Manitoba Hydro is building a new power transmission line called Bipole II.
Farmers don’t like the route because it affects their irrigation lines and operating costs as land is taken out of production and farming activities are complicated by having to work around the towers.
Regardless of whether the land is expropriated or voluntarily offered for compensation, payment for the easement has possible tax implications for landowners because it is considered a partial disposition of the land that may trigger capital gains income.
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It may also be necessary to determine whether ancillary compensation is on account of capital or income. This applies to any power line or pipeline easement or right-of-way.
Under a Canada Revenue Agency administrative policy, reinforced by an interpretation bulletin, the adjusted cost base of the easement is considered to be equal to the proceeds of disposition if the amount of land granted or expropriated for the easement is not more than 20 percent of the total area of the property and the compensation is not more than 20 percent of the total cost base of the land.
As a result, there is neither gain nor loss at that time, but the adjusted cost base of the property is reduced by the compensation received.
However, a capital gain could be triggered if the amount of land or compensation in question exceeds the 20 percent threshold.
Landowners who are individuals may qualify to use the $750,000 lifetime capital gains exemption to offset the capital gain on the partial disposition of the property.
However, the entire property under the easement must meet the definition of “qualified farm property” under the Income Tax Act.
It is common for easements to be renewed, renegotiated or extended after the expiration of the earlier easement term. In those cases, it becomes murky as to whether the subsequent payment is on account of income or capital.
If the payment is considered a capital receipt, the next question is whether a disposition has occurred that would be eligible for the capital gains exemption for farm property.
In some cases, a landowner might receive additional payments beyond the easement proceeds to compensate for what is called “injurious affection” related to the decrease in value of the remaining property caused by providing the easement.
Although no property is transferred, the tax agency will still consider the transaction as a partial disposition of residual land to which the above tax treatment applies.
In cases where additional allowances are also received as compensation for damage to crops, the farmer must include it in farming income in the year it is received.
Larry Roche is a tax analyst with Farm Business Consultants Inc. Contact: fbc@fbc.ca or 800-860-7011.
