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R. B. Day (613) 957-2136
APR 28 1989
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We are writing in reply to your letter of March 6, 1989, wherein you requested our views as to whether a disposition of property, as defined in paragraph 54(c) of the Income Tax Act, for purposes of computing taxable capital gains and losses is also relevant for claiming the capital gains exemption under section 110.6.
In certain situations there may, in your view, be some uncertainty at law as to whether a "disposition" has taken place where the extended definition of section 54 is not applicable. In your practice, it is common for your farm clients to receive compensation from oil companies for easements over their property. As well, a large dam project is now under construction in your area and it is also common to see payments for damages to land which has been injuriously affected by the dam construction. Often, however, title to the land does not pass, nor are the incidents of title present, such as possession, use and risk. Rather, the land is left with the taxpayer farmer but in a damaged state, perhaps because the site has been used for a land-fill, or perhaps because the flood plain extends onto the land. In such situations, when damages are paid, it is your view that a "disposition" has taken place for purposes of the capital gains provision as provided in paragraph 54(c) read in conjunction with subparagraph 54(h)(v) and as confirmed by IT-264R . However, since these definitions are limited in their application to subdivision c, you are requesting our views as to whether such dispositions, as contemplated within section 54, may also be considered dispositions of farm land, as contemplated by section 110.6. You are primarily interested in compensation received for damages or injurious affection to farm land so that you may advise your clients with greater assurance.
The granting of an easement or a public right-of-way is considered a disposal 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 disposal. A resulting capital gain or loss will occur. Generally, where a capital gain results and the taxpayer is an individual, he will be allowed to utilize his lifetime capital gain exemption up to the extent available in that year and not previously deducted in a prior year. Administratively, however, if no more than 20% of the total area of the property is expropriated or in respect of which 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, we will allow a reduction to the entire adjusted cost base of the property, easement, or right-of-way.
As we understand it, "injurious affection" relates to amounts paid to land owners to compensate them for the decrease in value of their remaining property, caused by a previous expropriation. Although there does not appear to be an expropriation, as such, in this situation where a distinct payment for injurious affection is received, it is our view that a part disposition of the residual land is considered to have been made. As a result, our previous comments regarding easements and rights-of-way would have equal application in this situation.
If an amount is received as an additional allowance to compensate for disturbance of the over-all farm operations in current and future years, such compensation would not, in our view, be with respect to a disposition or part disposition of the property. However, it involves a finding of fact in each case as to whether such an amount would be an income receipt or an eligible capital receipt.
We would caution that the above comments represent an expression of opinion only and, as such, are not binding upon the Department.
Yours truly,
for Director Small Business and General Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch