The income tax implications of conservation covenants stem from the fact that when a landowner grants a conservation covenant to a conservation organization the financial value of the subject land is usually reduced. For example, if the existence of a covenant prevents residential or commercial development of the property, then the financial value of the land to a prospective purchaser would likely be reduced by the covenant. The amount of the reduction in the value of the property is considered to be the value of the covenant.

Note that this value has been given from the landowner to the conservation organization holding the covenant. There are two important income tax consequences for the landowner. (They apply to the landowner rather than the conservation organization, which does not usually have to worry about income tax.)

Charitable donation

First, if the conservation organization is registered as a charitable organization under the Income Tax Act, then the making of the covenant is a donation to a charity. Naturally, this is good news for the landowner/taxpayer.

Recently, there has been more good news. In its March 1995 budget, the federal government announced changes to the Income Tax Act that will make it easier for a landowner donating a conservation covenant to a charitable organization to use the charitable credit to the fullest extent possible. Normally, a charitable credit can reduce a taxpayer's income by no more than 20% in one year. Under the new rules, charitable donations of ecologically sensitive land will not be subject to the usual limit of 20% of the taxpayer's annual income. In order to qualify, the donated land must be certified by the federal minister of environment to be ecologically sensitive land, "the conservation and protection of which is, in the opinion of that Minister, important to the preservation of Canada's environmental heritage." (Ways and Means Motion to Amend the Income Tax Act, etc., tabled December 12, 1995, section 20(1)) In addition, one of the main purposes of the conservation group receiving the gift of the covenant must be the conservation and protection of Canada's environmental heritage, and the group must be approved by the minister regarding the gift in question. Although the legislation refers to the minister making these decisions, in practice it will be civil servants who make the decisions. To make it run more smoothly, the federal government has offered to let the provinces make these designations, although federal-provincial agreements for this have not yet been approved. The new rules will be in effect for the 1995 tax year. Legislation implementing the changes was introduced in Parliament in December 1995 and is expected to be approved.

Capital gain

Second, and this is the bad news, by giving away part of the value of the property the landowner/taxpayer is deemed under the Income Tax Act to have disposed of it, triggering capital gain. This applies only to the conservation covenant's portion of the value of the property, but it can still be significant. For example, suppose a landowner bought property in 1960 for $1,000 and it is now worth $100,000 without the covenant and $80,000 with the covenant. The covenant is valued at $20,000. This represents 20% of the current value of the property. Taking 20% of the original purchase price comes to $200, so the value of this portion of the property went from $200 to $20,000, which is a capital gain of $19,800. Triggering the capital gain means that the gain of $19,900 is deemed to be income whether or not the landowner/taxpayer actually received any cash.

Here are two additional points regarding capital gains:

• Not all capital gains are taxable, most notably any capital gain regarding the taxpayer's principal residence. However, for large properties "principal residence" includes only the house and a defined amount of surrounding acreage, not the entire property.

• Eventually, the death of the landowner will trigger a capital gain on the whole property. So, if there is going to be income tax payable on the capital gain, then it will eventually be paid by the landowner's estate even if the landowner chooses not to grant the conservation covenant. This illustrates why the covenant should be considered as part of overall estate planning.

In light of all of this, it is essential that the landowner get advice from a tax expert before placing a conservation covenant on his or her land.

Photo: Headquarters Creek, Vancouver Island, BC

Property tax

Property taxes are based on the "assessed value" of the property in question. The BC Assessment Authority determines the assessed value based on what is referred in the Assessment Act to as the "actual value," which is roughly equivalent to the market value. Thus, to the extent that granting a conservation covenant regarding property changes its market value, the assessed value of property should change, and taxes will change accordingly. Significantly, the 1994 legislative changes authorizing non-governmental organizations to hold conservation covenants also amended the Assessment Act to specify that, in determining actual value, the assessor shall give consideration to any terms or conditions contained in a conservation covenant.

From the landowner's point of view, the critical question is whether and how much the Assessment Authority will reduce the assessed value of the land due to the granting of a covenant. There appears to be only one example in which a property has been reassessed following the granting of a conservation covenant. In that case, the assessor concluded that the covenant caused no change in the assessed value. Until there are more examples, however, it will be difficult to predict exactly how much property tax relief, if any, a landowner could expect from the granting of a covenant.

Property transfer tax

The BC property transfer tax does not apply to the granting of a conservation covenant in favour of a conservation organization.

In addition, where a conservation covenant is placed on a property and (a) the covenant is in favour of the Crown and (b) the property itself is also sold, there is an exemption from property transfer tax on the sale of the property. Also, note that a land transfer is exempt from the tax where the recipient is a charitable organization and the land is to be used for a charitable purpose (Property Transfer Tax Act, section 5(2)(l)).