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:
Whether compensation for expropriated land is taxable.
Position: Yes.
Reasons:
It is considered to be a partial disposition. Additional compensation for damages may be income or capital receipts, depending on the circumstances.
961654
XXXXXXXXXX A. Seidel
(613) 957-8974
Attention: XXXXXXXXXX
June 11, 1996
Dear Sirs:
Re: Compensation to Property Owners
This is in reply to your letter dated April 23, 1996, requesting confirmation of your view that compensation paid by XXXXXXXXXX for right-of-way easements is not a benefit to property owners and therefore not taxable.
The situation described in your letter appears to relate to specific taxpayers and actual fact situations. To the extent that you require assistance in determining the current tax status of the taxpayers involved, you should contact your local Taxation Services Office. To the extent that you require confirmation of the tax consequences of proposed transactions, we bring to your attention Information Circular 70-6R2 ("IC 70-6R2") dated September 28, 1990, and the Special Release thereto dated September 30, 1992, issued by Revenue Canada. Confirmation with respect to proposed transactions involving specific taxpayers should be the subject of a request for an advance income tax ruling. If you wish to obtain an advance income tax ruling for particular taxpayers with respect to specific contemplated transactions, a written request for an advance income tax ruling should be submitted in accordance with the Information Circular. Nevertheless, we can provide you with the following general comments with respect to the compensation paid by XXXXXXXXXX.
We do not share your view that the compensation received from XXXXXXXXXX by property owners is not taxable.
Generally, in the situation where an expropriation results in land of a taxpayer becoming the property of XXXXXXXXXX pursuant to the provisions of the Expropriation Act of XXXXXXXXXX Revenue Canada's views as to the resultant tax consequences to the taxpayer are discussed in Interpretation Bulletin IT-271R ("IT-271R"), a copy of which is attached. Subsections 44(1) and 13(4) of the Income Tax Act (the "Act") provide special rules designed to reduce or eliminate immediate taxation which would otherwise result from the taxpayer's disposition of the land. This is described in more detail in IT-271R.
In the situation where XXXXXXXXXX is not acquiring the property but is paying compensation to a taxpayer for the acquisition of an easement or right-of-way, the compensation received by the property owner/taxpayer may be taxable as either income or as a capital receipt, depending on the taxpayer's circumstances.
Generally, the granting of an easement or a public right-of-way is considered a disposition of property and a reasonable portion of the adjusted cost base of the whole property attributable to the part disposed of is required to be allocated to the disposition. A resulting gain or loss would occur. Interpretation Bulletin IT-264R, dated December 29, 1980, and the special release thereto dated October 19, 1984, (a copy of each is attached) discuss partial dispositions of property. As discussed in paragraph 2, if no more than 20% of the total area of the property is expropriated or an easement or right-of-way is granted, and the amount of the compensation received is not more than 20% of the amount of the adjusted cost base of the total property, an amount of the adjusted cost base of the entire property equal to the amount received as compensation for the expropriation, easement, or right-of-way would be permitted as being attributable to the portion of the property that is disposed of.
Generally, payments received as compensation for damage to crops and/or compensation for additional costs and/or losses to a property owner who carries on farming operations around structures situated on the owner's property by XXXXXXXXXX would be included in computing the property owner's income from the farming operations. Compensation received for damage to fences and buildings would generally be capital in nature and therefore reduce the undepreciated capital cost of these assets.
These comments are provided in accordance with the guidelines set out in paragraph 21 of IC 70-6R2 and are therefore not binding on Revenue Canada.
Yours truly,
for Director
Resources, Partnerships and Trusts Division
Income Tax Rulings and Interpretations Directorate
Policy and Legislation Branch
Attachments
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