Principal Issues: What is the tax treatment of cash paid to farmers for carbon credits?
Position: Business Income.
Reasons: Sections 9 and 28.
2007-023209 XXXXXXXXXX Shelley Lewis (613) 957-2118 May 24, 2007
Dear XXXXXXXXXX:
Re: Carbon Credits paid to farmers
This is in response to your correspondence of April 19, 2007, and is further to our recent telephone conversation (Lewis/XXXXXXXXXX), concerning farmers' carbon credits.
We understand the situation to be the following:
A farmer may earn carbon credits by reducing greenhouse gas emissions (GGE) by employing certain farming practices. Generally speaking, carbon credits represent the right to emit a specified amount of GGE. Carbon credits are valuable and can be traded. A business that emits GGE above its quota can buy carbon credits for its excess emissions and a business that produces GGE below its quota can sell its carbon credits. Carbon credits can be bought and sold between businesses or in a market such as the Chicago Climate Exchange and the European Climate Exchange.
Your question concerns the tax treatment of the amount a farmer receives from the sale of carbon credits generated in his or her farming activities.
Our Comments
The situation outlined in your letter appears to relate to a factual one, involving a specific taxpayer. It is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advanced income tax ruling. For more information about how to obtain a ruling, please refer to Information Circular 70-6R5, "Advanced Income Tax Rulings, dated May 17, 2002. This Information Circular and other CRA publications can be accessed on the Internet at http://www.cra-arc.gc.ca. Should your situation involve a specific taxpayer and a completed transaction, you should submit all relevant facts and documentation to the appropriate Tax Services Office ("TSO") for their views. A list of TSOs is available on the "Contact Us" page of the CRA website. Although we cannot comment on your specific situation, we are prepared to provide the following general comments, which may be of assistance.
Determining the tax treatment of amounts received by a taxpayer from transactions involving carbon credits would require a review of all the contractual documents and circumstances surrounding the taxpayer's situation.
In a situation where a farmer earns carbon credits, for example, by implementing a farming practice of no tilling and direct seeding, incidental revenue from the sale of these carbon credits would generally constitute income from the farmer's farming business. The incidental revenue will be included in the calculation of the profit or loss from the farming business under section 9 of the Income Tax Act (the "Act"), in accordance with ordinary commercial accounting and business practices and, if the farmer so elects, section 28 (cash basis) of the Act.
If a taxpayer receives an amount as assistance or inducement from a government or other public authority under a program to reduce GGE in respect of the taxpayer's farming business, the tax treatment of such assistance or inducement would generally depend on the details of the program and the purpose and conditions for receiving the assistance or inducement. Generally speaking, the assistance or inducement may reduce the cost of property acquired or expense incurred or may be included in computing income from a business or property. More information on the tax treatment of assistance and inducements can be found in Interpretation Bulletin IT 273R2, Government Assistance - General Comments, which is available on the Internet at www.cra-arc.gc.ca.
We trust that these comments will be of assistance.
Yours truly,
S. Parnanzone
For Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch