2017-0682691E5 NFLD Community Relocation Program

Principal Issues: What would the income tax implications be of financial assistance that is received from the government of NFLD where both residential and commercial property owners retain title to their property in return for individuals relocating and giving up their rights to all provincial services? That is, all provincial services in these communities will be discontinued.

Position: Depends on what the financial assistance amount is intended to replace. If the financial assistance is intended to replace/compensate individuals for the diminishing value of commercial and residential properties the amount would be considered proceeds of disposition for compensation for property injuriously affected pursuant to paragraph 54(e) of the definition of "proceeds of disposition". Financial assistance received by Residential Property Owners that is intended to compensate for moving / relocation expenses would not be taxable as this is compensation for personal expenses and would not be considered income from a source. The additional financial assistance that is received by Commercial Property Owners would be taxable pursuant to subsection 9(1) or paragraph 12(1)(x).

Reasons: Question of fact.

Author: D'Angelo, Sandro
Section: 54 "proceeds of disposition", 13(4.1), 40(2)(b), 40(2)(c), 12(1)(x), 9(1)

XXXXXXXXXX                                                                                                     2017-068269
                                                                                                                             Sandro D’Angelo
August 18, 2017

Dear XXXXXXXXXX,

Re:  2016 Community Relocation Policy – Newfoundland and Labrador

This is in response to the email you sent to the Canada Revenue Agency (the “CRA”) concerning the tax implications of the Community Relocation Policy (footnote 1) (“New Policy”).

Issue

You have asked the CRA to provide its comments with respect to the tax implications associated with the New Policy in light of some proposed changes from the 2013 Community Relocation Policy (footnote 2) (“Old Policy”).

The Department of Municipal Affairs (the “Department”) of the Government of Newfoundland and Labrador (the “Government”) will provide financial relocation assistance (“Assistance”) to Permanent Residential Property Owners (“Residential Owners”), Commercial Property Owners (“Commercial Owners”) and to Permanent Residents of voting age who are not Residential Owners. The Department will also pay legal fees for both Residential and Commercial Owners to help these owners make informed legal decisions as it relates to the Department’s written offer detailing Assistance and the discontinuation of provincial services.

You have specifically asked about the income tax treatment of the Assistance received by Residential and Commercial Owners (“Owners”) in light of a change in the New Policy whereby the Owners will now retain title to their properties.

Definitions

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

a) Community – Includes municipalities, local service districts, and / or unincorporated areas.

b) Permanent Residential Property Owner – An individual who meets the criteria for a Permanent Resident (as defined in the New Policy) and who also resides in and owns, either individually or jointly, habitable residential property in the Community requesting relocation (“Residential Owners”).

c) 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.

d) 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 (“Commercial Owners”).

e) 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.

Our understanding of the pertinent facts is as follows:

1. The New Policy, dated November 2016, seeks to assist with the voluntary relocation of communities that may be unsustainable.

2. The Department of 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 New Policy. The main applicable legislation is the Evacuated Communities Act which does not specifically deal with the payments made upon relocation.

4. Pending overwhelming majority support to relocate which is reasonably close to 90 per cent, the Department will conduct a Preliminary Cost Benefit Analysis. The analysis will consider the approximate relocation costs compared to the total savings over the applicable 10, 15, or 20 year period that would result from the withdrawal of Provincial services to the Community.

5. If the Preliminary Cost benefit Analysis indicates that the relocation will likely result in net savings to Government, the Department will determine the residency status of persons in the Community and give written notification of the determination made in that regard.

6. The Department will conduct a vote involving voting aged 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.

7. Only voting-aged Permanent Residents are eligible to vote on relocation. Joint property owners will each have one vote.

8. 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.

9. The amount of financial assistance payable to Residential Owners will be determined by the number of Permanent Residents living in the household in accordance with the following table:

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

1                                                                                                                         $ 250,000
2                                                                                                                         $ 260,000
3 or more                                                                                                            $ 270,000

10. Permanent Residents of voting age who are not Residential Owners will be entitled to financial assistance in the amount of $10,000.

11. The amount of financial assistance payable to Commercial Owners will be two times the assessed value of the commercial property as determined by the Municipal Assessment Agency.

12. To help Residential and Commercial Owners make informed legal decisions, the Department will pay legal fees related to consideration of the Department’s written offer detailing relocation assistance and the discontinuation of provincial services. A Residential or Commercial Owner may use the services of a different legal firm of their choosing provided the individual(s) pay this expense themselves.

13. Residential and Commercial Owners will retain title to their properties. (footnote 3)

14. No resident will be required to relocate, but residents who do not relocate will not receive relocation assistance. No provincial services will be provided to those choosing to remain in a relocated community.

15. 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 this policy.

16. Relocation assistance will be paid directly to Property Owners and also to Permanent Residents of voting age who are not Residential Owners.

17. On request, the Department will also assist Residential 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 all signed offers of financial assistance are received. The Department will recover the mortgage funds from the relocation assistance payment due to the person relocating.

Our Comments

This technical interpretation provides general comments about the provisions of the Income Tax Act (“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 70-6R7, Advance Income Tax Rulings and Technical Interpretations.

Pursuant to the Act, the tax treatment of the Assistance provided by the Department under the New Policy will depend on who receives the Assistance and the nature of the assistance in the hands of the recipient.  Generally, an amount is taxable under the Act if it constitutes income from a source or if a specific provision of the Act applies to the type of payment.

The tax consequences of an indemnity are derived from the surrogatum principle as explained by the Supreme Court of Canada in Tsiaprailis v Canada, 2005 DTC 5119 (SCC). 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?

