Gifts of Ecologically Sensitive Land
Introduction
Donations of ecologically sensitive land certified as “ecological
gifts” (or “ecogifts”) have been rapidly gaining
acceptance and popularity since the 2000 Federal Budget introduced
enhanced tax treatment and related amendments to the Income
Tax Act (the Act).
Between April 1995 and March 2003, a total of 325 gifts of over
24,000 hectares of land, valued at more than $67 million, were certified
through the Ecological Gifts Program administered by Environment
Canada.
The two principal benefits of the program are relief from the annual
donation limits and a reduction from one half to one quarter for
the rate at which deemed capital gains are included in income.
At the same time, individual and corporate donors are entitled
to a charitable donation receipt for the fair market value of the
gift. Consistent with the 2000 Federal Budget, this program is intended
to provide encouragement and incentives for Canadians to take voluntary
action to protect the environment, including species at risk, and
to make responsible stewardship of the land an easy choice.
This document outlines the Ecological Gifts Program advantages
and requirements with respect to:
a) the certification of qualifying lands
b) the approval or identification of qualified donees (recipients),
and
c) the certification of the fair market value of gifts.
In addition the gift process and the potential tax liabilities
for recipients are briefly considered.
What is an ecological gift?
Subsection 118.1 (1) of the Act was first amended to provide a
definition of “total ecological gifts” in 1995. Since
that time the qualifying lands have been described as:
- land, including a servitude for the use and benefit of dominant
land, a covenant or an easement…
- that is certified by that Minister (of the Environment), or
a person designated by that Minister, to be ecologically sensitive
land, the conservation and protection of which is, in the opinion
of that Minister, or that person, important to the preservation
of Canada’s environmental heritage.
For the parallel provision addressing corporate deductions see
subsection 110.1 (1) (d) of the Act.
In addition to fee simple title, eligible gifts may include certain
conservation servitudes, covenants and easements which allow the
land to remain in private ownership while its ecological values
are permanently protected. Most of the common law provinces have
now enacted legislation to enable the use of “conservation
easements” or “conservation covenants”. Provincial
legislation was required to allow the enforcement by conservation
bodies of conservation covenants and easements “in gross”
and to eliminate the common law requirement of benefiting “dominant”
lands. As the Civil Code in Quebec has not been similarly amended,
the Act also recognizes the possibility of servitudes “for
the use and benefit of a dominant land”.
Although a thorough review of conservation servitudes, covenants
and easements is beyond the scope of this paper, note that these
agreements will normally include at least two basic provisions.
The first is a set of covenants or restrictions on the use and development
of the land intended to protect natural values. The second is an
access easement for the purposes of monitoring compliance, for enforcement
and possibly for restoration or enhancement of the natural values.
Public recreational access is not a normal or necessary component
of the conservation servitudes, covenants and easements.
In addition to describing the nature of title and interests in
land that will qualify, subsection 118.1 (1) requires that the land
be certified as ecologically sensitive. The definition of ecologically
sensitive is broad and inclusive of lands with both existing and
potential ecological value. The following national criteria apply
to both environmental values and those that may result from conservation
initiatives:
- areas identified, designated or protected by local, provincial,
territorial, national or international system or body as ecologically
significant or ecologically important;
- natural spaces of significance to the environment in which
they are located;
- sites that have significant current ecological value, or potential
for enhanced ecological value, as a result of their proximity
to other significant properties;
- municipal or rural lands that are zoned or designated for biodiversity
objectives;
- natural buffers around environmentally sensitive areas such
as water bodies, streams or wetlands; and
- areas or sites that contribute to the maintenance of biodiversity
or Canada’s environmental heritage.
Several provinces, including Ontario, Quebec, New Brunswick and
Prince Edward Island, have refined and adapted these general criteria
to their specific circumstances. Detailed information on the criteria
for certification, including criteria applicable to individual provinces,
can be obtained through Environment Canada regional offices, or
through the national secretariat (www.cws-scf.ec.gc.ca/egp-pde).
The criteria for gifts in Ontario can be viewed at the Ontario ecogifts
Web site: www.on.ec.gc.ca/ecogifts.
To qualify for a charitable donation receipt, ecological gifts
must satisfy the basic legal requirements of gift giving, including
the requirements that a gift be made voluntarily and without consideration
or benefit to the donor. Note however, that the December 20, 2002
announcement by the federal government of “Draft Technical
Legislation and Explanatory Notes to Amend the Income Tax Act”
will modify the general rule that no consideration can be paid in
exchange for a charitable gift. Specifically section 248 of the
Act will be amended to permit “split-receipting” in
which a donation receipt may now be issued for the “eligible
amount of a gift”. The eligible amount of a gift will be defined
as the difference between the fair market value of the property
and the value of the actual advantage or consideration paid to the
donor. Proposed guidelines on split-receipting from the Canada Revenue
Agency are available at: www.cra-arc.gc.ca/E/pub/tp/itnews-26/itnews-26-e.pdf.
Other, traditional requirements of gift giving still apply. For
example, a transfer of conservation lands made as a condition of
municipal planning and development approvals could not be said to
occur on a voluntary basis or without consideration. On a related
note, land held by land development companies as the “inventory”
of their business will not be treated as capital property, and while
the land can be certified as ecologically sensitive, it will not
qualify for the eliminated taxable capital gain benefit under the
Ecological Gifts Program.
The tax advantages of an ecological gift
There are two principal tax advantages to gifts made under the
Ecological Gifts Program. First, the calculation of the non-refundable
credit to individuals or the deduction amount for corporations is
not limited to 75 percent of income as it is for a gift that could
not be certified as an ecological gift. See 118.1 (1), the definition
of “total gifts” for individuals and 110.1 (1) (d) with
respect to the treatment of ecological gifts by corporations.
Second, paragraph 38 (a.2) of the Act provides for the elimination
of the deemed capital gains arising from the disposition and transfer
of the property where the gift qualifies as an ecological gift under
paragraph 110.1 (1) (d) or subsection 118.1 (1). This is in contrast
to the standard one half inclusion rate. The elimination of the
deemed capital gain in income, at the same time that the donor is
entitled to a charitable donation receipt for the fair market value
of the property, often results in significant potential tax savings
to the donor. The Act also provides that charitable or municipal
recipients of an ecological gift may be subject to a tax, equivalent
to 50 percent of the current value of the property, for changes
in use or disposition without the authorization of the Minister
of the Environment (section 207.31 of the Act). This potential tax
liability against the recipient is mentioned here in the context
of program “advantages” since donors may appreciate
the fact that the gift they have made will continue to be protected,
not only by the good reputation of and management by the recipient,
but also by the potential for tax liability arising from the unauthorized
sale or transfer of the property or change of use by the recipient.
Valuation
In order to help Canada's landowners and conservation groups preserve
Canada's natural heritage, the Government of Canada has eliminated
the tax on capital gains for all certified ecological gift donations
made on or after May 2, 2006 by reducing the inclusion rate to zero.
The definitions of “ecological gifts” (subsection 110.1
(1)) and “total ecological gifts” (subsection 118.1
(1)) were amended to require that the fair market value of gifts
of ecologically sensitive land be certified by the Minister (of
the Environment). Subsequently, the Minister established an Appraisal
Review Panel and a process for the review of appraisals and the
certification of values submitted in support of ecological gifts.
With respect to an ecogift that is a servitude, covenant or easement,
subsection 118.1 (12) deems the fair market value to be the greater
of
"(i) the fair market value otherwise determined of the gift,
and
(ii) the amount by which the fair market value of the land is reduced
as a result of the making of the gift.”
The valuation method described in paragraph (ii) can also be described
as the “before and after” method of appraising a conservation
servitude, covenant or easement. In the absence of comparable market
sales of conservation easements, their value can be determined as
the difference between the value of the underlying land before,
and after, the conservation easement is registered on title. The
diminished value of the land after the registration on title reflects
the restrictions on land development and resource use set out in
the conservation servitude, covenant or easement.
The ecological gift recipients
The Income Tax Act, in subsections 110.1
(1) and 118.1 (1), allows for the donation of ecological gifts to
the federal or provincial crown, to any Canadian municipality and
to a registered charity certified by the Minister of the Environment
or the designate of the Minister.
The Minister or designate may approve a registered charity as a
qualified recipient, if, in the opinion of the Minister, one of
the main purposes of the organization is “the conservation
and protection of Canada's environmental heritage.” A large
number of such eligible organizations are listed on the national
Ecological Gifts Program Web site (www.cws-scf.ec.gc.ca/egp-pde).
The process of making an ecological gift
As previously noted, the Minister of the Environment must certify
that the property is ecologically sensitive, that the fair market
value of the donation is acceptable and, in the case of charities,
that the recipient is qualified. Often the identified recipient
is already eligible – check the list on the national Ecological
Gifts Program Web site (www.cws-scf.ec.gc.ca/egp-pde).
If they are not already eligible, it is possible for charities to
become eligible by contacting the Ecological Gifts Program and making
an application.
The donor will basically have two steps to complete before he or
she is finally in a position to submit a tax return and claim the
charitable deduction or credit. These steps and relevant forms and
guidance materials are detailed in the Canadian
Ecological Gifts Program Handbook (www.cws-scf.ec.gc.ca/egp-pde)
and Ontario Ecogifts Handbook (www.on.ec.gc.ca/ecogifts).
The two basic steps include providing: (i) information to support
the evaluation of the land as ecologically sensitive, and (ii) an
appraisal of Fair Market Value by a qualified appraiser along with
a signed Application for Appraisal Review and Determination.
The donor and recipient will generally cooperate on the application
to confirm that the property is qualified as ecologically sensitive.
The recipient will also often help the donor arrange for the appraisal
of fair market value. Guidelines for Appraisals
are available at the national Ecological Gifts Program Web site
(www.cws-scf.ec.gc.ca/egp-pde).
Despite the high degree of cooperation between the parties, donors
are strongly encouraged to obtain independent, professional tax
and legal advice to understand the implications of making an ecological
gift.
In support of his or her tax return the donor will require a Statement
of Fair Market Value issued by the Minister and a Certificate
for the Donation of Ecologically Sensitive Land (or, in Quebec,
a Visa pour dons de terrains ou de servitudes ayant
une valeur écologique), issued by the Minister or
a designated certification authority (different provinces have different
certification authorities). Of course the donor will also require
an official donation receipt issued by the recipient organization.
The complete process is outlined in the Canadian Ecological Gifts
Program Handbook, available from the Ecological Gifts Program (www.cws-scf.ec.gc.ca/egp-pde).
An Ontario edition of a handbook is also available at www.on.ec.gc.ca/ecogifts.
Applicants may also consult the national Web site or their regional
Ecological Gifts Program coordinator.
Ecological Gifts Program – National Secretariat
Canadian Wildlife Service, Environment Canada
351 St. Joseph Blvd. Gatineau, Quebec K1A 0H3
Tel: (819) 994-6687
Web site: www.cws-scf.ec.gc.ca/egp-pde
Ecological Gifts Program – Ontario Region
Canadian Wildlife Service, Environment Canada
4905 Dufferin Street, Downsview, Ontario, M3H 5T4
Tel: (416) 739-4286 or (416) 739-5828
E-mail: Ecogifts.Ontario@ec.gc.ca
Web site: www.on.ec.gc.ca/ecogifts
|
