Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
Principal Issues:
Tax treatment of amounts where farmer ceased to participate under the permanent cover program and repaid amounts in excess of amount received by farmers from the Prairie Farm Rehabilation Administration ("PFRA").
Position:
Where repayments exceed amounts received the excess is possibly not deductible.
Reasons:
No deduction provided for under the Act unless included in income or applied to grind the cost of assets. The Act provides that where a taxpayer repays an inducement, assistance, etc., that was included in income under paragraph 12(1)(x) or items to which a subsection 12(2.2) election was made, the taxpayer in computing income may pursuant to paragraph 20(1)(hh) of the Act deduct the amount repaid in that year. In our view the Liquidated damages would constitute a repayment of an inducement, assistance etc, and to the extent that it was included in income under paragraph 12(1)(x) or the amount was elected under subsection 12(2.2) would be deductible under paragraph 20(1)(hh) of the Act. If the amounts repaid were not included in income under paragraph 12(1)(x) but were instead paragraph 53(2)(k) or (s) or subsection 13(7.1) or 13(7.4) items then the cost grinds under those provisions would be the net of the amount received less the amounts repaid. However, if amounts repaid were in excess of the previous related income inclusions or cost grinds, it would be a question of fact as to whether the excess is a deductible business expense.
June 10, 1997
Regina Tax Services Office HEADQUARTERS
Business Enquiries A.M. Brake
(613) 957-8953
Attention: Vickey Wright
970586
Repayment of Permanent Cover Program Amounts
This is in response to your enquiry of February 26, 1997, wherein you requested our views regarding the repayment of amounts in excess of what was received by farmers from Agriculture Canada - Prairie Farm Rehabilitation Administration ("PFRA") under the above-noted program. An example is where the farmer received, say, $18,000 and because of withdrawing from the program has to repay $21,000. Your main concern is how to treat the additional $3,000.
Parts of our August 13, 1993 response to the Winnipeg TSO, file #931457, dealing with this matter are reproduced below:
"It is our understanding that the purpose of the Permanent Cover Program is to encourage Manitoba landowners to grow perennial forages or trees on highly erodible or marginal land of low productivity for annual cereal or other special crops. Conversion of these lands to permanent cover will result in the conservation of the soil resource, provide an alternate source of income and enhance wildlife and waterfowl habitat.
The program provides assistance for the establishment of permanent cover and to enter into a Land Use Contract ("Contract") to maintain the land in permanent cover. Payments will be made to eligible applicants in two parts:
(a)Initial payment - Permanent cover establishment assistance
An initial payment of $20 per acre will be paid after the applicant returns the Forage Emergence Statement and a signed Contract. This payment is intended to offset some of the cash costs related to planting forages or trees.
(b)Second payment - Land Use Contract assistance
The second payment will be a one time payment of $20 per acre for a 10 year or $50 per acre for a 21 year Contract. This payment is intended to offset some of the costs related to changing from growing annual crops to growing permanent cover crops. The second payment will be made when the following conditions have been met:
(1)an acceptable perennial forage or tree cover has been established as determined through an inspection by PFRA staff (normally after one growing season);
(2)a completed Contract has been accepted and duly registered by way of a caveat on the landowner's Certificate of Title.
In the event of default of certain covenants contained in the Contract, the Landowner would have to pay Liquidated damages calculated as a percentage of the payment received times the number of months left until the expiry of the Contract. Should the Landowner fail to pay the Liquidated damages, Her Majesty would have the option to purchase the applicable land.
....
Based on the above, it is our view that these payments would likely result in cost grinds under paragraph 53(2)(k) or subsection 13(7.1) of the Act. However, if not these amounts would be paragraph 12(1)(x) items, for which the election under subsection 53(2)(s) would be available for the land portion and subsection 13(7.4) for any depreciable property and subsection 12(2.2) of the Act for any outlay or expense. The amount by which the farmer reduces his cost or capital cost of property or reduces his deduction of an outlay or expense would be excluded from income inclusion under paragraph 12(1)(x).
Where a taxpayer repays an inducement, assistance, etc., that was included in income under paragraph 12(1)(x) or items to which a subsection 12(2.2) election was made, the taxpayer in computing income may pursuant to paragraph 20(1)(hh) of the Act deduct the amount repaid in that year. In our view the Liquidated damages would constitute a repayment of an inducement, assistance etc, and to the extent that it was included in income under paragraph 12(1)(x) or the amount was elected under subsection 12(2.2) would be deductible under paragraph 20(1)(hh) of the Act. However, if the amounts repaid were not included in income under paragraph 12(1)(x) but were instead paragraph 53(2)(k) or (s) or subsection 13(7.1) or 13(7.4) items then the cost grinds under those provisions would be the net of the amount received less the amounts repaid."
As can be seen from the above, there is no mechanism to cover the additional $3,000 in your example, since it was neither included in income nor applied to reduce the cost of specific assets. It appears that this amount represents some punitive amount for withdrawing from the program or possibly interest for the use of the money from the time of receipt to the time of repayment. In the event that some portion of this amount is interest, depending on the circumstances, a case may possibly be made to treat the interest portion as an interest expense. In the event the charges are merely punitive, whether they would meet the business test set out in paragraph 18(1)(a) of the Act as being an amount incurred to earn income is a question of fact. Without having any details on the additional payment, we cannot comment further, however, we refer you to IT-104R2, Deductibility of Fines and Penalties, and IT-467R, Damages, Settlements and Similar Payments, for assistance.
R. Albert
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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