In Ritchie v R, 2018 TCC 113, the taxpayer owned land that he rented to a corporation he owned. The corporation carried on a farming business. Enbridge paid amounts to the taxpayer for easements across his land, including $255,790 as an “early signing bonus” (a bonus for signing the easement agreement before a certain date). The taxpayer reported the bonus as a capital gain. The CRA reassessed to include the full amount of the bonus in the taxpayer’s income. Was the bonus on capital account?
At trial, the parties argued the appeal on the basis of a statement of agreed facts. The taxpayer argued that the bonus was a windfall or that it was on capital account. The Crown argued that the taxpayer had received the bonus as income realized in the course of carrying on his farming business or as an inducement under s 12(1)(x) of the Income Tax Act (Canada).
The Court held that the taxpayer had properly reported the bonus as a capital gain because it was received as proceeds for the easements. The Court, based on the somewhat limited record in front of it, rejected the notion that the taxpayer had carried on the farming business. The corporation carried on the business, not the taxpayer, who merely leased the land on which the corporation operated the farm.
The bonus was an inducement for the purposes of s 12(1)(x), but it was an inducement “in respect of” (words of the “widest possible scope” per Nowegijick) the granting of the easement (ie an acquisition of property belonging to the taxpayer), which is excluded by s 12(1)(x)(viii). The Court wrote:
[35] Enbridge paid the Signing Bonus as an incentive for the early signing of the easement agreement. It was paid in connection with the Appellant’s granting of the easement on his property. As a result, it was paid in respect of the acquisition by Enbridge of an interest in the Appellant’s property. Therefore, paragraph 12(1)(x) does not apply to the Signing Bonus.
[36] Since Enbridge paid the Signing Bonus in respect of the disposition by the Appellant of a capital asset, namely an interest in his land, it was a capital receipt to the Appellant. Further, in my view, the Signing Bonus was part of the proceeds of disposition of the interest in land. Enbridge agreed to pay a higher sale price for the easement if the Appellant granted the easement before a specific date.
[37] As a result, the Signing Bonus must be included for the purpose of determining the Appellant’s capital gain under subsection 39(1) from the disposition of the interest in his land.
The Court then rejected the taxpayer’s windfall argument because it was based on facts not before the Court (ie facts that were not part of the statement of agreed facts).
