A June 26, 2018 Tax Court of Canada case (Ritchie vs. H.M.Q., 2015-1874(IT)G) reviewed the tax implications of payments of over $250,000 received as a “signing bonus” (SB) in respect of early signing of agreements to permit the installation of two pipelines on the taxpayer’s land. The land was also used by the taxpayer’s corporation in a farming business.

The individual taxpayer personally reported the SB as a capital gain. He had also received $19,782 as consideration for the easement itself, which was reported as a capital receipt.

The corporation reported further payments in respect of insurance ($111,422), temporary work space ($15,532), and disturbance damages ($38,202) as ordinary income. Signing the related agreements was a condition of receiving the SB.

the various categories of receipts related to farmland

CRA had reassessed the taxpayer on the basis that the SB was ordinary income and not a capital gain. The taxpayer argued before the Court that it was a non-taxable windfall, contrary to his original return which reported it as a capital gain. The allocation of the various payments between the taxpayer and his corporation, and the tax treatment of the payments other than the SB, were not disputed. The classification of the SB (income, capital gain or windfall) was the only issue before the Court.

Taxpayer wins – in part
CRA argued that the SB was received in the course of the taxpayer’s income-earning activity of farming. The Court dismissed this argument since the corporation, not the taxpayer, carried on the farming business. In support of this, the Court noted that the corporation reported all payments related to the farming business, while the taxpayer reported all payments related to ownership of the land.

Alternatively, CRA argued that the payment was deemed to be income as an incentive or inducement (Paragraph 12(1)(x)). The taxpayer did not challenge the SB’s classification as an inducement; however, he argued that an exception (Subparagraph 12(1)(x)(viii)) to the deemed income provision was applicable. He argued that, since the SB was in respect of the agreements related to the easement, it would meet the exception requiring that the payment reasonably be considered made in respect of the acquisition of an interest in the taxpayer’s property.

inducements related to property acquisitions are not deemed to be ordinary income

The Court agreed. As a result, it was considered additional proceeds for the granting of the easement. As the easement was a capital disposition, the related SB was correctly reported as a capital gain.

Finally, the Court dismissed the argument that the payment was a non-taxable windfall due to a lack of relevant evidence.

Editors’ Comment
All of the payments received, other than the SB, were reported by the taxpayer consistently with CRA’s previously expressed interpretations (see VTN 382(6) for a detailed discussion of same). However, the Court rejected CRA’s interpretation of the taxability of a SB.

The decision did not discuss whether the capital gain would be derived from sale of the farmland itself and potentially eligible for the capital gains exemption. CRA’s interpretations permitting the application of easement and similar payments to reduce the tax cost of the land in certain situations were also not addressed in the case.