2013-0495791I7 Community Relocation Program

Principal Issues: What would be the income tax implications of the payments for a voluntary relocation in a remote community?

Position: Question of fact.

Reasons: See letter below.

Author: Hikspoors, Maryann
Section: 13(4.1), 40(2)(b), 40(2)(c), 44(5), 54, 62(1)(d)

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                                                                                                                                                               2013-049579
                                                                                                                                                               Maryann Hikspoors

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December 24, 2014

Dear XXXXXXXXXX,

Community Relocation Policy – Newfoundland and Labrador

This is in response to the email you sent to the Canada Revenue Agency (the “CRA”) earlier in 2013 concerning the tax implications of the Community Relocation Policy (footnote 1) (“Policy”) as announced in the 2013 Newfoundland and Labrador Provincial Budget. We apologize for the delay in responding to your query.

Unless otherwise expressly stated, every statutory reference herein is a reference to the relevant provision of the Income Tax Act (“Act”).

Issue

You have asked the CRA to provide its comments with respect to the tax implications associated with the Policy, which seeks to assist with the voluntary relocation of communities that may be unsustainable. More particularly, you ask about the tax treatment of payments received by a taxpayer in the context of the voluntary relocation of a remote community. 

Definitions

The following terms, as defined in the Policy, apply in respect of this technical interpretation:

a)    Community – Includes municipalities, local service districts, and / or unincorporated areas.
b)    Permanent Resident – Permanent residency is established if, in each of the two twelve-month periods immediately preceding the Relocation Request Date, an individual fulfills the requirements listed in (i), (ii) and (iii) below:
i.    The individual resided in the Community requesting relocation for at least 183 days in each of the two twelve-month periods. Absences from the Community for
ii.   The following reasons will be accepted as residing in the Community and will count toward calculation of the 183 days:
*     The individual was temporarily absent from the community to attend grade school or post-secondary school.
*     The individual was temporarily absent for medical reasons substantiated by a doctor’s note satisfactory to the Minister or to assist a close relative who was temporarily absent for medical reasons.
*     The individual or his / her spouse worked outside the Community and regularly returned to the Community between periods of outside employment.
iii.  The individual did not establish permanent residency in another community; and
iv.   Proof of (i) and (ii) must be satisfactory to the Department.
c)    Permanent Residential Property Owner – An individual who meets the criteria for a Permanent Resident and who also resides in and owns, either individually or jointly, habitable residential property in the Community requesting relocation.
d)    Non-Resident Residential Property Owner – An individual who does not fall within the definition of a Permanent Resident but who owns habitable residential property in the Community requesting relocation. This will normally include persons who maintain seasonal homes in the Community.
e)    Commercial Property Owner – An individual or company that owns property within the Community and currently operates a commercial enterprise on that property or that owns a Rental Property in the Community.
f)    Rental Property – Habitable residential property which was rented as of the Relocation Request Date or which, though vacant on that date, had previously been rented and had been vacant for no more than six months immediately prior to that date.
g)    Relocation Request Date – The date on which the Department deems it has received the request to consider the Community’s eligibility for relocation assistance.

Facts

Our understanding of the facts is as follows:

1.    The Policy, dated March 2013 seeks to assist with the voluntary relocation of communities that may be unsustainable.
2.    The Department of Municipal Affairs (the “Department”) of the Government of Newfoundland and Labrador (the “Government”) will only consider relocation assistance requests that are community-initiated and community-driven.
3.    There is no legislation which specifically governs community relocations if a community relocation request is approved under the Policy. The main applicable legislation is the Evacuated Communities Act which does not specifically deal with the payments made upon relocation.
4.    The Department will conduct a vote involving Permanent Residents. If the vote does not confirm that at least ninety percent of the eligible voters want to relocate, the Government’s consideration of the relocation request will stop.
5.    Only voting-aged Permanent Residents are eligible to vote on relocation. Joint property owners will each have one vote.
6.    If the vote indicates ninety percent or more of the individuals eligible to participate in the community vote support relocation, the Department will request Government approval of:
i.    The relocation of the community;
ii.   Sufficient funds to pay relocation assistance; and
iii.  An Order in Council, pursuant to section 4.1 of the Public Utilities Act exempting utilities from the application of Section 38 of the Public Utilities Act  for that community.
7.    A cabinet paper is prepared and the funding for the payment is approved once a cost benefit analysis is completed and a vote is held with over 90% of the Permanent Residential Property Owners in the community sign acceptance to the offers to purchase as drafted by the Minister of Municipal Affairs.
8.    The amount of financial assistance payable to Permanent Owners will be determined by the number of Permanent Residents living in a given household in accordance with the following table:

Number of Permanent Residential
Property Owners and their minor
dependents per household                                       Total Household Relocation Assistance

1                                                                                $ 250,000

2                                                                                $ 260,000

