7 December 1981 Income Tax Severed Letter

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.

REVENUE CANADA TAXATION    MEMORANDUM    REVENUE CANADA IMPÔT

DATE: December 7, 1981

TO/À EDMONTON DISTRICT OFFICE J.K. O'Hara, Chief Basic Files Section

FROM/DE HEAD OFFICE
        Corporate Ruling
        Directorate
        D.J. Agopsowicz
        593-6201

ATTENTION Gene Kindrachuk

RE: Right of Way and Easement Costs -------------------------------

This is in reply to your memo dated August 14, 1981 with respect to the submission by XXXX on behalf of the above company.

Property generally referred to as land is a bundle of corporal and incorporal property, i.e., tangible and intangible. At least some of the intangible property interests inherent in land can be separated from the tangible property interests . . . as in the case of easements. Therefore, the granting of an easement is a disposition of a part (an intangible part) of the property in respect of which it is granted, as stated in IT-264R , dated December 29, 1980.

Incidentally, the foregoing position is not inconsistent with the U.S. view of easements. While the tax treatment differs as between Canada and the U.S. it is simply for the reason that the tax legislations differ. U.S. court cases . . . Southern Natural Gas Co. (Ct. Cls), 412 F2d 1222 (69-2 USTC #9473) and in greater detail . . . Panhandle Eastern Pipe Line Co. (Ct. Cls.), 408 F2d.690 (69-1 USTC #9276) regard easements as intangible property. The provisions of the Internal Revenue Code allow depreciation on the cost of easements as such, and not as part of the cost of the pipeline. In Canada, depreciation on intangible property is allowed . . . Class 14 . . . but the cost of easements is not provided for in Class 14.

This Directorate over the years has followed the position outlined above. A current review of the matter was made by our Publications Division in its preparation of IT-482 - Capital Cost Allowance - Pipelines, dated November 30, 1981 and our position was confirmed. Although the bulletin does not mention right of way and easement costs, its exclusion is because of the fact that such cost is not a cost of the pipeline.

In conclusion, thu cost of easements may qualify as eligible capital expenditures because they are not excluded by subparagraphs 14(5)(b)(ii) or (iii) and are an exception to the items excluded under subparagraph 14(5)(b)(i). That is to say, since they are not deductions in computing income by virtue of paragraph 18(1)(b) and since they otherwise meet the requirements of paragraph 14(5)(b), they may qualify as eligible capital expenditures under the Act. In this case, as the expenditure meets the broad requirement under paragraph 14(5)(b) (see also paragraph 2 of IT-143R ), it is our opinion that the cost of the easement is an eligible capital expenditure.

Chief Mines, Oil & Forest Industries Section Specialty Corporations Rulings Division Corporate Rulings Directorate Legislation Branch