A recent ruling letter 1 from the CRA highlighted what for most is an obscure provisions of the Income Tax Act which related to gifts of ecological property.
Section 207.31 of the Act imposes a tax on any charity, municipality in Canada or municipal or public body performing a function of government in Canada (the recipient) where, without the approval of the Minister of the Environment or a person designated by that Minister, the recipient disposes of or changes the use of property received as an ecological gift. The tax is equal to 50% of the amount that is the fair market value of the property at the time of the disposition or change in use.
The ruling was in response to a letter where the writer requested the CRA’s views with respect to the application of section 207.31. More specifically, this was a situation where a municipality received multiple parcels of land as an ecological gift. Since the municipality is considering changing the use of some but not all parcels of land without the authorization of the Minister of the Environment, the writer was interested in the tax implications under section 207.31 of the Act.
The germane part of the letter is as follows:
Section 207.31 of the Act does not appear to contemplate a situation involving a gift comprised of multiple parcels of land where the recipient changes the use of some but not all of the parcels of land. In our view, the tax implications under section 207.31 of the Act would depend on whether the transfer of the parcels of land would be considered a gift of one property or a gift of multiple separate and distinct properties. This is a question of fact and law, the determination of which can only be made after a review of the legal agreements, the applicable provincial legislation, and the facts of the particular situation. In this regard, you may want to consult with your legal advisor. If, after such a review, it was determined that the recipient received a gift of one property, then the tax under section 207.31 of the Act would be applied based on the fair market value of all the parcels at the time of change in use. If, however, it was determined that there was a gift of multiple separate and distinct properties, it seems reasonable to apply the tax on a property-by-property basis and therefore the tax will be based on the fair market value of those parcels that had a change in use.
Finally, in our view, it is possible to interpret the words of section 207.31 of the Act as they currently read such that the tax could be applied more than once on the same property where the property undergoes multiple changes in use over time without the authorization of the Minister of the Environment.
Whether this interpretation of the law is correct or not is not really the issue. In practical terms, the recipient of a gift to which section 207.31 could apply is effectively on notice of the tax ramifications of a change of use and would have to abide by the CRA’s position or be faced with launching an appeal after the fact…hardly an attractive proposition.