3 or more                                                                   $ 270,000

9.    Permanent Residents of voting age who are not Permanent Owners will be entitled to financial assistance in the amount of $10,000.
10.   The amount of financial assistance payable to Commercial Property Owners will be two times the assessed value of the commercial property as determined by the Municipal Assessment Agency.
11.   To help Permanent Residential Property Owners and Commercial Property Owners make informed legal decisions, the Department will pay legal fees related to consideration of the Department’s written offer detailing relocation assistance and transfer of legal title to their property to the Crown if the owner uses the legal firm selected by the Department. A Permanent Residential Property Owner or a Commercial Property Owner may use the services of a different legal firm of their choosing provided the individual(s) pay this expense themselves.
12.   The Department and all relocating property owners (including Permanent Residential Property Owners and Commercial Property Owners) will execute legal documents transferring title to the Crown in return for the relocation assistance detailed in the Department’s offer of assistance.
13.   Relocation assistance will be paid directly to Property Owners and also to Permanent Residents of voting age who are not Permanent Residential Property Owners.
14.   On request, the Department will also assist Permanent Residential Property Owners with the prior purchase of a property in another community by taking an interim mortgage on the property purchased which will represent a maximum of 80% of the relocation assistance they will receive. The Department will release the interim mortgage after the property in the relocating Community is vacated and transferred to the Crown. The Department will recover the mortgage funds from the relocation assistance payment due to the Permanent Residential Property Owner.
15.   The Crown will acquire unencumbered legal title to habitable residential properties and commercial properties for which relocation assistance is paid.
16.   The relocation assistance is not intended to compensate individuals or businesses for loss of employment, income potential, or any other costs beyond those specifically mentioned in the Policy.
17.   No resident will be required to relocate, but residents who do not relocate will not receive relocation assistance.

Analysis

This technical interpretation provides general comments about the provisions of the Income Tax Act and related legislation (where referenced). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R6, Advance Income Tax Rulings.

The Income Tax Rulings Directorate’s (“ITRD”) role is to interpret Canada’s income tax legislation, (including the Income Tax Act, the Income Tax Regulations, all related statutes and the Income Tax Conventions which Canada has with other countries), and explain how it applies to given situations.

This particular interpretation involves a Policy that was made public in the 2013 Newfoundland and Labrador Provincial Budget and is not a review of any provincial legislative text supporting such policy. It is our understanding that there is no enacted provincial legislation for this Policy. As we do not have any particular facts or provincial legislation, our comments below are of necessity general in nature.

Pursuant to the Act, the tax treatment of the assistance provided by the Department under the Policy will depend on who receives the assistance and the nature of the assistance in the hands of the recipient.

The tax consequences of an indemnity are derived from the surrogatum principle as explained by the Supreme Court of Canada (“SCC”) in Tsiapraillis. (footnote 2)  This means that the tax treatment will depend on what the amount is intended to replace. Consequently, the determinative questions are:

1.    What was the payment intended to replace? If the answer to this question is sufficiently clear, then the following question should be considered.
2.    Would the replaced amount have been taxable in the recipient’s hands?

      Permanent Residential Property Owners

Pursuant to the surrogatum principle, the tax treatment of the assistance received by a Permanent Residential Property Owner will depend on what the amount is intended to replace. Considering the Crown will be providing financial assistance to Permanent Residential Property Owners that decide to relocate in exchange for their residential property, our preliminary view is that this financial assistance will represent proceeds of disposition pursuant to section 54. Normally, the amount received as proceeds of disposition in an open market would be the fair market value.

Should the property qualify as the Permanent Residential Property Owner’s principal residence, pursuant to the definition of “principal residence” in section 54, the principal residence exemption can be used to reduce or eliminate any capital gain otherwise occurring. The principal residence exemption is claimed under paragraph 40(2)(b), or under paragraph 40(2)(c) where land is used in a farming business carried on by the taxpayer which includes his or her principal residence.

Should the disposition of a principal residence result in a loss, it is deemed to be nil by virtue of subparagraph 40(2)(g)(iii).  Please see the Income Tax Folio S1-F3-C2 “Principal Residence” for more information on the principal residence exemption.

Permanent Residents of Voting Age who are not Permanent Residential Property Owners

A sum of money received by a taxpayer is generally taxable when it represents income from a source under section 3 or is included in income by virtue of section 56.

It can be argued that the relocation payment received by a Permanent Resident of voting age who is not a Permanent Residential Property Owner may not be taxable based on the fact that the amount received under the policy has no source. Income Tax Folio S3-F9-C1 “Lottery Winnings, Miscellaneous Receipts and Income (and Losses) from Crime” discusses the tax treatment of various receipts that do not clearly come within any of the more usual categories.

