Tax benefits and implications

A conservation easement will not make you rich. A conservation easement is first and foremost a tool to help landowners accomplish their long-term conservation objectives.

In the past, conservation-minded landowners had no opportunity to receive any financial benefit for seeking long-term protection of the ecological, scenic or agricultural values of their property outside of selling their land to a conservation buyer or government agency. For landowners wishing to retain ownership and use of their land, this was not a viable option.

Broadly speaking, there are two financial incentives for granting a conservation easement: a tax receipt and a cash payment. The latter is by far the more lucrative and useful and by far the rarer! Land trusts and government agencies rarely have cash to pay for conservation easements, and when they do, they are rarely able to compensate the full value.

A mythology has arisen about the tax receipt being of no use to Alberta landowners, one which comes from both a lack of creative thinking around tax receipts and a misunderstanding of the point above - conservation easements will not make you rich.

For those landowners who are already stewarding their land for long-term conservation, the benefit is straightforward - keep doing what you are doing AND receive a financial benefit for doing it.

However, it is important to keep in mind that there are potential negative tax implications that must be weighed, but which can often be avoided with careful planning.

Tax receipts for donations of conservation easements

Because both qualified organizations and government agencies can issue tax receipts, donations of conservation easements are eligible for a federal and provincial tax receipt. For the most part, the tax implications are the same as for any other type of charitable donation, though certification under the federal Ecological Gifts program greatly augments these benefits.

For a corporation, taxable income is reduced by an amount equal to the value of the donation. For individuals, a non-refundable tax credit is applied to their tax payable. The tax credit is 29% of the value of the donation (but 15% of the first $200). The tax receipt can be used in the year of the donation, and then in as many as five additional years.

There are additional tax considerations, and this is where the EcoGift certification has great value. First, in a normal charitable donation, the maximum receipt value you can use in any one year is 75% of your income, whereas an EcoGift-certified receipt can be applied against 100% of your income. Also, any property can generate a capital gain, which is taxable. When a property (or interest in that property) is disposed of through a donation, only 50% of the gain is taxable. When that donation occurs through the EcoGifts program, no portion of the capital gain is taxable.

Finally, it is important to recognize that only 'gifts' are eligible for a tax receipt. This means that any conservation easement which is provided in exchange for something is not considered to be a gift given freely and without consideration. For example, conservation easements provided to secure special development considerations from a municipality or conservation easements provided to a land trust in exchange for grazing rights on another property would not be considered 'gifts' and would not be eligible for a tax receipt.

Valuing a conservation easement

It likely goes without saying that determining the tax and financial implications of a conservation easement starts with financially valuing the conservation easement. This process is complex, and requires the services of a qualified appraiser. However, at a conceptual level, it is relatively straightforward.

The most common valuation process is known as the "before and after" process. This process assumes that the value of a property is heavily determined by the uses to which it can be put, and the marketability of those uses and its products. Because a conservation easement places restrictions on several land uses, the property is deemed to have an associated decrease in value.

The "before and after" process starts by valuing the property at the 'fair market value' - an estimation of the price it would command on an open market with willing buyers and willing sellers. Subsequently, the appraiser estimates the price the land would get if its sale value was diminished by the loss of certain land use opportunities. The appraiser takes into account the specific restrictions proposed in the conservation easement, and creates a second estimate of 'residual' market value, presumably a decreased one.

The difference between these two estimates is considered to be the financial value of the conservation easement.

There are no hard and fast guidelines on what those values might be, and the values of conservation easements can vary dramatically. However, the biggest determinant of value is usually the local pressure for more intensive development. This pressure inflates the 'fair market value' and thereby inflates the difference between the fair market value and the residual value.

Split Receipting

Financial benefits for conservation easements are often characterized as cash OR a tax receipt, but there is a third option that splits the difference: split receipting.

In so-called 'split receipting' (also called a 'bargain sale' in the U.S.), the landowner receives a combination of a cash payment and a tax receipt which add up to the full value of the conservation easement.

This option arose in response to the reality that cash payments for conservation easements are extremely rare, and tend to happen with certain groups, in very specific locations, at very specific times, when cash is uncharacteristically available. At the same time, landowners who received a tax receipt faced not being able to use its full value in the time allotted.

For example (and using completely fictional numbers!), a landowner with a conservation easement worth $100,000 could be compensated by a $25,000 cash payment and a $75,000 tax receipt.

In 2002, the Canada Revenue Agency issued a policy bulletin proposing guidelines for split receipting, which have since become their operating policy (the Canada Revenue Agency tends not to amend the Income Tax Act and regularly uses these bulletins as de facto policy). Those guidelines contain some restrictions, a key one being that there must be clear 'donative intent.' This means the landowner receiving the combined tax receipt / payment must be able to show that there was a clear intent to make a gift (freely and without consideration). The guideline offered to satisfy this is that the cash cannot make up more than 80% of the value of the conservation easement.

The Ecological Gifts program

As mentioned above, the federal Ecological Gifts (or EcoGifts) program can provide significant additional tax benefits to the donor of a conservation easement. This program, managed by Environment Canada, is made available to encourage and support conservation of 'ecologically significant land.'

Generally, the first question is, "What is 'ecologically significant land'?" The EcoGifts program describes ecologically significant land as land that "currently, or could potentially, contribute significantly to the conservation of Canada's biodiversity and environmental heritage." They go on to state a series of broad national criteria, which are aimed at being inclusive rather than persnickety. Local coordinators (listed in the Ecological Gift Handbook) can give a more specific interpretation.

The process for certification has three parts:

  • Certification of the property, which involves providing concrete information to back up your assertion that the property in question is ecologically significant;
  • Approval of the recipient, which ensures the holder of the conservation easement is an eligible recipient; and
  • Certification of the appraisal, which involves satisfactorily proving the fair market and residual value of the property subject to the conservation easement.

This process is technically initiated by the landowner, but qualified organizations are well-versed in this process and can do the heavy lifting in the application process.

A couple of items are important to be aware of. First, the conservation easement is only eligible if it is 'in perpetuity' - limited term conservation easements are not eligible. Second, subsequent changes in use or in the terms of the conservation easement must be approved by the EcoGifts, or the donor and recipient of the conservation easement may be subject to punitive clawback provisions.

Tax and succession planning

How many of your friends and neighbours know the details of your financial, tax, and succession planning circumstances? And are they likely to be the same as those of your friends and neighbours?

It is common to hear blanket statements that a tax receipt is of no value for landowners who make their living from working landscapes. Everyone's situation is different, and tax and succession planning is complex. When you hear that tax receipts are of no use, take that with a grain of salt.

Here are a few actual examples that surprised Alberta landowners who went on to grant a conservation easement:

  • Successive CE donations on different parcels, staggered over time to ensure full value of tax receipts used over time;
  • Tax receipt from CE donation used to lower the adjusted cost base and decrease the ultimate tax burden on heirs;
  • Tax-deferred savings liberated (tax-free) and applied to mortgage to reduce monthly payments;
  • (and the obvious one) Tax receipt used to reduce total taxable income to zero for six years;

Remember, only a creative financial advisor with detailed knowledge of your situation and goals can say if a tax receipt will or will not work for you.

Property taxes

Virtually all privately held parcels of land in Alberta are subject to property tax. This is the case, regardless of the land use, and - more specifically - regardless of whether they are conservation lands.

Within guidelines set out by the Province, municipalities can set their taxation rates and modify their assessment process, and each one does it somewhat differently. Because the tax you pay is a function of the assessment and the taxation (or mill rate), relief in either one can be significant.

For the purposes of parcels that might be subject to a conservation easement, there are essentially two assessment categories: 'fair market value' and 'agricultural.' 'Fair market value' is essentially the price the property would fetch on an open market for its most economically advantageous use ("highest and best use"). 'Agricultural' value recognizes that agricultural parcels may have an inflated value based on their potential for more intensive development, but would garner a much lower price based purely on their agricultural-based economic productivity.

When it comes to property taxation of conservation lands - that is, lands either subject to a conservation easement or held by a conservation organization - the province has left property taxation rates up to the individual municipality. In response, various Alberta municipalities have either been silent on the issue, assessed conservation properties are a lower rate (like the agricultural rate), or provided relief or complete waiver of the property taxation.

You will need to check with your local municipality to know how conservation lands in your area are taxed by the municipality.

What to watch out for

The world of taxation on income and property can be complex, and can vary depending on your location and your circumstances. It is important to consult your tax advisor about the specific implications of a conservation easement for you.

In the meantime, here are a few potential issues to be on the lookout for:

  • Only gifts can get tax receipts - A conservation easement given in exchange for something (development considerations, other land use options, etc.) is not considered a gift and is not eligible for a tax receipt.
  • Capital gains - Capital gains, and the taxes payable on them, accrue on property no matter what. Any disposition of land - even a donation - will trigger a capital gains calculation. That capital gains tax is waived if your donation is certified under the Ecological Gifts program, but 50% of the gain is taxable if it is a normal charitable donation.
  • Agricultural conservation easements are not EcoGifts - Donations of conservation easements that have only an agricultural conservation purpose are not eligible for the Ecological Gifts program. Your gift would be eligible for the regular charitable tax receipt, but it would not receive the additional beneficial tax treatment available under the EcoGifts program.
  • Municipalities determine property tax relief - Municipalities typically have two property tax categories: fair market value and agricultural. Some municipalities will waive the property tax on a conservation property, some will lower it to the agricultural rate, and some will provide no special considerations. You need to talk to your municipality to determine the situation in your area. Remember, if a property subject to a conservation easement is being used for agriculture, its property tax is already at the agricultural rate.
  • Appraisals outside of the EcoGifts program are subject to challenge by the CRA - Every appraisal done to support a tax deduction can be challenged by the Canada Revenue Agency at any point for three years. Appraisals done under the EcoGifts program are reviewed, then guaranteed by Environment Canada.
  • Ecogifts restrict changes in use - Conservation easement legislation allows the landowner and the holder of the conservation easement to re-negotiate the conservation easement and provide for changes in use. However, grantors and recipients of conservation easements certified under the EcoGifts program may be exposed to punitive clawback penalties for certain changes in use. Both parties should be aware of these limitations.
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