When a charity receives a gift of land, the charity is not necessarily free to sell the land or use it in any manner it desires. For example, if the gifted land has been designated by the federal Minister of the Environment (the “Minister”) as ecologically sensitive land, there are rules in the Income Tax Act (the “Act”) that state that a tax is payable by the charity upon the charity disposing of the land or changing the designated use of the land, without the authorization of the Minister. According to the Act, in such instances, the tax payable by the charity is equal to 50% of the amount of the fair market value of the land immediately before the disposition or the change in use.
For purposes of the Act, “ecologically sensitive land” means land “the conservation of which is, in the opinion of the Minister […], important to the preservation of Canada’s environmental heritage”.
Section 207.31 of the Act, the provision of the Act that permits this tax to be imposed on charities (and on other entities such a municipalities and other public bodies), was added in 1995 (the calculation of the amount of the tax was modified at a later date). Since then, the Canada Revenue Agency (“CRA”) has only interpreted this provision in a handful of circumstances. It most recently considered how the tax would apply in a document published on October 15, 2014, wherein it was asked to consider the following questions:
- Whether the tax under section 207.31 applies based on the fair market value of a property at the time a gift is made, or at the time of a change in use of the property?
- Whether the tax under section 207.31 applies on all parcels of land that form part of the gifted land, or whether it applies only to those parcels that have a change in use?
- Whether the tax can be applied more than once in respect of the same land?
The particular instance being considered by CRA involved a municipality that had received multiple parcels of land as an ecological gift. The municipality planned to change the use of some, but not all, parcels of land it had been gifted, without the authorization of the Minister.
CRA took the position that the tax would apply to the municipality at the time of the change in use of the parcels, not at the time when the land was gifted to the municipality. CRA also held that if the property underwent multiple changes in use over time, without the authorization of the Minister, it was conceivable that the 50% tax could apply each of those times.
On the question of whether the tax would only apply to those particular parcels affected by the change in use, or the entire property, CRA held that it would depend on whether the initial transfer of the parcels of land to the municipality were “a gift of one property or a gift of multiple separate and distinct properties.” In the view of CRA, this question of fact and law could only be determined:
[A]fter a review of the legal agreements, the applicable provincial legislation, and the facts of the particular situation […]. 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 a 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 [emphasis added].
Based on the above, if the parcels were considered to be “one property” then the 50% tax would apply to the entire property, regardless of the fact that only certain parcels were affected by the change in use. If the municipality had gifted the affected parcels by way of separate and distinct legal agreements, then, in the words of CRA, “it would seem reasonable” to apply the 50% tax only to those properties.
This technical interpretation suggests that upon becoming aware of a potential gift of ecologically sensitive land, charities may want to take the opportunity to consider ways of structuring the transfer if they are contemplating a change in use.