Residential Owners

Pursuant to the surrogatum principle, the tax treatment of the Assistance received by Residential Owners will depend on what the amount is intended to replace. The Department will be providing Assistance to Residential Owners based on the number of Permanent Residents living in the household that decide to relocate. However, under the New Policy, Residential Owners will retain title to their properties.

The disposition of a capital property, or a part thereof, may result in a capital gain where a taxpayer disposes of, or is considered to have disposed of, the property for more than the total of its adjusted cost base and the outlays and expenses incurred to sell or dispose of the property.  Among other things, a disposition will generally occur when there are “proceeds of disposition” (“POD”).  Typically, the POD is the sale price of property that has been sold as a consequence of a purchase and sale agreement; however, the Act also includes as POD compensation for property taken under statutory authority and “compensation for property injuriously affected … under statutory authority or otherwise”.

An injurious affection describes damages caused to one person’s property by another, usually as a result of the other performing work that diminishes the value of the neighbouring property.  For example, the placement of a landfill site will usually have a negative impact on the value of the surrounding properties.  Often the work that causes this depreciation in value is performed lawfully under statutory authority.

Thus, property does not have to be sold in order for an amount received to be included in POD.  In other words, compensation for property injuriously affected may result in POD for tax purposes that could give rise to a taxable capital gain (or loss) in the year of receipt despite the fact that the taxpayer has not actually “parted with” the property. Normally, the amount received as proceeds of disposition in an open market would be the fair market value (“FMV”).

It is a question of fact whether the actions of the Department (i.e., the discontinuation of all provincial services in the Community) will result in the diminished FMV of both residential and commercial properties in these remote communities and hence, whether all or a portion of the Assistance paid is compensation for property injuriously affected. It is generally the provincial or territorial government or body that is administering the program and making the payments (i.e., the Department) that would need to determine the purpose and nature of these payments (i.e., Assistance paid to Residential Owners and Commercial Owners).  Under this program, it is likely that at least a portion of the Assistance paid would be considered POD for the property.

It is also a question of fact whether individuals are receiving Assistance that is wholly or partially intended to replace or compensate individuals for additional travel and relocation expenses.  Since travel and relocation assistance is for personal expenses only (i.e., not in respect of a recipient’s employment, business or investment), any Assistance received would not be taxable.  However, these individuals would not be entitled to a moving expense deduction pursuant to paragraph 62(1)(d) of the Act to the extent of the amount received for moving expenses.

Principal residence exemption

Should part of or all of the Assistance be considered POD for property that is injuriously affected, where the property qualifies as the Residential Owner’s principal residence, pursuant to the definition of “principal residence” in section 54 of the Act, 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).  Income Tax Folio S1-F3-C2 “Principal Residence” provides additional information on the principal residence exemption.

Permanent Residents of voting age who are not Residential 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 of the Act.

It is our view that the Assistance received by a Permanent Resident of voting age who is not a Residential Owner is not taxable based on the fact that the amount received under the New Policy has no source.

Commercial Owners

The tax treatment of the Assistance received by Commercial Owners will also depend on what the amount is intended to replace. Considering the Department will be providing financial assistance to Commercial Owners that decide to relocate in exchange for giving up their right to Provincial services, this 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.

Assistance received by Commercial Owners that is intended to replace or compensate these owners for the decline in the value of the commercial property will represent POD from compensation for property injuriously affected pursuant to paragraph (e) in the definition of “proceeds of disposition” in section 54 of the Act. Normally, the amount received as POD in an open market would be the FMV.  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 despite the fact that the taxpayer has not actually “parted with” the property.

Additional Assistance received by Commercial Owners

As a general rule, compensation received in the course of carrying on a business or earning income from a property will be either on income or capital account for income tax purposes, the determination of which is always a question of fact.  If the assistance or compensation relates to lost profits or additional expenses incurred from either business income or property income, then this amount is included in business or property income under subsection 9(1) of the Act.

Paragraph 12(1)(x) of the Act 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 assistance for an amount included in or deducted as, the cost of property or an outlay or expense.

Assistance amounts that are received by Commercial Owners to compensate or assist them with moving and relocating expenses relating to their commercial property or business would, in our view, be received in the course of earning income from a business or property and would be taxable under subsection 9(1) or paragraph 12(1)(x) of the Act.

Legal Fees

In situations where the Commercial 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.

As the Residential Owners generally would not be receiving the legal fees in the course of earning income from a business or property, the legal fees paid by the Department for Residential Owners would likely not be taxable.

We trust our comments will be of assistance.

Yours truly,

Lita Krantz CPA, CA
Manager, Tax Credits and Ministerial Issues
Business and 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 November 2016 on the following website: http://www.ma.gov.nl.ca/publications/relocation/Community_Relocation_Policy2016.pdf

2  Pursuant to the Policy dated March 2013 on the following website:
http://www.ma.gov.nl.ca/publications/relocation/Community%20Relocation%20Policy.pdf

3  A November 2016 news release by NFLD Department of Municipal Affairs at the following link stated: http://www.releases.gov.nl.ca/releases/2016/ma/1129n09.aspx

“To implement the decision to no longer acquire title under the new Community Relocation Policy, a legislative amendment to the Evacuated Communities Act received second reading in the House of Assembly yesterday. Since government will no longer be taking title to properties in relocating communities, this amendment removes the requirement to obtain a permit to access properties in future relocated communities. In past practice, as the Provincial Government became title holder to residences in vacated communities, having individuals access these properties created a liability issue for the province. With this amendment, permits will only be issued for properties in relocated communities that were previously acquired by the Provincial Government.”

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