      Commercial Property Owners

The tax treatment of the assistance received by a commercial property owner will also depend on what the amount is intended to replace. Considering the Department will be providing financial assistance to Commercial Property Owners that decide to relocate in exchange for their commercial properties, this financial assistance will likely be considered as either capital or income in nature.

When compensation is received for the loss or destruction of capital property, the amount of the compensation is considered to be proceeds of disposition received on the disposition of that property, whereas any compensation received for the loss or destruction of inventory or for loss of profits is considered to be income from carrying on a business or income from property, as appropriate.

The financial assistance appears to allow the Government to acquire the unencumbered legal title to the commercial properties. Therefore we are of the opinion that the assistance will likely represent proceeds of disposition pursuant to section 54. The disposition of the commercial properties could result in a gain or loss as well as recapture of capital cost allowance or a terminal loss. Please see Interpretation Bulletins IT-79R3, “Capital Cost Allowance – Buildings or Other Structures”, and IT-478R2, “Capital Cost Allowance – Recapture and Terminal Loss” for further guidance with respect to the capital cost allowance implications.

Subsections 13(4) and 44(1) are elective provisions commonly referred to as the “replacement property rules”. Subsection 13(4) allows, under certain circumstances, a taxpayer to defer the recognition of recapture of capital cost allowance by providing a rollover of the undepreciated capital cost of the property, while subsection 44(1) allows, also under certain circumstances, a taxpayer to defer the recognition of capital gains by providing a rollover of the cost base of the property.

The replacement property rules apply where a former property is involuntarily disposed of, or when a former property that is a “former business property” (footnote 3) is voluntarily disposed of, and a replacement property is acquired. Under both provisions, it must be reasonable to conclude that the property was acquired to replace the former property. In this regard, there must be some correlation or direct substitution, that is, a causal relationship between the disposition of a former property and the acquisition of the new property or properties.

A property is considered to be a replacement property for a former property only if the conditions outlined in subsections 13(4.1) (footnote 4) or 44(5) are met and the taxpayer specifically elects to have the replacement property rules apply. If a former property is a depreciable property, subsection 44(4) provides that if a taxpayer elects on that property under subsection 44(1), the taxpayer is deemed to have elected also under subsection 13(4), and if the taxpayer elects under subsection 13(4), the taxpayer is deemed to have elected under subsection 44(1) as well.

For further guidance with respect to the replacement property rules please see IT-259R4, “Exchange of Properties” and IT-491, “Former Business Property”.

It should be noted that subsections 14(6) and (7) provide similar treatment for a property that is an “eligible capital property”. (footnote 5)

      Legal Fees

The legal fees incurred on the acquisition of capital property are generally included as part of the cost of the property.

In situations where the Commercial Property Owners do not choose a different legal firm, the Department will pay the legal fees related to the relocation process. To the extent that the amount of the legal fees was not taken into consideration in the calculation of the taxpayer’s income from business or property, paragraph 12(1)(x) will likely apply to include the amount received in the year as income from business or property.

Paragraph 12(1)(x) applies, inter alia, to any particular amount (other than a prescribed amount) received by a taxpayer in the year, in the course of earning income from a business or property, from a government, municipality or other public authority, where it can reasonably be considered that the amount was received as an assistance for an amount included in or deducted as, the cost of property or an outlay or expense.

As the Permanent Residential Property Owners generally would not be receiving this amount in the course of earning income from a business or property with respect to their personal residential property, the legal fees paid by the Department would likely not be taxable. Please see Income Tax Folio S3-F9-C1 “Lottery Winnings, Miscellaneous Receipts and Income (and Losses) from Crime”.

For general information on deducting legal fees please see IT-99R5 (CONSOLIDATED), “Legal and Accounting Fees”.

Conclusion

The income tax treatment of a particular payment received for a voluntary relocation from a remote community is a question of fact, which can only be determined after a careful examination of the particular taxpayer’s situation.

This technical interpretation does not cover all possible scenarios with their respective income tax implications. We would be pleased to provide assistance with any particular situation that is not covered in this document upon written request.

We trust these comments have been of assistance.

Yours truly,

Stéphane Charette CPA, CMA, MBA
Acting Manager
Business & Employment Division
Income Tax Rulings Directorate

FOOTNOTES

Note to reader:  Because of our system requirements, the footnotes contained in the original document are shown below instead:

1  Pursuant to the Policy dated March 2013 on the following website: http://www.ma.gov.nl.ca/ma/forms/index.html//relo.
2  Vasiliki Tsiapraillis v. Canada, 2005 SCC 8.
3  Subsection 248(1) defines “former business property” to mean capital property that was used by the taxpayer or a person related to the taxpayer primarily for the purpose of gaining or producing income from a business, and that was real property or an interest in real property, but does not include rental property of the taxpayer.
4  Subsections 13(4) and (4.1) apply only to a depreciable property.
5  As defined by section 54.

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