection 118.1(1) of the Act refers to the fair market value of a gift of land, including a servitude for the use and benefit of a dominant land, a covenant or an easement, that is certified to be ecological sensitive land. Paragraph 110.1(1)(d) of the Act provides a similar provision for a corporation. Accordingly, the above provisions could apply providing that the transfer of the property, the restrictive covenant, by the land owner to the land trust is a gift (i.e., is a voluntary transfer of the individual’s or the corporation’s property without valuable consideration).

The land trust that receives such a gift would be entitled to issue an official donation receipt equal to the fair market value of the property received. Providing that Bill C-28 as passed by the House of Commons on April 21, 1998 is enacted, the fair market value of a gift of a covenant will be (for purposes of section 207.31, the definition of “total ecological gifts” in subsection 118.1(1) and for the purpose of paragraph 110.1(d)) deemed to be the greater of its fair market value otherwise determined and the amount by which the fair market value of the ecological sensitive land is reduced as a result of the making of the gift. In this respect, please refer to proposed subsections 110.1(5) and 118.1(12) of the Act.

In our view, since the property to be donated by the land owner is created when the restrictive covenant is granted to the land trust, the cost to the land owner would either be nil or, at most, a nominal amount. Pursuant to paragraph 69(1)(b) of the Act, the land owner would be deemed to have received proceeds of disposition for the restrictive covenant equal to the fair market value of the covenant at the time of the disposition by gift. Subject to subsections 110.1(3) and 118.1(6) of the Act, such cost and proceeds of disposition would be used for the purpose of determining the land owner’s capital gain under subsection 40(1) of the Act. The deemed fair market value rules in proposed subsections 110.1(5) and 118.1(12) of the Act will not apply in determining the proceeds of disposition of the gift.

In our view, a restrictive covenant on a Canadian ecological sensitive land is an interest in real property situated in Canada and as such would be a taxable Canadian property defined in paragraph 115(1)(b) of the Act and expanded upon in subsection 115(3) of the Act. Accordingly, subsections 116(5) and (5.1) of the Act would apply to a Canadian resident who acquires such a restrictive covenant from a non-resident of Canada. Again, the deemed fair market rules in proposed subsections 110.1(5) and 118.1(12) of the Act would not apply in determining the cost to the Canadian resident of the property so acquired by gift.

We hope our comments are helpful.

Yours truly,

Jim Wilson
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch