Charitable Gifts of Conservation Easements: … tax journal / revue fiscale canadienne (2010) vol....

canadian tax journal / revue fiscale canadienne (2010) vol. 58, no 1, 25 - 61

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Charitable Gifts of Conservation Easements: Lessons from the US Experience in Enhancing the Tax Incentive

Ellen Zweibel and Karen J. Cooper*

P R É C I S

Au Canada, la Loi de l’impôt sur le revenu accorde un traitement avantageux au titre des gains en capital pour le don intégral d’une terre écosensible ou le don d’un intérêt foncier partiel dans une terre écosensible en faveur d’une municipalité, du gouvernement fédéral ou provincial ou d’un organisme de bienfaisance admissible voué à la conservation au moyen du programme des dons écologiques (PDE). Ces dons prennent de plus en plus la forme d’une servitude de conservation (conventions obligatoires entre le propriétaire et l’organisme de conservation qui a pour but d’empêcher de façon permanente toute forme d’aménagement ou de créer des obligations expresses dans l’atteinte de certains objectifs de conservation). Le présent article compare les principales caractéristiques des incitatifs fiscaux actuellement offerts au Canada et aux États-Unis accordés aux dons de servitudes de conservation et s’interroge sur la nécessité pour le PDE du Canada de bonifier ses dispositions actuelles pour qu’elles comprennent certaines des caractéristiques américaines visant à accroître les dons auprès des contribuables ayant beaucoup de terres et qui souhaitent accroître leurs liquidités. Ces caractéristiques comprennent des crédits d’impôt transférables, de plus longues périodes de report sur des années ultérieures, la possibilité de report sur des années antérieures, des crédits d’impôt remboursables limités, ainsi que les transferts intergénérationnels des crédits pour organismes de bienfaisance inutilisés.

A B S T R A C T

In Canada, the Income Tax Act provides favourable capital gains treatment for gifts of full and partial interests in ecologically sensitive land made to eligible conservation charities, municipalities, and federal and provincial governments through the ecological gifts program (EGP). Such donations increasingly take the form of conservation easements—binding agreements between landowners and conservation organizations that permanently restrict land development or create affirmative obligations in favour of specific conservation objectives. This article compares key features of the current

* EllenZweibelisoftheFacultyofLaw,UniversityofOttawa(e-mail:[email protected]).KarenJ.CooperisofCartersProfessionalCorporation,Barristers,Solicitors,andTrade-MarkAgents,Ottawa(e-mail:[email protected]).

26 n canadian tax journal / revue fiscale canadienne (2010) vol. 58, no 1

Canadian and US tax incentives for donations of conservation easements with a view to considering whether Canada’s EGP should expand its current provisions to include some US features aimed at increasing donations from “land-rich and cash-poor” taxpayers. These features include transferable tax credits, longer carryforward periods, the possibility of carrybacks, limited refundable tax credits, and intergenerational transfers of unused charitable credits.

KEYWORDS: CHARITIES n LAND n GIFTS n TAX INCENTIVES n CANADA n UNITED STATES

C O N T E N T S

Introduction 26Conservation Easements: Attractions and Drawbacks 33Key Features of the Tax Treatment of Conservation Easement Donations in Canada

and the United States 38Tax Incentive Structure: Credit or Deduction, Overall Limit, Carryforward, and

Transferability 39Defining the Environmental Goals: What Are Eligible Conservation Purposes? 44Eligibility and Valuation: Upfront Certification Versus Post-Return Audit 47Qualified Recipients: The Donee’s Stewardship Capacity 50

The Land-Rich and Cash-Poor Taxpayer: Comparing the Current Canadian Tax Benefits with Longer Carryforward Periods, Transferable Credits, and Refundable Credits 52

Improving the Canadian Tax Incentive for Conservation Easements and Their Associated Ecological Services 57

Conclusion 61

INTRO DUC TIO N

PrivatelandconservationisvitaltoprotectNorthAmerica’senvironmentalherit-ageandtopreventthepotentiallyirreversibledestructionofnaturallandfeaturesrequiredtosupportbiodiversity,waterquality,runoffprevention,carbonsequestra-tion, climate change mitigation measures, and many other ecological services.1Ecologicallyimportantlandisoftenownedbyfarmers,ranchers,orcottagerswhoarenotpreparedtogiveuptheland’sproductiveorpersonaluse.Aconservationeasement,insteadofanoutrighttransfer,becomestheonlyviableoptiontosecurevoluntaryconservationoftheproperty’secologicalfeatures.Alsoknownasconserva-tioncovenants,conservationeasementsarebindingagreementsbetweenlandowners

1 Ecologicalservicessuchaswetlandwaterfiltration,nativevegetationsoilretention,floodcontrol,andinsectpollinationareclassicexamplesofpositiveexternalities—“direct,unintentionalanduncompensated”actionsthatbenefitthewell-beingofothers.Thesepositiveexternalitiesprovidepublicgoodsthatarenotgenerallytakenintoaccountinalandowner’sprivatedecisionsonthedevelopment,use,orsaleofproperty.Thesepublicgoodsmaythereforebeundersuppliedandrepresentapotentialmarketfailure.SheilaM.OlmsteadandNathanielO.Keohane,Markets and the Environment(Washington,DC:IslandPress,2007),66-67.SeealsoJ.B.Ruhl,StevenE.Kraft,andChristopherL.Lant,The Law and Policy of Ecosystem Services(Washington,DC:IslandPress,2007),63-67.

charitable gifts of conservation easements n 27

andacharityorgovernmententitythatpermanentlyrestrictlanddevelopmentorcreateaffirmativeobligationsinfavourofspecificconservationobjectives.Forex-ample,aconservationeasementcanbeusedtoprohibitresidentialsubdivisiononlargetractsofenvironmentallysensitiveland,preservenativegrasslandsthatserveascontainmentfiltersalongashoreline,orrestricttheuseofpesticidesinasensitivewatershedarea.

Incometaxincentives,deliveredviastatutorycharitabledonationprovisions,areusedinCanadaandtheUnitedStatestoencouragethecreationofconservationeasementsthatpreserveecologicalservicesandtheirrelatedeconomicandsocialbenefits.InCanada,theIncomeTaxAct2providesenhancedtaxincentives,3beyondthoseavailable in respectofordinarycharitablegifts, forgiftsof full andpartialinterestsinecologicallysensitivelandmadetoeligibleconservationcharities,mu-nicipalities,andfederalandprovincialCrownagenciesthroughtheecologicalgiftsprogram(EGP).TheEGPwasintroducedin1995asatoolforencouragingthecon-servationofhabitatandbiodiversityacrossCanada;itisadministeredbyEnvironmentCanadaincooperationwithfederal,provincial,andmunicipalgovernments.4Sincetheprogram’sinception,themostimportantchangehasbeenthegradualand,ul-timately,thecompleteexemptionofqualifyingecologicalgiftsfromcapitalgainstaxation.5IntheUnitedStates,enhancedtaxincentivesarecurrentlyprovidedatthefederalandstatelevelsforqualifiedconservationcontributionstofederal,state,or localgovernmentunitsoragencies,orcharitableorganizationscommitted toconservationpurposes.6ConservationcharitiesinCanadaandtheUnitedStatesareoftenreferredtoas“landtrusts,”andforeaseofreference,thattermwillbeusedinthisarticletorefertoalltypesofeligiblerecipientsofqualifyingconservationgifts.

2 RSC1985,c.1(5thSupp.),asamended(hereinreferredtoas“theITA”).

3 IndividualdonorscanclaimataxcreditforecologicalgiftspursuanttoITAsubsection118.1(3);corporatedonorscandeductthevalueofanecologicalgiftfromtheirincomepursuanttoITAsubsection110.1(1).Thedefinitionof“totalecologicalgifts”inITAsubsection118.1(1)(andparagraph110.1(1)(d)forcorporatedonations)limitstheeligiblerecipientsofecologicalgifts(seethediscussionbelowundertheheading“QualifiedRecipients:TheDonee’sStewardshipCapacity”).Theenhancedtaxbenefitsavailabletocorporationsthatmakeecologicalgiftsarelargelythesameasthoseavailabletoindividualsandarenotdiscussedinthisarticle.

4 InformationabouttheprogramisavailableontheWebsiteoftheCanadianWildlifeService,EnvironmentCanada,athttp://www.cws-scf.ec.gc.ca/egp-pde.ForanoverviewofthetaxconsequencesofgiftsthroughtheEGP,seeAnnHillyerandJudyAtkins,Giving It Away: Tax Implications of Gifts To Protect Private Land(Vancouver:WestCoastEnvironmentalLawResearchFoundation,2004).

5 ITAparagraph38(a.2).GiftsofecologicallysensitivelandandconservationeasementsmadeoutsidetheEGPqualifyforthecharitabletaxcreditbutnottheeliminationoftaxablecapitalgains.

6 USfederaltaxlawoncharitablecontributionsofconservationeasementsisfoundinsection170(h)oftheInternalRevenueCodeof1986,asamended(hereinafterreferredtoas“theIRC”)andsection1.170A-14oftheUSCodeofFederalRegulations(hereinafterreferredtoas“Treasury


Thisarticlefocusesongiftsofconservationeasements,asdistinctfromgiftsoffullfee-simpleinterests.Conservationeasementshaveuniquecharacteristics,andthenumberofsuchdonationsisbeginningtooutstripfee-simplecharitablegifts.ThepurposeofthearticleistoconsiderhowtheEGPmightbeenhancedtoencour-agethedonationofeasementsonecologicallysensitive land,consistentwiththegovernment’s policy goals.7 Possible tax incentives include transferable credits,longercarryforwardperiods,carrybackperiods,limitedrefundabletaxcredits,andintergenerationaltransfersofunusedcharitablecredits.ThediscussiondrawsonacomparisonofCanadianandUSincentiveprovisions,andspecificallyconsidersUSinitiativesatboththefederalandstatelevelsaimedatincreasedlandconservationthroughprivatedonations.8Insomerespects,theseprogramshavebeensuccessful,buttheyhavenotbeenentirelyfreefromcriticismorabuse.

InCanada,theEGPispartofthefederalgovernment’sbroadercommitmenttoensuretheprotectionofspeciesatriskandbiodiversityby,amongotherthings,9supportingtheprotectionofecologicallysensitiveland,whichisoftenthehabitatfor rare and threatened species. More recently, the government has expressed acommitmenttoreducegreenhousegasemissionsandaddressclimatechange.Landprotectionand land-usemanagement throughecologicalgiftscanbepartofaneffective greenhouse gas emissions and climate change strategy. Forests, grass-lands,andwetlandsfunctionascarbonsinksbyremovingcarbondioxidefromthe

regs.”).Contributionstogovernmentunitsmustbemadeexclusivelyforpublicpurposes.Charitableorganizationsmustbetax-exemptunderIRCsection501(c)(3),meetthepublicsupporttestinsection509(a)(2),andincludeconservationasoneoftheorganization’spurposes.

ThisarticledoesnotdiscussindetailtheUSfederalestateandgifttaxbenefitsforeasementdonations,althoughitisnotedthatlandownersareoftenpartiallymotivatedtodonateeasementsbecauseofconcernsthattheirheirswillhavetosellthepropertytopayestatetaxes.ConservationeasementsreduceUSfederalestatetaxbyloweringtheproperty’sfairmarketvalueandmakingthepropertypotentiallyeligibleforanadditional40percentexclusionfromtheestatevalue(IRCsection2031(c)(8)(C)).Foradiscussionofboththeestateandgifttaxbenefitsfromconservationeasementdonations,seeC.TimothyLindstrom,A Tax Guide to Conservation Easements(Washington,DC:IslandPress,2008),191-218.

7 EnvironmentCanadahasexpressedinterestinfurtherenhancementstotheEGP.Inthisregard,authorKarenCooperalongwithAnnHillyerandJudyAtkinspreparedanunpublishedEnvironmentCanadainternaldiscussionpaper,“TaxIncentivesforCharitableGiftsofConservationEasements,”(May2008)ontransferabletaxcredits.

8 SeveralkeyaspectsoftheUSfederaltaxincentivesdiscussedinthisarticlewereintroducedin2006astemporaryprovisionsandwereduetoexpireattheendofDecember2009.However,thereissignificantlobbyingtoreinstatetheseprovisionsandmakethempermanent.Forfurtherdiscussion,seeinfranotes60to63andtherelatedtext.Stateinitiativesincludetransferableincometaxcreditsandextendedcarryforwardperiods.Transferableincometaxcreditprogramsallowdonorstosellalloraportionoftheirunusedstateconservationincometaxcreditvaluetoothertaxpayersinthesamestate,whocanthenusethepurchasedincometaxcreditvalueagainsttheirowntaxpayable.

9 Notably,theenactmentoftheSpeciesatRiskAct,SC2002,c.29.


atmosphere.Aswell,thedegreeofnaturalvegetativecoverinandaroundagricul-turallandcanhaveanimpactonnaturalcarbonstorageandrelease.10

InbothCanadaandtheUnitedStates,thetaxincentivesforlandconservationcomplementothertoolssuchasregulation,zoning,anddirectspendingmeasures.Taxincentivescansometimesbemoreefficientthandirectregulation,forseveralreasons: the large number of private landowners; the difficulty of detecting andtrackingactivitiesthatmayhaveanegativeimpactonlandfeaturesandhabitats;theneedforactive,adaptive,andindividualizedplans;andthehighpoliticalcostsofimposingconservationrequirementsonunwillinglandowners.11Taxincentivespar-tiallycompensatelandownersforpositiveexternalitiesthatbenefitthebroaderpublic,andforwhichthereisnocommercialmarketmakingdirectspendingmeasureslessfeasible.Income-tax-basedcharitabledonationcreditsanddeductionscreateamarketenvironmentbydefiningagroupofpotentialbeneficiaries(charitiesandgovernment-alentities)withwhichlandownerscannegotiate,andbyestablishinganeconomicvaluefortheecologicalservicesprovidedbytheland.12Directspendingmeasuresandtaxincentivescanbecombinedforanoverallapproachthatislessexpensiveandavoidscostlyandprotractedexpropriationproceedings.

Enhancedtaxbenefitsforlandprotectionhavesignificantlyspurredthegrowthoflandtrustsandincreasedthequantityandqualityoflandholdingsofallconservationorganizations.InCanada,sincetheintroductionoftheEGPin1995,692ecologicalgiftsvaluedatover$427millionhavebeendonated,protecting117,454hectaresoflandofnational,provincial,andregionalimportance.13ThemostrecentUSLandTrustAlliancefive-yearcensusestimatesthat,together,thealliance’s1,660memberorganizations have acquired conservation easements totalling 6,245,969 acres

10 SaraJ.WilsonandRichardJ.Hebda,Mitigating and Adapting to Climate Change Through the Conservation of Nature(SaltSpringIsland,BC:TheLandTrustAllianceofBritishColumbia,2008);andStevenA.Kennett,ArleneJ.Kwasniak,andAlastairR.Lucas,“PropertyRightsandtheLegalFrameworkforCarbonSequestrationonAgriculturalLand”(2005-2006)vol.37,no.2Ottawa Law Review171-214,at173-74,notingthatcarbonsequestrationachievedthroughlandmanagementisarecognizedclimatechangestrategy.However,Kennettetal.concludethatthecurrentstatutoryregimeforconservationeasementsisnotanadequatebasisforcarbonsequestrationtransactionsnecessaryforimplementingaclimatechangestrategy:ibid.,at198-205.

11 SeeJamesBoyd,KathrynCaballero,andR.DavidSimpson,“TheLawandEconomicsofHabitatConservation:LessonsfromanAnalysisofEasementAcquisitions”(2000)vol.19,no.1Stanford Environmental Law Journal209-55,at210-20;StephanieStern,“EncouragingConservationonPrivateLands:ABehavioralAnalysisofFinancialIncentives”(2006)vol.48,no.3Arizona Law Review541-84,at547-50;andKennettetal.,supranote10,at175-76.

12 JamesSalzman,“CreatingMarketsforEcosystemServices:NotesfromtheField”(2005)vol.80,no.3New York University Law Review870-961,at883-84.

13 DatareportedtotheendofDecember2008,asconfirmedtotheauthorsbythenationalcoordinatoroftheEGPinane-maildatedMay19,2009.Formorerecentfigures,see“EcologicalGiftsProgram:History”attheCanadianWildlifeServiceWebsite,supranote4.


(2,527,654hectares).14TheLandTrustAlliancemorerecentlyconductedataxin-centive impact survey, which estimates a 36 percent increase in acres protectedthroughconservationeasementsinthetwoyearsfollowingtheintroductionoftheenhancedfederaltaxincentivesin2006.15

Inconsideringimprovementstotheexistingregime,itisworthnotingcertaincharacteristicsofconservationeasementsthatshouldbetakenintoconsiderationinthedesignofanythingnew.Conservationeasementscanoftenhaveahighappraisalvalue,whichcangeneratesignificanttaxbenefits.16However, landtrustsseeking

14 RobAldrichandJamesWyerman,2005 National Land Trust Census Report(Washington,DC:LandTrustAlliance,2006)(http://www.landtrustalliance.org/about-us/land-trust-census/2005-report.pdf ).TheLandTrustAlliancesurveydoesnotincludeeasementsheldbynational-leveltrustsorbyfederal,state,orlocalgovernmententities.Forexample,inthesurveytimeperiod,theNatureConservancy,alandtrustoperatingonthenationallevel,reportedthatitheldeasementsencumberinganadditional2.7millionacresin2005.CommentatorsconsidertheLandTrustAlliancesurveydatatobeincompleteandnotethataccuratedataarehardtocomeby.Thevastmajorityofstatesdonotrequireaspecialindexorsetofrecordingbooksforconservationeasements,andothersurveysindicatethatlandtruststhemselvesaresometimesunclearastotheeasementsthattheyown.SeeGeraldKorngold,“SolvingtheContentiousIssuesofPrivateConservationEasements:PromotingFlexibilityfortheFutureandEngagingthePublicLandUseProcess”(2007)no.4Utah Law Review1039-84,at1046;BayAreaOpenSpaceCouncil,Ensuring the Promise of Conservation Easements(SanFrancisco:BayAreaOpenSpaceCouncil,1999),citedinJeffPidot,Reinventing Conservation Easements: A Critical Examination and Ideas for Reform,PolicyFocusReport(Cambridge,MA:LincolnInstituteofLandPolicy,2005);andElizabethByersandKarinMarchettiPonte,The Conservation Easement Handbook,2ded.(Washington,DC:LandTrustAlliance,2005),8-9,notingthathundredsofpublicagenciesacrosstheUnitedStatesholdconservationeasements.

15 LandTrustAlliance,“TaxIncentiveSurveyResults”(http://www.landtrustalliance.org/policy/taxincentives/federal/survey).TheLandTrustAlliancesurveyed480landtruststhattogetherrepresentedover90percentoftheeasementacreagereportedinthe2005landtrustcensus.Theeasementsheldattheendof2007werecomparedwithdatathattheselandtrustshadgiventheLandTrustAlliancein2003and2005.Thesurveyindicatesthat2,027,553acres(820,525hectares)wereprotectedwithconservationeasementsinthefirsttwoyearsfollowingtheintroductionoftheenhancedfederaltaxincentivein2006.Thisrepresentsanadditional535,000acres(216,507hectares)overtheprotectedacreagereportedasof2005,oranincreaseof36percent.Itisnotablethattominimizedatadistortion,thesurveyexcludedeasementsinexcessof100,000acres.Thesurveyalsoreportsanincreaseofalmost50percentinthenumberofeasementsaddedinthetwopost-incentiveyearsoverthosereportedinthetwoyearsbefore.

16 NancyA.McLaughlin,“IncreasingtheTaxIncentivesforConservationEasementDonations—AResponsibleApproach”(2004)vol.31,no.1Ecology Law Quarterly1-115,at26,notingthatrisinglandvalues,developmentpressures,andthetypeofpermanentrestrictionsthatqualifyforthefederaltaxincentivetypicallyresultinhighvaluationsofdonatedeasements.McLaughlincitesanecdotalevidencefrom17reportedInternalRevenueService(IRS)caseschallengingeasementvaluationswherethecourtsultimatelyapprovedeasementvaluesrangingfrom$20,800to$4,970,000.Also,theLandTrustAlliancereportsthattheaverageconservationeasementdonationintheUnitedStatesisvaluedat$400,000.SeeLandTrustAlliance,“IRSAuditsofConservationEasements”(http://www.landtrustalliance.org/policy/taxincentives/ce-audits/irs-audits).


conservationeasementdonationsarguethat“land-richandcash-poor”taxpayers17areunabletotakefulladvantageofthetaxbenefitsgeneratedbyagiftofaconserva-tioneasement.Conservationeasementsalsopresentuniquelong-termenforcementproblems.Unlikeagiftoflandinfeesimple,wherethedonorhasnofurtherrespon-sibilitiesor rightsvis-à-vis thegiftedproperty,conservationeasementscreateanactive,ongoing,andpermanentrelationshipbetweenthedonor-landownerandthecharitableorgovernmenteasementholder.Subsequentlandowners,oftenbenefici-ariesofadeceaseddonor,havetheburdenoftheconservationencumbrancewithoutthetaxincentiveandwithoutnecessarilysharingtheecologicalvisionthatmotiv-atedtheinitialgift.Thisongoingrelationshipcancreatepressurepointsovertimetoresist,modify,orterminatetheeasement.18Landtrustshaveongoingstewardshiprightsandconcomitantcostlyresponsibilities,includingmaintenance,monitoring,andenforcement,whichcanbecomemoredifficulttomeetwiththepassageoftimeorifsubsequentlandownersarenon-supportive.

Ideally,enhancementstotheconservationeasementincometaxincentivesshouldstrivetomaximizeconservationgoals;increaseeconomicefficiencybyrecognizingtheongoingandfuturepublicbenefitoftheecologicalservicesprovided;19addressdistributional inequities for moderate- and low-income donors and subsequentlandowners;andstrengthenthebondbetweenlandownersandcharitableorganiz-ationstoensurelowercompliancecostsforeasementholders.

IntheUnitedStates,criticspointtoaproliferationofconservationeasementtransactions with questionable environmental value and involving aggressive taxplanning. The criticism is particularly intense in some states where transferablecreditsareavailable.20However,thesecriticismshavenotdampenedinterestinthe

17 Theland-richandcash-poortaxpayerisoftenreferredtoinsupportoflobbyingeffortsbylandtruststoincreasetaxincentives:McLaughlin,supranote16,at47-48(seeespeciallyfootnotes173and174).

18 Forexample,SusanF.French,“PerpetualTrusts,ConservationServitudes,andtheProblemoftheFuture”(2006)vol.27,no.6Cardozo Law Review2523-36,at2529,citesthecaseofafamilyseekingareleasefromanagricultural-userestrictionforaportionofa68-acrefarm,only11yearsaftergrantingaperpetualservitudetothecityofEncinitas,California(reportedbyJoelMillman,“FlowerPowerStruggle,”Wall Street Journal,November2,2005,B1).Frenchremarksthat“[s]kyrocketinglandvaluesandchangingownershipofrestrictedlandswillleadtoescalatingchallengestodevelopmentrestrictions.”SeealsoBoydetal.,supranote11,at228.

19 Thefairmarketvalueoftheconservationeasementdonationismeasuredbythediminishedvalueofthelandusinga“beforeandafter”fairmarketvaluecomparison.Theongoingpublicgoodachievedbytheeasementandthehighsocialandenvironmentalcoststhatwouldbeincurredifthepropertyweredevelopedarenotpartofthevaluationprocess.Itisarguedbysomethatthedonationsubsidyisnotlikelytoadequatelycompensatefortheactualmarketfailure:seeBoydetal.,supranote11,at244-45.Futurelandowners,particularlythosewhoinherittheproperty,continuetocontributetothepublicgoodwithoutcompensation,althoughinsomejurisdictionsthelocalpropertytaxmaybereducedbecauseoftheeasement.

20 Mediareportsquestiontheappropriatenessofeasementdonationsforlandbetweenhomesinanexpensivesubdivision($800,000-$2,000,000homes);forlandalongthefairwayofagolf


UnitedStatesinusingtransferableincometaxcredits.Encouragedbyevidencethattransferablecreditswithcertainfeaturessignificantlystimulatethepaceofconserv-ationeasementdonations,otherstatesareconsideringadoptingsimilarmeasures.Despitea targetedauditblitzby theInternalRevenueService (IRS), resulting inchallengestoanestimated$15millionoffederaltaxbenefitsreceivedfordonationsofeasementsinColorado,21in2008Coloradoexpandeditsconservationeasementtaxcredittransferprogram,albeitwithspecificreformmeasuresaimedatcurbingabuse.22 As discussed below, the Canadian EGP addresses such forms of abusethroughitspre-certificationofbothenvironmentalqualificationsandvaluation.

ThisarticlecomparestheCanadianandUSincometaxincentivesforconservationeasementsandconsiderspossibledesignmodificationsforCanada’sEGPincorpor-atingelementsoftheUSapproach.Webeginwithabriefdescriptionofconservationeasementsandtheirattractionsanddrawbacks.WethenoutlinekeyfeaturesoftheCanadianincometaxprovisionsandUSincentivesadoptedatboththefederalandstatelevels.ThisoverviewisfollowedbyacomparisonofthetaxcostsandbenefitsofCanada’sincentivesandtheapproachadoptedinColorado—astatethatprovidestransferableandrefundablecreditsanda20-yearcarryforwardperiod.Forthispur-pose, we use the example of a moderate-income Canadian farmer motivated todonateaconservationeasement.Finally,weconsiderwhetherincentivesmodelledontheUSprovisionswouldbeappropriateinCanadafrombothapracticalandapolicyperspective.Weconcludethatanapproachthatcombinedalongercarry-forwardperiodwithanintergenerationaltransferofunusedcreditsondeathandalimitedcarrybackperiodwouldhavemanyadvantages.Ontheotherhand,atrans-ferabletaxcreditwouldinvolvealargerfiscalexpenditureandhighertransactioncosts,aswellasmorecomplexanti-abuseprovisions;moreover,suchaprovision

coursethathostsprofessional(PGA)tournaments;forparcelsthatallowoilandgaswellsandwindfarms;forverysmall(one-thirdofanacre)parcels;andforranchetteswheretheownercanstillbuildmultiplehomes.Thereportsalsochronicleongoingauditsofinflatedappraisalvalues.SeeJerdSmithandBurtHubbard,“AbusesTaintLandDeals:ConservationEasementsApprovedforPriceySubdivisions,Fairways,SmallParcels,”Rocky Mountain News,February9,2008(http://www.rockymountainnews.com/news/2008/feb/09/abuses-taint-land-deals/);andDavidMigoya,“IRSFindsaThirdofEasementsinProbeAreFaulty,”Denver Post,November29,2007(http://www.denverpost.com/colleges/ci_7584710).

21 ThenationwideIRSinvestigationcoveredmorethan400conservationeasementdonations,ofwhich290wereinColorado.SeeMargaretJackson,“IRSLatestToScrutinizeConservationEasements,”Denver Post,June29,2008(http://www.denverpost.com/ci_9725601);andMigoya,supranote22.

22 Coloradoincreasedthemaximumcreditamountfrom$260,000to$375,000.Inaddition,HouseBill08-1353,passedinJune2008,includedprovisionforthereviewofeasementappraisalsbytheColoradoDivisionofRealEstate,withthepowertosuspendorimposepenaltiesonappraisers;thecreationofaconservationeasementoversightcommission,withamandatetoadministeracertificationprogramforconservationeasementholdersandtoadvisetheDivisionofRealEstateandthestateDepartmentofRevenue;andtheintroductionofaminimumpre-donationlandholdingperiodrequirement.


wouldbeasignificantdeparturefromthegeneralCanadianincometaxprohibitionagainst transferring tax attributes between unrelated entities. Therefore, in ourview,atransferabletaxcreditisnotafeasibledesignoptionfortheEGP.

CO NSERVATIO N E A SEMENT S: AT TR AC TIO NS A ND DR AWB ACK S

“Conservationeasement”isthepopularnameforabindingagreementbetweenalandownerandacharityorgovernmententitythatplacesrestrictionsonthefutureuseofthelandorcreatesobligationstoachievespecificconservationgoals.Forex-ample, the easement grantor may agree to forgo the use of the land for certaineconomicactivities,suchascommercialdevelopment,residentialsubdivision,graz-inglivestockwithinasetdistancefromawatershed,orharvestingtreesthatprovidethehabitatforaparticularspecies.Theeasementmaybegrantedinordertopre-servenaturalandphysicalfeatures,suchaswetlands,freshwaterponds,orlargetractsofnativegrasslands.Tofulfillthisobjective,theagreementmaysetoutspecificaf-firmativeobligations,suchasdevelopingandimplementinganapprovedsustainableforestmanagementplan,orimposingprohibitionsontheuseofchemicalherbi-cidesandpesticidesorthedischargeofsepticorwastewaterinsensitivewatershedareas.23Specialprovincialandstatestatutesarerequiredtocreateenforceablerightsinthehandsofeasementholders,sincethecommonlawdoesnotgenerallyrecog-nizethisformofencumbrance.24

Bydefinition,conservationeasementseligiblefortaxincentivesarewithintheprivate-public realm of charitable activity.25 Public support of a private charity’s

23 ByersandPonte,supranote14,atchapters19and20.

24 Conservationeasementsarenon-possessoryinterestsinlandrecordedonthetitle,andincludeeasements,servitudes,orcovenants.Common-lawconstraintsnecessitatingspecificconservationeasementenablingstatutesincludenon-recognitionorlimitedrecognitionofeasements“ingross,”whichbenefitthepublicatlargeoranentityratherthananeighbouringparcelofland(dominanttenement)appurtenanttotheencumberedland(servienttenement);andnon-enforcementof“negativeeasements,”whichimposerestraintsontheservienttenement’sfutureeconomicuseandalienability.Foranextensivediscussionofthecommon-lawdoctrinesrealtingtoconservationeasement,seeJeffreyA.Blackie,“ConservationEasementsandtheDoctrineofChangedConditions”(1989)vol.40,no.6Hastings Law Journal1187-1222.ForadiscussionofthecommonlawrelatingtoeasementsinCanadaandthecivillawrelatingtoservitudesinQuebec,seeJudyAtkins,AnnHillyer,andArleneKwasniak,Conservation Easements, Covenants and Servitudes in Canada: A Legal Review,NorthAmericanWetlandsConservationCouncil(Canada)Reportno.04-01(Ottawa:NAWCC,2004).

25 ThedraftersoftheUnitedStatesUniformConservationEasementAct(1981)(UCEA),12ULA55(Supp.1985),wantedtosituateconservationeasementswithintherealmofprivatedecisionmaking.Inthisregard,charitableactivityandcharitableentitiesrepresentprivate,non-governmentalactions.SeeMaryAnnKingandSallyK.Fairfax,“PublicAccountabilityandConservationEasements:LearningfromtheUniformConservationEasementActDebates”(2006)vol.46,no.1Natural Resources Journal65-129,at82-89.However,thepublic-privatelineisactuallyblurred.Charitableentitiesandcharitableactivitiesaresubjecttopublicscrutinyand


conservation program is achieved via tax-subsidized charitable donations. TheUnited States Uniform Conservation Easement Act (1981) (UCEA),26 and mostprovincialandstatelegislation,restrictsconservationeasementholderstocharitableorganizations,generallylandtrusts,andgovernmententities.Byadoptingthisre-striction,theUCEAdrafterssoughttoavoidoverlyprescriptivestatutoryprovisions.Theybelievedthatcharities

weretrustworthyenoughtoexercisediscretionintheabsenceofpublicoversightandwouldnottakeonobligationsandresponsibilitiesthattheycouldnotuphold.Thecommissionerswereconfidentthatthelawconcerningcharitableorganizationsandlevelsoffederalandstatetaxlawwouldpreventabuse.27

Commentatorsdescribearecentvirtualexplosionofconservationeasementac-tivityintheUnitedStates.The2005censusoftheLandTrustAlliancereportsthatbetween2000and2005thenumberofacresheldunderconservationeasementsbylandtrustsincreasedby148percent(from2.5millionto6.2millionacres).28Inthesame period, land trusts increased their fee-simple holdings by a more modest40percent.29InCanada,approximately42percentofallecologicalgiftstodatehavebeenpartialinterestsinland(thatis,easements,servitudes,orcovenants).30

accountabilitythroughavarietyofjudicialandstatutorymechanisms,includingthepotentiallossofcharitableregistration.SeeNancyA.McLaughlinandMarkBenjaminMachlis,“ProtectingthePublicInterestandInvestmentinConservation:AResponsetoProfessorKorngold’sCritiqueofConservationEasements”(2008)no.4Utah Law Review1561-94,at1565,wheretheauthorsobservethat“neitherconservationeasementsnorlandtrustscanbeaccuratelydescribedas‘private,’andtorefertothemassuchobscurestheessentialpublicnatureofboth.”

26 Supranote25.Forty-ninestateshaveconservationeasementstatutes,ofwhichabouthalfarebasedontheUCEA.SeeNancyA.McLaughlin,“RethinkingthePerpetualNatureofConservationEasements”(2005)vol.29,no.2Harvard Environmental Law Review421-522,at426,especiallyfootnotes13and15;seealsoAtkinsetal.,supranote24,at81-83.

27 KingandFairfax,supranote25,at86.IntheUnitedStates,burgeoningeasementactivity,unevenstewardshipcapacityamonglandtrusts,andreportedinstancesofabusiveorquestionabletax-drivenconservationtransactionssuggestthattheUCEAdrafterswereoverlyconfidentintheabilityofthecharitablesectortoproviderestraintandoversight.SeegenerallyMcLaughlin,supranote16.

28 AldrichandWyerman,supranote14.

29 Thetrendtowardeasementacquisitionhasbeenconsistentsince1988.SeeMcLaughlin,supranote16,at4-5;andKorngold,supranote14,at1047-48.

30 Supranote13.SeealsoEnvironmentCanada,CanadianWildlifeService,The Canadian Ecological Gifts Program Handbook 2005(Gatineau,QC:EnvironmentCanada,2005)(hereinreferredtoas“theEGPhandbook”),“TheEcologicalGiftsProgram:EcosensitivityCriteria,”and“TheEcologicalGiftsProgram:RetainingtheRightToUseLandDonatedasanEcologicalGift”(allavailableathttp://www.cws-scf.ec.gc.ca).


Conservation easements offer significant advantages, as compared with fee-simpleownership,forboththedonorandtherecipientlandtrust:

n Easementsarecheapertopurchase—animportantconsiderationincircum-stanceswherethelandownerneedspartialcompensationsuchthatthetrans-ferispartgiftandpartsale.31

n Wherethelandownerpreferstoretainpersonaluseofthedonatedproperty(asisoftenthecase),aconservationeasementistheonlywaytocurtailfuturedevelopment.32

n Aneasementcanresultinamoreefficientallocationofresources:ownershipresponsibilitycosts,suchasmaintenanceandinsurance,oftenremainwiththelandowner,whilethemonitoringandmaintenanceoftheconservationattrib-utesareundertakenthroughthelandtrust’sexpertise,effort,andexpense.33Donatingthroughaconservationeasementalsokeepsproductivepropertyinthe localproperty taxbase.Conservationgoalscanbeachievedata lowereconomicefficiencycostthanthatofsomeregulatoryapproaches.34

n Eachconservationeasementisanindividuallynegotiated,andthusunique,arrangementdraftedtomaximizetheachievementofparticularconservationgoalsandtominimizetherestrictionsonthelandowner’spersonalorproductiveuse.Workingconservationeasementsaretailoredtopreservethelandowner’slivelihood by allowing compatible productive economic activities, such asfarming, ranching, and small-scale woodlot production, while at the sametimepreservingtheland’ssignificantecologicalvalues.35Balancingtargeted

31 IntheUnitedStates,thiskindoftransactionisreferredtoasa“bargainsale.”SeeJeffreyO.SundbergandRichardF.Dye,Tax and Property Value Effects of Conservation Easements,LincolnInstituteofLandPolicyWorkingPaper(Cambridge,MA:LincolnInstituteofLandPolicy,2006).InCanada,proposedamendmentstosection248oftheITArelatedtosplitreceiptingwouldpermitsimilartransactions:Canada,DepartmentofFinance,BillC-10,IncomeTaxAmendmentsAct,2006,October29,2007,proposedsubsections248(30),(31),and(32).ThisbillceasedtoexistwhenParliamentwasdissolvedonSeptember7,2008andhasnotyetbeenreintroduced.

32 Boydetal.,supranote11.

33 However,therecanbesignificanttransactioncostsinestablishinganeasement,aswellasmanagementandenforcementcosts.SeeBoydetal.,supranote11,at219-20;fordescriptionsofeasementholder’sresponsibilities,seeByersandPonte,supranote14,at22,andchapter9.Foraneconomicanalysisofeasementholders’andlandowners’rightsandacomparisonofthetransactioncostsofeasementsandfullownership,seeDominicP.Parker,“LandTrustsandtheChoiceToConserveLandwithFullOwnershiporConservationEasements”(2004)vol.44,no.2Natural Resources Journal483-518,at501-8.

34 Boydetal.,supranote11,at218;andStern,supranote11,at546-49.

35 Foradescriptionofagriculturalandworkingforesteasements,seeByersandPonte,supranote14,atchapter13.


conservationgoalswithcompatibleprivateeconomicrightscreateseconomicefficiencycomparabletothatwhich isoftenaccomplishedthroughfull feeownership.36Ofcourse,theallowableproductiveusesmustbewelldefinedinordertoensurecompatibilitywiththeeasement’sconservationpurposes.37

Ontheotherhand,thereisnowanextensivebodyofreform-orientedcriticismofconservationeasements,mostlybyUSauthors.UScommentatorsquestionwhetherconservationeasementsprovideapublicbenefitcommensuratewiththeirpublicsubsidy.Concernsmostoftennotedincludepoorintegrationintoestablishedformsofpublicreview,resultinginoverallpoorland-useplanning,lackoftransparency,andoversightofwhatisessentiallyprivateland-usecontrol;38andunderresourcedeasementholderswithinsufficientcapacitytoevaluate,monitor,andenforceease-ments.39Thereisalsoalivelydebateontheperpetuityrequirementforconservationeasements,citingthecoststofuturegenerationswhodonotreceivethebenefits,restrictionsthathaveoutgrowntheirenvironmentalrelevance,andotherunantici-patedburdens.40

36 SeeParker,supranote33,at498-501,511-13,and516-17,describingtransactioncostsandspecializationgains.Parkerconcludesthatdividingownershipbetweenenvironmentalamenitiesandnon-conservationoutputscanbecost-effective,subjecttothecaveatthatimperfectlyspecifiedrightsandsomecostlymonitoringandenforcementactivitiescanreducethecostsavingsgeneratedbyspecialization.

37 Retainedrightstoengageincommercialactivitiesmustbecarefullydefinedsoasnottoharmtheconservationpurposesspecifiedintheeasement.

38 Pidot,supranote14,at7,13-15,and31,describinguncertaincost-benefitcalculus,adhocdecisionmaking,and“backyard”easementswithquestionableconservationvalues;JoanYoungman,“TaxingandUntaxingLand:OpenSpaceandConservationEasements”(2006)vol.41,no.11State Tax Notes747-62,at759and761,describing“leapfrog”sprawlandblockedconstructionofaffordablehousing;Korngold,supranote14,1059-60;andLeighRaymondandSallyK.Fairfax,“The‘ShifttoPrivatization’inLandConservation:ACautionaryEssay”(2002)vol.42,no.3Natural Resources Journal599-639,at636-37.

39 Pidot,supranote14,at18-21;andKorngold,supranote14,at1062.SeealsoSallyK.Fairfax,LaurenGwin,MaryAnnKing,LeighRaymond,andLauraA.Watt,Buying Nature: The Limits of Land Acquisition as a Conservation Strategy, 1780-2004(Cambridge,MA:MITPress,2005),268-69,wheretheauthorsnotethatalargenumberoflandtrustswereformedinthepast20yearsandthattheseorganizationshavenotrackrecordandlimitedresourcesforstewardshipandenforcement.Canadianlandtrustsalsofacedifficultieswitheffectivemonitoring:seeL.CampbellandC.D.A.Rubec,Land Trusts in Canada: Building Momentum for the Future,WildlifeHabitatCanadaandEnvironmentCanadaReport(Ottawa:WildlifeHabitatCanada,2006),16,citingaBritishColumbiastudysurveying100non-governmentorganizations.

40 Althoughmostenablingstatutesdonothaveaperpetuityrequirement,inboththeUnitedStatesandCanada,easementsareusuallygrantedinperpetuity,inordertoqualifyforincometaxbenefits.Forasummaryofthecriticism,seeJuliaD.Mahoney,“TheIllusionofPerpetuityandthePreservationofPrivatelyOwnedLands”(2004)vol.44,no.2Natural Resources Journal573-600;JuliaD.Mahoney,“PerpetualRestrictionsonLandandtheProblemoftheFuture”(2002)vol.88,no.4Virginia Law Review739-87,at756;andJohnD.Echeverria,“Regulating


Anotherpersistentcriticismisthateasementacquisitionisoftenopportunistic:

[A]lmostuniformly,easementdealsareconstructedtomeetthespecificfinancialandrealestateneedsofthedonororseller.Conservedlandthuscomesunderprotectionbecauseitisavailable...notnecessarilybecauseitisanappropriateparceltocon-serve.Thelandowner,ratherthanthetrust,drivestheprocess.41

Oneauthorwarnsthattheconservationagendacanbecomehijackedbyotherpol-iticalinterests,resultinginconservationeasementprogramsthat“infactaresimplymethods of subsidizing existing farmers or landowners . . . but [do] not alwaysachieveconservationobjectives.”42

CriticalcommentarydirectedattheUSfederaltaxincentivesalsounderscorestheproblemsrelatingtoeasementfairmarketvaluedeterminations.Inaddition,efficiencyandequityconcernsareoftennoted.Forexample,oneauthorpointsoutthatintheabsenceofinformationaboutthepercentageoflandownerswhorequirethefinancialinducementofthetaxincentivetomakethegift,thevalueofthoseeasements,ortheaggregatecostoftheincentives,itisimpossibletoassesstheef-ficiencyoftheUSfederalincentiveprogram.43ThesameauthorquestionswhethertheUSfederaltaxdeductionstructurecouldeverprovideappropriateincentivesforland-richandcash-poorlandowners;shealsosuggeststhatfurtherincreasesunderthe charitable deduction provisions might only provide a windfall to affluentlandowners.44

VersusPayingLandOwnersToProtecttheEnvironment”(2005)vol.26,no.1Journal of Land, Resources, and Environmental Law1-46,at25.ButseeMcLaughlin,supranote26,at430,arguingthatcyprescanbeusedtostrikeabalance“betweenthelandowner’sdesiretoexercisedeadhandcontrolandsociety’sinterestinensuringthatassetsperpetuallydevotedtocharitablepurposescontinuetoprovidebenefitstothepublic.”Foradiscussionofissuesrelatingtothemodificationandterminationoftax-deductibleperpetualconservationeasementsintheUnitedStates,see,forexample,NancyA.McLaughlinandW.WilliamWeeks,“InDefenseofConservationEasements:AResponseto‘TheEndofPerpetuity’ ”(2009)vol.9,no.1Wyoming Law Review1-96;andNancyA.McLaughlinandMarkBenjaminMachlis,“AmendingandTerminatingPerpetualConservationEasements”(2009)vol.23,no.4Probate and Property52-56.

41 RaymondandFairfax,supranote38,at627.SeealsoParker,supranote33,at516-17.

42 GwenannSeznec,“EffectivePoliciesforLandPreservation:ZoningandConservationEasementsinAnneArundelCounty,Maryland”(2005)vol.23,no.3Virginia Environmental Law Journal479-525,at487.

43 McLaughlin,supranote16,at92.

44 Ibid.,at99-105.McLaughlinnotesthatthereislittlehardevidencesupportingtheexistenceofatargetgroupofland-rich,cash-poorlandowners,andexplainsthat“thefundamentalmathematicsofthecharitableincometaxdeductionworkagainsteffortstousethatmechanismtoprovideameaningfulincentive”tosuchtaxpayers:ibid.,at100.Aswewilldiscussinthenextsectionofthearticle,theCanadianEGPdeliversthetaxbenefitthroughacredit,whichintheoryislesssusceptibletocriticismonthegroundofequitythanisthecaseforadeductionstructure.


ThreetypesofreformaregenerallysuggestedintheUSliterature:

1. tighteningappraisalrulesandstandards; 2. correctingdeficienciesintheselectionofeasementpropertyandthedrafting

ofeasementterms;and 3. institutinghigherstandardsthroughaccreditationmechanismstoensurethe

stewardshipcapacityofeasementholders.

Aswewilldiscussinthenextsection,toagreatextentCanada’sEGPalreadydealswithvaluationappraisalproblemsandenvironmentalintegrityineasementselec-tionaspartoftheinitialeligibilityprocess,makingtheprogramlesssusceptibletothecriticismsraisedintheUnitedStates.

ThecriticalcommentaryintheUnitedStateshasthusfarpaidlittleattentiontothe intergenerational equity or the behavioural effectiveness of the income taxbenefit’s design. For example, both the charitable deduction and the charitablecreditprovideaone-time,upfrontsubsidytotheinitialeasementdonor.Thisde-signdoesnotconsiderthevalueoftheongoingecologicalservicesprovidedbythelandandtheneedtoreinforcetheongoingrelationshipbetweenthelandownerandthelandtrust.Asaresult,theincentiveprovisionsmaybeinequitableforsubse-quentownersofpropertythatissubjecttomaintenanceobligationsandrestrictionsontheuseofthelandinperpetuity.Thedesignofthetaxbenefitalsofailstotakeadvantageoflessonstobelearnedfromthebehaviouralliterature,whichsuggeststhatongoingfinancialincentivesprovidebettersupportforthedesiredbehaviour—inthiscase,complianceandastrongworkingrelationshipbetweenthedonor,thedonor’sheirs,andtherecipientlandtrust.45Inalatersectionofthearticle,wewillconsiderapproachesthatincreaseandstaggerbenefitsacrossalongertimespan,aswellasintergenerationalcredittransfers.

K E Y FE AT URE S O F THE TA X TRE ATMENT O F CONSERVATION E A SEMENT DON ATIONS IN C A N A DA A ND THE UNITED S TATE S

InbothCanadaandtheUnitedStates,privatevoluntaryconservationmeasuresaresupportedthroughfederalandprovincial/stateincometaxincentivesdeliveredviacharitablegiftprovisions.Whilethestructureanddetailsaredifferent,bothcountriessingleoutconservationgiftsforextraincentivesbeyondwhatisavailableformostothercharitabledonationsofcapitalproperty.Toprovidethebackgroundforthehypotheticalexampleandthepolicydiscussionthatfollows,thissectionpresentsacomparisonofthekeyfeaturesoftheCanadianandUSincentiveprograms.

45 SeethediscussioninStern,supranote11.


Tax Incentive Structure: Credit or Deduction, Overall Limit, Carryforward, and Transferability

Abriefoverviewofthebasicrulesforcharitabledonationsisthestartingpointforcomparingeachcountry’senhancedincometaxincentivesforcreatingconservationeasements.InCanada,individualtaxpayerswhomakegiftstoqualifieddoneesreceiveanon-refundabletaxcredit.46Eachyear’screditiscalculatedbyapplyingthelowestfederalmarginaltaxrate(15percentin2009)tothefirst$200ofthedonor’stotaleli-gibledonationsfortheyearandthehighestrate(29percentin2009)tothebalance.47Formostcharitabledonations,thetotalamountqualifyingforthecreditinayearmaynotexceedaspecifiedannuallimit,currently75percentofthedonor’snetincome.48Anyunusedportionofqualifyingcharitabledonationsfortheyearcanbecarriedforwardforfiveyears,atwhichpointtheavailabilityofthecreditfortheunusedamountexpires.Donationsof capitalproperty, including land, triggeradeemeddisposition,whichcanresultintaxablecapitalgains.49Provincialincometaxprovi-sionsmirrorthefederaltreatment,albeitatthemuchlowerprovincialtaxrates.50

In the United States, charitable donations qualify as itemized deductions forthosewhochooseitemizationoverastandarddeduction.51Theitemizeddeduction

46 ITAsubsection118.1(3). 47 ITAsubsection117(2). 48 Asdiscussedbelow,thelimitdoesnotapplytoCrowngiftsandecologicalgifts.SeeITA

subsection118.1(1),thedefinitionof“totalgifts.” 49 Generally,ataxpayerwhodisposesofpropertybywayofgiftisdeemedtohavereceived

proceedsofdispositionequaltothefairmarketvalueofthepropertyatthattimeunderITAparagraph69(1)(b).Ifthefairmarketvalueofthepropertyexceedsitsadjustedcostbase,thetaxpayerwillrealizeacapitalgainasaresultofthedisposition.Formostgiftsofproperty,50percentofthecapitalgainisincludedinincomefortheyearandissubjecttotax.Incomerecaptureofexcesscapitalcostallowancecanalsooccurfordepreciableproperty.However,ITAsubsection118.1(6)willallowthedonortoelectanamountbetweentheadjustedcostbaseandthefairmarketvalueofthegiftedpropertytobethedonor’sproceedsofdisposition,thusallowingareductionintheamountofcapitalgainstriggeredandtheeligibleamountofthegift.SeeInterpretation BulletinIT-288R2,“GiftsofCapitalPropertiestoaCharityandOthers,”January16,1995,paragraph1,foradetaileddiscussionoftheserules.Again,anexceptionisprovidedforcertainecologicalgifts:seeinfranote55andtheaccompanyingtext.

50 ThereisalivelydebateinCanadaonwhethercharitablegiftsshouldgetspecialtaxrecognition.SeegenerallyDavidDuff,“CharitableContributionsandthePersonalIncomeTax:EvaluatingtheCanadianCredit,”inJimPhillips,BruceChapman,andDavidStevens,eds.,Between State and Market: Essays on Charities Law and Policy in Canada(Montreal:McGill-Queen’sUniversityPress,2001),407-56;andNeilBrooks,“TheTaxCreditforCharitableContributions:GivingCreditWhereNoneIsDue,”inthesamevolumeat457-84.

51 Thestandarddeductionvariesaccordingtothetaxpayer’sfilingstatus.In2009,thedeductionswere$5,700forasinglefiler,$11,400forjointfilers,and$8,350forasingleheadofhousehold(allamountsinUSdollars).Alongwithcharitablecontributions,itemizeddeductionsincludemedicalanddentalexpenses,interestonahomemortgage,uniondues,employeetravelexpenses,andotherspecifieditems.Thereisanadditionaloveralllimitoncertainitemizeddeductions,includingcharitabledeductionsunderIRCsection68;however,theoveralllimitisexpectedtobephasedoutafter2009.


structuretiestheamountofthetaxsubsidytotheindividualdonor’sfederalmarginaltaxrate,whichrangedfrom10percentto35percentin2009.Charitablecontribu-tionsarealsosubjecttoanannualcontributionlimitcalculatedasapercentageofthe taxpayer’s “adjustedgross income” (AGI).There is anoverall annual limitof50percentofAGIforcashandnon-capitalproperty.52Capitalpropertiesaresubjecttoalower30percentlimit(2009).53Conservationeasementswouldordinarilybeconsideredcapitalproperty,absentthespecialincentivesdiscussedbelow.Unusedportionsofdeductibledonationscanbecarriedforwardforfiveyears.IncontrasttotheCanadianprovisions,donationsofcapitalpropertyarenottreatedastaxabledis-positions.Moststatesalsoprovideadeductionbasedonthefederaldeduction.54Aswillbediscussedmorefullybelow,somestateshaveintroducedastateconservationeasementincometaxcredit,eitheronitsownorinadditiontothededuction.

BothCanadaandtheUnitedStateshavemadepublicpolicychoicestoenhancethetaxincentivesfordonationsofecologicallysensitiveproperty.Inbothcoun-tries,theadditionaltaxadvantageshaveincreasedlandconservationinitiativesandcontributedgreatlytothegrowthofthelandtrustcommunity.InCanada,ecologic-algiftsofbothfee-simpleinterestsinlandandconservationeasementshavetwoaddedtaxadvantagesbeyondthoseavailableformostothercharitablegifts:theyarenotsubjecttothe75percentannualnetincomelimitforcharitabledonations,andthedonationdoesnottriggertaxablecapitalgains.

TheCanadiangovernment’spolicyoncapitalgainstaxationinrespectofecologic-algiftshaschangedsincetheinceptionoftheEGPin1995.Initially,thetreatmentwasthesameasthatforothertaxabledispositionsofcapitalproperty.Then,begin-ningin2000,thecapitalgainsinclusionrateforecologicalgiftswasreducedtohalfofthenormalinclusionrate(33.3percentforFebruarytoOctober2000and25per-cent thereafter). In May 2006, the government amended the ITA to completelyeliminatecapitalgainstaxationforsuchgifts.55Thispolicychangewasexceptionally

52 IRCsection170(b);Treas.reg.section1.170A-8(a).

53 IRCsection170(b)(1)C(i);Treas.reg.section1.170A-8(e).

54 Thisisbecauseinstatesthatimposeanincometax,thestatesystemusuallytracksthefederalincometaxstructureanddeductions(Korngold,supranote14,at1050,footnote45).Sevenstatescurrentlyhavenoincometax:Alaska,Florida,Nevada,SouthDakota,Texas,Washington,andWyoming.Twostates,NewHampshireandTennessee,haveonlytaxdividendsandinterest(http://www.taxadmin.org/fta/rateind_inc.html).

55 ITAparagraph38(a.2).ThisprovisionwasintroducedaspartoftheMay2006federalbudget,atthesametimeastheeliminationoftaxablecapitalgainsongiftsofpubliclytradedsecurities:Canada,DepartmentofFinance,2006Budget,NoticeofWaysandMeansMotionToAmendtheIncomeTaxAct,May2,2006.Theamendinglegislationwasenactedinthesameyear:SC2006,c.4,section51(2),applicableinrespectofgiftsofpropertymadeafterMay1,2006.Theeliminationoftaxablecapitalgainsdoesnotapplytoecologicalgiftsofinventoryland.Agiftoflandheldasinventorywillgiverisetoaninclusioninincomeofthefairmarketvalueoftheproperty,althoughtheresultingtaxwillbeoffsetbyacorrespondingdeductionortaxcreditinrespectofthedonation.


importanttothelandtrustcommunity,whichhadviewedthecapitalgainstaxpro-visionsasasignificantdisincentivetolandconservation.56Ecologicalgiftsarenowdistinctfromdonationsofothercapitalproperty,suggestingtheirimportancetothegovernmentinachievingspecificpublicpolicyobjectives.Followingtheelimina-tionoftaxablecapitalgainsinMay2006,therewasanimmediateupsurgeindonationsoflandforconservationpurposes.57BetweentheinceptionoftheEGPin1995andDecember31,2005(aperiodwhenecologicalgiftswerestillsubjecttocapitalgainstaxation),atotalof475giftsweremadethroughtheprogram,withacombinedvalueofabout$139millionandprotecting44,423hectares(anaverageof4,442hectareseachyear).Incontrast,inthefollowingthreeyears( January1,2006toJanuary1,2009),donationsofecologicallysensitivelandsurged,surpassingthepaceofthepre-vious10-yearperiod:anadditional217giftsweremade,valuedatabout$288millionandprotecting73,031hectares(anaverageof23,343hectareseachyear).58

AtthefederallevelintheUnitedStates,donationsofconservationeasements(qualifiedconservationcontributions)59 are a specificexception to ageneral ruledisallowingdonationsforpartialinterestsinproperty.Beginningin2006,temporaryprovisionsincreasedtheannualcontributionpercentagelimitationforconservation

56 Thenon-taxationofcapitalgainsfordonationsofcertaintypesofappreciatedproperty(culturalproperty,ecologicallysensitiveland,andpubliclytradedsecurities)isintenselycontroversial.Forasummaryofthecriticisminthecontextofgiftsofpubliclytradedsecurities,seeLisaPhilipps,“ThinkingCriticallyAbouttheTaxationofCapitalGainsonDonatedPublicSecurities(orLookingParagraph38(a.1)intheMouth)”(2003)vol.51,no.2Canadian Tax Journal913-24;andDavidG.Duff,“SpecialFederalTaxAssistanceforCharitableDonationsofPubliclyTradedSecurities:ATaxExpenditureAnalysis”(2003)vol.51,no.2Canadian Tax Journal925-36.Foracontraryview,seeWilliamI.Innes,“TheCaseforTaxIncentivesonGiftsofPubliclyTradedSecurities”(2003)vol.51,no.2Canadian Tax Journal905-912.Whileweacknowledgethedebate,wedonotaddressitdirectly.ProponentsofspecialtaxtreatmentforgiftsofecologicallysensitivelandwillfindsupportinourdiscussionofthebenefitsofconservationeasementsandinEnvironmentCanada’sdirectinvolvementindeterminingtheeligibilityandvaluationofecologicalgifts.DetractorswillfindsupportinthediscussionofthelimitationsofconservationeasementsandthecritiqueandreportofabusesintheUSliterature.

57 Ofcourse,theremaybemanyfactorscontributingtothisupsurge,includingincreasedeffortsbylandtrusts,greaterpublicinterestinenvironmentalissues,andgrowingcoverageinnewsreportsoftheeffectsofglobalwarming.Aswell,beforetheexemptionwasintroduced,donorsmayhavebeenholdingbacktheirdonationsinanticipationofchangestothegovernment’spolicyonthetaxtreatmentofecologicalgifts.

58 Supranote13.

59 “Qualifiedconservationcontribution”isdefinedinIRCsection170(h)andTreas.reg.section1.170A-14.Sections170(h)(2)(A)and(C)defineaqualifiedrealpropertyinteresttoinclude“theentireinterestofthedonorotherthanaqualifiedmineralinterest”and“arestriction(grantedinperpetuity)ontheusewhichmaybemadeoftherealproperty.”Treas.reg.section1.170A-14(b)(2)definesaperpetualconservationrestrictionasarestrictiongrantedinperpetuityontheusethatmaybemadeofrealproperty,includinganeasementoranyotherrealpropertyinterestwithsimilarattributesunderstatelaws.


easementsfrom30percentto50percentofAGIandextendedthecarryforwardper-iodfrom5to15years.60Qualifiedfarmersandrancherscouldclaimthedeductiongeneratedbytheconservationeasementdonationtotheextentof100percentoftheirAGI.61Thesetemporaryprovisionsappliedonlytoconservationeasementsandnottooutrightgiftsofland.Theenhancedincentivesinitiallyexpiredattheendof2007butwereretroactivelyreinstatedtoapplythrough2008totheendof2009.62BillshavebeenintroducedinbothhousesofCongresstomaketheeasementincen-tivepermanent.63

Thirteenstatescurrentlyprovideaconservationeasementdonationtaxcreditthatcanbeapplieddirectlyagainststateincometaxliability.64Inmoststates,thecreditisapercentageoftheeasement’sappraisedfairmarketvalue,rangingfrom25to100percent.65Statesusuallyalsocapthecreditusingsomecombinationofanoveralldollar limit, annual limit,per-easement limit, annual statewide limit, andrestrictions on multiple easement donations. Some states provide for extendedcarryforwardperiods,rangingfrom8to20years.

Fourstates—Virginia,Colorado,SouthCarolina,andmostrecentlyNewMex-ico—allowadonortotransferalloraportionofanyunusedstateconservationtaxcredittoanothertaxpayerinthesamestate,whocanthenclaimthecreditagainst

60 TheincentiveprovisionswereenactedasIRCsection170(b)(1)(E),effectivefordonationsmadeinthe2006and2007taxyears.Theyweresubsequentlyextendedtotheendof2009:seeinfranote62andtheaccompanyingtext.

61 Qualifiedfarmersandranchersmustderivemorethan50percentoftheirincomefromthebusinessoffarmingintheyearinwhichtheeasementdonationismade:IRCsection170(b)(1)(E)(v).SeeLindstrom,supranote6,at103-4.

62 Theprovisionswereextendedundersection15302oftheFood,Conservation,andEnergyActof2008,Pub.L.no.1104-234,enactedonMay22,2008.

63 RepresentativesMikeThompson(D-CA)andEricCantor(R-VA)recentlyintroducedHR1831,111thCong.,1stsess.(2009),andsenatorsMaxBaucus(D-MT)andCharlesGrassley(R-IA)introducedS812,111thCong.,1stsess.(2009),bothwithsignificantbipartisansupportandcosponsorship.SeeLandTrustAlliance,“WorkingforaPermanentEasementIncentive”(http://www.landtrustalliance.org/policy/taxincentives/federal).

64 SeeDebraPentz,State Conservation Tax Credits: Impact and Analysis,ConservationResourceCenterReport(Boulder,CO:CRC,2007),foradescriptionoftheconservationcreditprogramsin12states:California,Colorado,Connecticut,Delaware,Georgia,Maryland,Mississippi,NewMexico,NewYork,NorthCarolina,SouthCarolina,andVirginia.Sincethereportwaswritten,Massachusettshasenactedlegislationtoimplementataxcreditprogram:theLandConservationIncentivesActwassignedintolawonJanuary14,2009,andappliestodonationsfortaxyearsbeginningJanuary1,2011.

65 Somestatesalsoallowadeductionfortheportionoftheeasementdonationthatdoesnotqualifyforthecredit.Foradiscussionofstateconservationtaxcredits,seeJeffreyO.Sundberg,Measuring the Effect of State Income Tax Incentives on Land Conservation,LincolnInstituteofLandPolicyWorkingPaper(Cambridge,MA:LincolnInstituteofLandPolicy,2007).Inseveralstates,thetaxpayermustreducetheamountofthestatecharitabledeductionbytheamountofthecredit:see,forexample,NewMexicosection7-2-18.10( J)NMSA1978.NorthCarolinaallowsafulldeductionforacharitablecontributioninadditiontoa25percenttaxcredit.


hisorherownstateincometaxpayable.66Virginiahasanannualcapof$100,000pertaxpayerandanoverall$100millionstatewidecaponthecreditamount;67NewMexicohasa$250,000per-conveyancemaximum;SouthCarolinalimitsthedonationvalueto$250peracre;andColoradohasa$375,000annualcreditcap(50percentofthefirst$750,000oftheeasement’sfairmarketvalue),withdetailedrulesrestrictingmultipleeasementdonationsinanyoneyear.Coloradoalsoallowsaportionofthecredittoberefundedinyearsinwhichthereisastatebudgetsurplus.Thecreditwasrefundablefortaxyears2000,2001,and2005butisnotexpectedtobeentitledtotherefundinthenearfuture.68

Credittransferabilityisoftenpromotedasnecessarytosecureeasementdona-tionsfromconservation-minded,land-richbutcash-poorfarmersandrancherswhowouldnototherwisebeabletotakemeaningfuladvantageofthecharitableconserv-ation income tax credit. The donor generally receives a cash payment of 70 to80percentofthevalueofthetaxcredittransferred.Oftenathird-partybrokerfa-cilitatesthetransferforacommission.A2007researchreportontheimpactofstateconservationcreditsbytheConservationResourceCenter(CRC)trackedchangesinthenumberofeasementsdonatedandacresprotectedfollowingtheintroductionofstatecreditprograms,increasesincreditamounts,andtheintroductionofcredittransferability.69 According to the report, the number of conservation easementdonationsgenerallyrosewhencreditvaluecapswereraisedtoover$100,000;forexample,NorthCarolinaandNewMexicoreported increasesof20percentand25percentrespectively.70Themostdramaticriseineasementdonationsoccurredaftertransferabilitywasintroduced,providedthatthecreditvaluedidnotincludeasubstantialcap.71Forexample, in the fouryears followingVirginia’sadoptionof

66 Massachusetts’newLandConservationIncentivesActcreatesanine-personcommissiontostudyallaspectsofthetransferabilityoftheconservationtaxcredit(includingitsstatusandapplicationinotherstates,potentialfiscalimpacts,andpotentialconservationbenefits).Thecommission’sreportistobefiledbyJanuary1,2011.

67 Virginia’soverallstatewidecapeffectiveJanuary2007wasaresponsetobudgetconcernsthataroseafterthetransferabilityprovisionswereenacted.SeeEleanorWestonBrown,“TransferableConservationEasementTaxCredits...TheVirginiaExperience,”inJacquelineCottrell,JanetE.Milne,HopeAshiabor,LawrenceKreiser,andKurtDeketelaere,eds.,Critical Issues in Environmental Taxation, International and Comparative Perspectives,vol.VI(Oxford,NY:OxfordUniversityPress,2009),chapter30,693.

68 Thepartialrefundisavailabletotheoriginaldonorbutnottotransfereesofthecredit.FortaxyearsbeginningonorafterJanuary1,2000andbeforeJanuary1,2003,therefundlimitwas$20,000perdonationpertaxyear.Thelimitwasincreasedto$50,000fordonationsmadeintaxyearsbeginningonorafterJanuary1,2003.SeeColoradoDepartmentofRevenue,TaxpayerServiceDivision,“IncomeGrossConservationEasementCredit,”FYI—For Your Information(Denver,CO:DepartmentofRevenue,2007)(http://taxtransfer.net/pdf/income39_11-07.pdf ).

69 Pentz,supranote64,at10-14. 70 Ibid.,at14. 71 Forexample,transferabilitydidnotincreaseeasementactivityinSouthCarolina.Thereport

suggeststhatthisislikelyduetothecombinationofa$250per-acrecreditcap,ashortercarryforwardperiod,andarequirementforstateapproval:ibid.


transferablecredits,theaveragenumberofdonationsdoubledandthenumberofacres protected tripled.72 In Colorado, which introduced transferable credits in2003,73easementdonation taxcreditclaims jumped from2.3million in2001 to85.1millionin2005.

AworkingpaperfortheLincolnInstituteofLandPolicy,alsopublishedin2007,comparedchangesineasementdonationactivitybetweenstateswithdifferenttypesofincometaxincentives.74SimilartotheCRCreport,theworkingpaperfoundthattransferabilityandcreditvaluesover$100,000hadastatisticallysignificantimpactonthenumberofacresencumberedbyconservationeasements,whereassmallcreditamounts,usableonlybythedonor,didnotaffectdonationrates.75TheCRCreportand the Lincoln Institute working paper both include caveats noting significantgapsinavailabledataowingtoincompleterecordkeepingforeasementsgenerallyandconservationeasementdonationsinparticular.76Also,caremustbetakenwhenevaluatingdonationincreasesinaprogram’sinitialyears,sincesuchincreasescouldrepresentanartificialupsurgebydonorswhoheldbackdonationsinanticipationoftheprogram.Nonetheless,transferablecreditsaregenerallyconsideredtobeasig-nificantstimulusforeasementactivity.

Defining the Environmental Goals: What Are Eligible Conservation Purposes?

UnderCanada’sincentiveprovisions,eligibleconservationpurposesarenarrowlydefinedtofocusonecologicalservicesandbiodiversity.Incontrast,intheUnitedStates,conservationpurposesaredefined in IRCsection170(h)(4) to includenotonlythepreservationofhabitat,butalsocategoriesdefinedusingnon-ecologicalcriteria;forexample,landprovidingopenspaceforoutdoorrecreationoreduca-tion,and“scenic”openspacedefinedbyaesthetic rather thanstrictlyecological

72 Ibid.,at13.SeeBrown,supranote67,at681,citingdatafromtheVirginiaDepartmentofTaxationandtheVirginiaOutdoorFoundation,andstatingthatby2006,“withthetransferabletaxcreditinfullswingwithawell-developedmarket,notonlyhadthenumberofdonationsincreasedremarkablyto445,representing92,487preservedacres,but‘largedonations’[yieldingataxcreditperdonationofUS$1millionormore]increasedto55,representing24,564preservedacres,anincreaseto12percentofdonationsand27percentofpreservedacres.”SeealsoMcLaughlin,supranote16,at24.

73 Korngold,supranote14,at1059,citingK.C.Mason,“LawmakersWantToTightenControlsonCreditforDonatedLand”(2007)vol.44State Tax Notes146(discussingColoradoHouseBill07-1361).

74 Sundberg,supranote65.Theworkingpaperinvestigatedthehypothesesthat“iftheincentivesforeasementdonationaresignificant,theacreageundereasementshouldgrowfasterinstateswithtaxincentivescomparedtothosewithout.Inaddition,theeffectofcreditsshouldbelargerwhentheavailablecreditislarge,andwhencreditsaretransferablesothattheprogramisvaluabletomorelandowners”:ibid.,at5.

75 Ibid.,at10.

76 Ibid.,at5;andPentz,supranote64,at11.


qualitiescanqualify.Bothcountriesgivetaxrecognitiononlyforeasementsinper-petuity.IntheUnitedStates,theperpetuityrequirementisexplicitinIRCsections170(h)(2)(C)and170(h)(5)(A).TheCanadaRevenueAgency(CRA)takesthepos-itionthatonlyeasementsgrantedinperpetuityqualify.77

ToqualifyunderCanada’sincentiveprovisions,landdonatedasan“ecologicalgift”(includinganeasement,servitude,orcovenant)mustbe“ecologicallysensitiveland”that,intheopinionofthefederalministeroftheenvironmentortheminister’sdesignate,is“importanttothepreservationofCanada’senvironmentalheritage.”78Thiscertificationauthorityhasbeendesignatedtoanumberoffederalandprovin-cialgovernmentofficials.TheadministrationoftheEGPbyEnvironmentCanadaalsounderscorestheecologicalorientationofCanada’sincentiveprogram.Environ-mentCanadahasdevelopedadefinitionofecologicalsensitivitybasedonnational,provincial,andterritorialcriteriaoutlinedintheEGPhandbook.79Examplesfromthenationalandprovincialcriteriainclude“sitesthathavesignificantcurrentecologicalvalue,” “lands that are zoned or designated for biodiversity objectives,” “naturalbuffers around environmentally sensitive areas such as water bodies, streams orwetlands,”“significanthabitats,”“siteswithenduringgeologicalfeaturesthatcon-tributetobiodiversity,”and“areasofwildlifeconcentration.”80

In the United States, the definition of conservation purposes in IRC section170(h)(4) includes two purposes that mirror the Canadian concept of ecologicalsensitivity:“theprotectionofarelativelynaturalhabitatoffish,wildlife,orplants,or similar ecosystem” (section 170(h)(4)(A)(ii)) and “the preservation of openspace...pursuanttoaclearlydelineatedFederal,State,orlocalgovernmentalcon-servationpolicy”(section170(h)(4)(A)(iii)(II)).ExamplesintheTreasuryregulationsinterpretingsection170(h)(4)(A)(ii)paralleltheCanadiancriteria,describingsignifi-canthabitatsandecosystemsforrare,endangered,orthreatenedspeciesandnaturalareasthatcontributetotheecologicalviabilityofparks,naturepreserves,wildliferefuges,wildernessareas,orotherconservationareas.Ontheotherhand,examplesintheTreasuryregulationsforsection170(h)(4)(A)(iii)(II)mayormaynotmeettheCanadiancriteria,dependingonwhetherthedelineatedgovernmentconservation

77 Atkinsetal.,supranote24,at96.CRAdocumentnos.2004-0106211E5,October18,2005and2002-0163405,March11,2003.SeealsoITAsection207.31,whichimposesaspecialtaxonmunicipalitiesorregisteredcharitiesthatreceiveecologicalgiftsandthendisposeofthemorchangetheirusewithouttheauthorizationoftheministeroftheenvironmentortheminister’sdesignate.Thetax,whichis50percentofthefairmarketvalueofthepropertyatthetimeoftheunauthorizeddispositionorchangeinuse,isintendedtoensurethelong-termprotectionofecologicallysensitivelanddonatedundertheincentiveprogram.

78 Definitionof“totalecologicalgifts”inITAsubsection118.1(1).

79 Supranote30,at5.Seealsotheupdatedinserttothehandbook:EnvironmentCanada,CanadianWildlifeService,“ImprovedIncomeTaxTreatmentofCertifiedEcologicalGifts,”2006.

80 EnvironmentCanada,CanadianWildlifeService,“TheEcologicalGiftsProgram:EcosensitivityCriteria,”supranote30.Sitesthathavethepotentialforenhancedecologicalvaluebasedontheirproximitytootherecologicallysignificantpropertiesarealsoincluded.


policy isrootedinecologicalcriteria.Forexample, thepreservationofawildorscenicriverortheprotectionofthe“scenic...characterofland”couldconstituteavalidconservationpurpose.81InCanada,theriverorsceniclandwouldalsoneedtohaveecologicallysensitivefeaturesinordertomeritprotection.

Theother conservationpurposes in IRC section170(h)(4)—topreserve “landareasforoutdoorrecreationby,ortheeducationof,thegeneralpublic”(section170(h)(4)(A)(i)),“openspace . . . for thescenicenjoymentof thegeneralpublic”(section170(h)(4)(A)(iii)(I)),or“anhistoricallyimportantlandareaorcertifiedhis-toricstructure”(section170(h)(4)(A)(iv))82—wouldnotlikelyqualifyinCanada.83Scenicvieweasementsundersection170(h)(4)(iii)(I)aimtopreservenaturalbeautyandlandscapeaestheticsandaredefinedinsubjective,non-ecologicaltermsclearlyoutsidetheCanadianparameters.84TheTreasuryregulationscontainalistofeightnon-exclusive factors, ranging from the relatively objective “consistency of theproposedscenicviewwitharegionalorlocallandscapeinventorymadepursuanttoasufficientlyrigorousreviewprocess”totheclearlysubjective“degreeofcontrastandvarietyprovidedbythevisualscene”and“harmoniousvarietyofshapesandtextures.”85Althoughpublicaccessisrequired,thisrequirementcanbemetbyvisual(asopposedtophysical)accesstoasignificantportionoftheproperty.86

OpenspaceeasementsunderIRCsections170(h)(4)(iii)(I)and(II)mustalso“yieldasignificantpublicbenefit.”TheTreasuryregulationssetforth11non-exclusive

81 Treas.reg.section1.170A-14(d)(4)(iii)(A).Thisregulationsectionismostlyconcernedwithdescribingthecriteriafora“clearlydelineated”governmentpolicy.Itstatesthata“generaldeclarationofconservationgoalsbyasingleofficialorlegislativebodyisnotsufficient.”Aprogrammustinvolvea“significantcommitmentbythegovernmentwithrespecttotheconservationproject,”butthisdoesnotmeanthattheprogrammustbefunded,noristherearequirementfor“certification”ofparticularlands.Lindstrom,supranote6,at47,notesthatthisis“perhapsthemostfrequentlyusedcategoryofconservationpurposes,”andalthoughtherehavebeennoreportedcasechallenges,readingtheTreasuryregulations,“itisclearthatcomplianceisnotasimplematter.”

82 Thehistoricpreservationpurposehasanentiredetailedsubsetofstatutoryrequirementsthatareoutsidethescopeofthisarticle.Foranoverviewoftheseprovisions,includingamendmentsaimedatcurbingabusesinvolvingdonationsofhistoricaleasements,seeLindstrom,supranote6,at55-60.

83 SomeecologicalandrecreationalusesmightqualifyunderPrinceEdwardIsland’scriteria,whichrecognize“areaswhollyorpartiallyadjacenttoanynature,educational,orrecreationaltrailintheProvince”:EnvironmentCanada,CanadianWildlifeService,“TheEcologicalGiftsProgram:EcosensitivityCriteria,”supranote30.Lindstrom,supranote6,at40-41,notesthatintheUnitedStates,conservationeasementsforpublicrecreationoreducationofthegeneralpublicarenotthatcommon,inpartbecauseTreas.reg.sections1.170A-14(d)(2)(i)and(ii)requiresubstantialandregularusebythepublic,sothatlandforthispurposeismoreaptlythesubjectofafullfee-simpledonation.

84 ThescenicvieweasementhasalonghistoryintheUnitedStates,reportedlyencouragedinthemid-1960sbyLadyByrdJohnson(thepresident’swife).KingandFairfax,supranote27,at80-81.

85 Treas.reg.section1.170A-14(d)(4)(ii)(A).

86 Treas.reg.section1.170A-14(d)(4)(ii)(B).


factorsgermane to thepublicbenefit requirement.These include theproperty’suniqueness,itsrelationshiptothefulfillmentofexistingpublicorprivateprograms,itspotentialcontributiontothepreservationoflocalorregionalnatural,scenic,orhistoriccharacter,anditspotentialtopreservealandscapeorresourcethatattractstourismorcommerce.87Examplesincludethepreservationofavacantdowntownurbanlotasapublicgarden;woodlandsalongapublichighway;andundevelopedproperty between the highway and the ocean to preserve landscapes and scenicviews.88ItisunlikelythateasementsforanyofthesepurposeswouldqualifyunderCanada’sEGP.

Manyindividualstatesincorporate,byreference,theconservationpurposesinIRCsection170(h)intotheirstateincometaxregimes.Severalstatesusenarrowerdefinitionsand includesomespecificprohibitions.Forexample,NorthCarolinarequireswildlifehabitattoexceed25acres,Connecticutrequiresforestrylandtoexceed25acres,Californiarequiresagriculturallandtobe“threatenedbydevelop-ment,”andCaliforniaandGeorgiaexcludegolfcoursesandothersportsfields.89

Eligibility and Valuation: Upfront Certification Versus Post-Return Audit

Theefficientuseofpublicresourcesdevotedtoconservationmeasuresrequiresgoodchoicesineasementacquisitionandfairvaluationofthetaxbenefit.CanadaandtheUnitedStatestakeverydifferentapproachestooverseeingeasementqualificationandvaluationdetermination.InCanada,eachgiftundertheEGPispre-certifiedbyagovernmentdepartmentforitsenvironmentalqualificationsandfairmarketvalue.90Incontrast,theUnitedStatesreliesforthemostpartondetailedregulationsandpenaltyprovisionstosetthestandardsandencouragevoluntarycompliance,aswellasconductingrandompost-taxfilingauditstocatchquestionabletransactions.Onlyasmatteringofstatesusesomeformofpre-certificationintheirstatetaxincentiveprograms.

InCanada,beforeadonorcanobtainthespecialtaxbenefitsavailableundertheEGP,EnvironmentCanada,oritsdesignate,firstconductsanupfrontqualification

87 Treas.reg.section1.170A-14(d)(4)(iv).

88 Treas.reg.section1.170A-14(d)(4)(iv)(B).

89 Pentz,supranote64,at18-19and32-34.Inaddition,Delawarehasitsowndefinitionofnaturalhabitat;Connecticutincludespromotionoforderlyurbanorsuburbandevelopment;SouthCarolinaexcludesgolfcoursesbutnotsportsfields.

90 ItisworthnotingthattheCanadiancertificationapproachappliesonlytoecologicalgiftsandgiftsof“culturalproperty,”bothofwhichreceiveenhancedcreditbenefits.Forothercharitablegiftsofproperty,Canadareliesonpost-returnauditstopickupinflatedvaluations.Thisisanotherexampleofhowecologicalgiftsaretreateddifferentlyfromothercharitablegifts,recognizingboththeirspecialstatusandtheiruniquecharacter.Seethediscussionabove,andDanielSandlerandTimEdgar,“TheTaxExpenditureProgramforCharitableGiving:KickingaGiftHorseintheTeeth”(2003)vol.51,no.6Canadian Tax Journal2193-2214.


assessmentoftheconservationfeaturesofthelandandeasement,basedoninforma-tionsubmittedbythedonorandassessedbythedepartment’sprogramstaff,oftenthroughsitevisits.91Oncetheecologicalsensitivityofthelandhasbeenestablished,andtherecipient’seligibilityhasbeenverified,theministeroftheenvironment(orhisdesignate)willissuea“CertificateforDonationofEcologicallySensitiveLand”(or, inQuebec, a “Visapourdonsde terrainsoude servitudes ayantune valeurécologique”).Theministerthendeterminesthefairmarketvalueoftheecologicalgiftthrougharigorousappraisalreviewanddeterminationprocess(ARDP)overseenbytheAppraisalReviewPanel.TheARDPrequiresdonorstoobtainprofessionalappraisalsthatfollowtheEGPguidelinesforappraisals.Theappraisalsundergore-viewbytheAppraisalReviewPanel,anindependentbodylargelymadeupofseniormembersoftheappraisalprofession.Thepanelrecommendsafairmarketvaluetotheminister,whomakes thedetermination taking the recommendation into ac-count.Theministerthenissuesastatementtothedonor,certifyingthevalueofthegift.Thedonorcanrequestaredeterminationofthevalueand,ifstillunsatisfied,canappealtotheTaxCourtofCanada(ortheCourtofQuebec).92TheARDPprovidesimportant safeguards toensure that tax credits accurately reflect the fairmarketvalueofgiftswhileat thesametimeensuringthatthereviewprocess is fairandincludespromptjudicialreview.

IntheUnitedStates,ataxpayer’sdeductionwillbequestionedonlyifthetaxpayerisauditedwithinthestatuteoflimitationsperiod.Asapracticalmatter,landownersdonatepropertieswithfeaturesthattheythinkmeettheincometaxrequirementsand,togetherwiththerecipientorganization,drafteasementrestrictionswithcare-fulattentiontothedetailedinterpretiveTreasuryregulationsandIRSnotices.93IRCsection170(f )(11)containsthebasicreportingandsubstantiationrequirementsfor deductions for non-cash charitable contributions,94 and Treas. reg. section1.170A-14(h)(3) describes some factors that must be taken into account in fairmarketvalueappraisalsofconservationeasements.Easementappraisalsarecom-plex;forexample,thereareoftenno“marketcomparators,”andaneasementcan

91 SeeITAsubsection118.1(1),thedefinitionof“totalecologicalgifts,”andsubsections118.1(10.2)to118.1(10.4)(applicabletogiftsmadeorproposedtobemadeafterFebruary27,2000).ThecertificationprocedureisdescribedintheEGPhandbook,supranote30,at12ff.

92 Anapplicationforjudicialreviewmustbefiledwithin90daysoftheminister’sconfirmationorredeterminationofthefairmarketvalueofthegift.SeetheEGPhandbook,supranote30,at20.

93 Ofcourse,therecipientorganizationcannotguaranteethetaxbenefit.

94 Taxpayersarerequiredtoobtainaqualifiedappraisalfordonatedpropertyforwhichadeductionofmorethan$5,000isclaimed(IRCsection170(f )(11)(C)).A“qualifiedappraisal”isdefinedinIRCsection170(f )(11)(E)(i).IRCsection170(f )(11)(E)(ii)definesa“qualifiedappraiser”asanindividualwhohasearnedanappraisaldesignationfromarecognizedprofessionalappraiserorganizationorhasotherwisemetminimumeducationandexperiencerequirementssetforthinregulationsprescribedbythesecretary,whoregularlyperformsappraisalsforwhichtheindividualreceivescompensation,andwhomeetssuchotherrequirementsasmaybeprescribedbythesecretaryinregulationsorotherguidance.


sometimescreateamenitiesthatenhancecontiguousandnon-contiguouspropertyownedby the landownerora familymember.TheTreasury regulationsaddresstheseconcerns.95

Most states follow the federalpost-donationaudit approach.EvenColorado,whichallowscredittransferabilityandhastighterconservationrequirementseffect-ive2008,doesnotrequirepre-certificationoftheeasement’sconservationpurposes.96Virginia,anothercredittransferstate,requirescertificationbytheDepartmentofConservationandRecreationifthecreditisover$1million.Onlyafewstatesre-quirepre-approvalorpre-identificationbyastateorlocalagency.97Massachusetts,oneofthefirststatestopassconservationeasementenablinglegislation(in1956),hasalwaysrequiredreviewbystateofficialsandapprovalbythelocalgovernmentwherethelandissituated.98ThisrequirementiscontinuedinitsnewLandCon-servationIncentivesActestablishingastateconservationincometaxincentive.

Until2005,veryfewconservationeasementtransactionswereaudited,andthoseauditsmostlyconcentratedonvaluationissues.CriticsintheUnitedStatesquestionwhetherthisunsupervisedsystemproduceseasementsthatjustifythepublicsubsidy,citingexamplesofconservationeasementsclaimedforgolfcoursefairwaysorforamenitiesforwealthyneighbourhoods,aswellasadhocdecisionsleadingto“scat-teredgreensprawl.”99Aseriesofinvestigativenewspaperarticlesin2003promptedUSSenatecommitteehearingsandatargetedIRSauditprogram.100Subsequently,

95 Treas.reg.section1.170A-14(h)(3)(i)startswithapreferencefora“comparablesales”method;however,ifthereis“nosubstantialrecord”onwhichtobasea“meaningfulorvalidcomparison,”theregulationauthorizesa“beforeandafter”approach.Theregulationalsocontainsan“enhancementrule”requiringappraiserstoreducethevalueofaconservationeasementifcontiguousornon-contiguouspropertyownedbythedonororarelatedpartyincreasesinvaluebecauseoftheeasement.

96 However,ColoradohasaddedarequirementthatdonorsmustfileastatementwiththeColoradoDepartmentofRevenuedescribingthespecificnatureoftheeasement.

97 InCalifornia,awildlifehabitatmustbeidentifiedbythestateorfederalEndangeredSpeciesActandcertifiedbytheWildlifeConservationBoard.Mississippieasementsmustbecertifiedbythestatestreamsstewardshipprogramortheheritageprogram.InNorthCarolina,theDepartmentofEnvironmentandNaturalResourcesmustcertifythatthepropertydonatedissuitableforoneormorevalidpublicbenefitsdefinedinthestatelegislation.SeePentz,supranote64,at32-34.

98 SeeKingandFairfax,supranote25,at71-72;andPidot,supranote14,at11.

99 Pidot,supranote14,at15.

100 See,forexample,JoeStephensandDavidB.Ottaway,“DevelopersFindPayoffinPreservation,”Washington Post,December21,2003,describing“questionable”easementtransactionsbenefitingwell-to-dosubdivisionsandgolfcourses;andaseriesofarticlesfocusingprimarilyontransactionsinvolvingtheNatureConservancyintheUnitedStates:DavidB.OttawayandJoeStephens,“NonprofitLandBankAmassesBillions,”Washington Post,May4,2003;JoeStephensandDavidB.Ottaway,“HowaBidToSaveaSpeciesCametoGrief,”Washington Post,May5,2003;JoeStephensandDavidB.Ottaway,“NonprofitSellsScenicAcreagetoAlliesataLoss,”Washington Post,May6,2003;JoeStephens,“Charity’sLandDealsToBeScrutinized,”Washington Post,May10,2003;andJoeStephensandDavidB.Ottaway,“SenatePanelIntensifiesItsConservancyProbe,”Washington Post,November10,2003.


reportsofunsupportedandinflatedvalues101andlaxprofessionalappraisalstandardsemerged.TheseeventspromptedchangesinIRSpoliciesandTreasuryregulations,andneweffortson thepartofnational land trustorganizations tobringhigherstandardstotheirmembers’conservationacquisitionprograms.

TreasuryregulationsnowrequiredonorstoidentifyonIRSform8283,“NoncashCharitableContributions,”theconservationpurposesfurtheredbytheeasement;thevalueofthelandbeforeandafterthetransaction;permits,approvals,orcon-tractsconnectedtothecontribution;andanyownershipinterestsinnearbyprop-erty.Inaddition,ifthevalueofthecontributionexceeds$500,000,thefullappraisalmustbesubmittedtotheIRS.102NewIRCsection6695Aaddsaseriesofpenaltiesfor“substantialandgrossvaluationmisstatements”103ifanappraiserknew,orreasonablyshouldhaveknown,thattheappraisalwouldbeusedinconnectionwithareturnorclaimforrefund.104Thepenaltyisthegreatestofthreeamounts:10percentoftheunderpaymentoftaxflowingfromthemisstatement;$1,000;and125percentofthegross incomereceivedby theappraiser.Given thehighvalueofmanyease-ments,10percentofthetaxunderpaymentcanbeconsiderable.

Thecombinedeffectofthenewreportingrequirementsandthird-partypenal-tiesaimedatappraisersisexpectedtoassisttheIRSinwinnowingouteasementsforauditandincurbinginflatedappraisals.

Qualified Recipients: The Donee’s Stewardship Capacity

Inthesearchforasuccessfulconservationeasementincentiveprogram,thedoneeorganizationplaysacriticalrole.Becauseconservationeasementsareintendedtobepermanentencumbrances,theeasementholdermusthavethecommitmentandcapacitytomaintain,monitor,andenforcetherestrictionsintheagreement.Overtime,therecanbeconsiderablepressurefromnewlandownersorsurroundingurbandevelopmenttomodifyorextinguishtheeasement.105BothCanadaandtheUnitedStatesentrustcharitableorganizationsandgovernmententitieswith therespon-sibilityforsafeguardingtheeasement’senvironmentalpurposesinperpetuity.Legalchallengestoconservationeasementsarestillrare,althoughtherehavebeenreportsofsomeverycostlycases,andlandtrustsacknowledgethatevenonecourtcase

101 Migoya,supranote20.

102 Treas.reg.section1.170A-13(c)(4).Treas.reg.section1.170A-13(f )(2)requiresthereceivingorganizationtoacknowledgewhetherthedonorreceivedanygoodsorservicesinconsiderationforacontribution.

103 AsdefinedinIRCsection6662.

104 IntheabsenceofnewregulationsoramendmentstoTreas.reg.section1.170A-14takingintoconsiderationtherecentIRCamendments,theIRShasissuedNotice2006-96,“GuidanceRegardingAppraisalRequirementsforNoncashCharitableContributions,”providingtransitionalguidancewithrespecttotheserequirementsandtherequirementsofaqualifiedappraiser.

105 Boydetal.,supranote11,at228.


involvinganeasement’sviolation,validity,orscopecouldimposeasubstantialburdenonthetrust’sresources.106

Doneeorganizationsrangefromlargecharitiesthathavesignificantdonorbasesandarerunbypaidstafftosmalllocallandtruststhathavelimitedresourcesandarestaffedprimarilybyvolunteers.Smalllocalorganizationshavetheadvantageofbeingwellplacedtodeterminewhicheasementscanbestservethelocalcommun-ity,butthedisadvantagesofsmallmembershipsandlimitedfund-raisingcapacity.

Conservationeasementstewardshipcostsincludetrackingthelandconditions,monitoringandenforcingtheeasement’srestrictions,andsometimesdefendingtheeasementagainstlegalchallenges.Commentatorsraiseconcernsabouttheabilityofsomerecipientorganizationstoappropriatelyscreentheeasementsinthefirstplaceandtocarryoutongoingcomplianceovertime.Underfundingofstewardshipcostsisacknowledgedasapersistentconcern.107Landtrustumbrellaorganizationsrecommendrequestingorevenrequiringeasementdonorstomakeacontempor-aneouscashcontributiontothestewardshipfund.108

UnderCanada’sEGP,registeredcharitiesmustbeapprovedbytheministeroftheenvironment,ortheminister’sdesignate,toreceiveanecologicalgift.TheEGPWebsite109listsapprovedcharities.Inadditiontomeetingtherequirementsimposedonallregisteredcharitiestomaintaintheirstatus,acharityqualifiesforthelistifoneofitsmainpurposesistheconservationandprotectionofCanada’senvironmentalheritage.Eachtimeanecologicalgiftisreviewed,thedoneeorganizationwillalsobeexaminedtoconfirmthatitistheappropriaterecipientofthatparticulargift.Thisrequirementgivestheministeranopportunitytoreviewandscreenoutorganiza-tionsthatmadethelistinitiallybutdonothavesufficientstewardshipcapacityforaparticulargift.However,itisuncleartowhatdegreethedonee’sstewardshipcapacityiscurrentlyreviewed.Inthisregard,EnvironmentCanadaintroducedtherequire-mentthat,beginningApril1,2008,recipientorganizationsmustadoptthestandardsandpracticesoftheCanadianLandTrustAlliance(CLTA),whichincludesamongitsguidingprinciplesthecommitmentbymemberlandtruststohaveadequatehuman

106 ByersandPonte,supranote14,at159,notingthatasof2002,surveysindicatedthatasingleeasementviolationhadcostalandtrust$284,000todealwithandthatearliersurveysreportedlegalcostsassociatedwitheasementviolationsrangingfrom$5,000to$100,000,withouttakingintoaccountstafftimeandresources.

107 SeeKorngold,supranote14,at1062;Pidot,supranote14,at18-19;andKatieParis,Land Trusts: Measuring the Effectiveness of Conservation Easement Programs(Toronto:NatureConservancyofCanada,May20,2004)(http://www.stewardshipcanada.ca/files/scn/984_Land_Trust_Effectiveness_Paper_May_2004.pdf ).Thereareotherconcernswithstewardshipofdonatedeasements.Forexample,whathappenstotheeasementifthedoneeorganizationceasestoexist?Howmuchleewayshouldtherebeforextinguishingoramendingeasements?BothCanadaandtheUnitedStatesaddresssomeoftheseissues;however,thereismuchroomforimprovement.

108 ByersandPonte,supranote14,at123-31.

109 Supranote4.


andfinancialresourcesforcurrentandfuturestewardshipobligations.110TheCLTA’sstandardhasthepotentialtoexertapositiveinfluenceontheorganizationalcap-acityofmemberorganizations;however,intheshortrun,itmaynotbeeffectivetoensurestewardshipcapacity,sincetheCLTAdoesnotyethaveeitheranaccredita-tionoranauditprogramtodeterminecomplianceby itsmemberorganizations.TheUSLandTrustAlliancehasanextensiveaccreditationprocess,butitisstillavoluntaryprogram.111

In theUnitedStates, qualifiedorganizationsmustmeet thedetailed require-mentsforall tax-exemptorganizationsandpubliccharities.112Treas.reg.section1.170A-4(c)(1)furtherrequiresthattheorganizationhaveacommitmenttoprotecttheconservationpurposeofthedonation,andtheresourcestoenforcetheease-ment.113However,theregulationspecificallystatesthatthisrequirementdoesnotmeanthattheorganizationmusthavefundssetasideforprotectionandenforcementpurposes.PubliccharitiesholdingconservationeasementsmustannuallyreportonIRSform990theireasementmonitoringactivities,includingthenumberofease-mentsphysicallymonitoredandtheamountofmoneyandstaff timedevotedtothesetasks.114ThisrelativelyrecentreportingrequirementisintendedtoenabletheIRStomoreeffectivelyauditthecommitmentandresourcerequirement.

THE L A ND - RICH A ND C A SH - P O O R TA X PAY ER: COMPA RING THE CURRENT C A N A DI A N TA X BENEFIT S WITH LO NGER C A RRY FO RWA RD PERIO DS , TR A NSFER A BLE CREDIT S , A ND REFUNDA BLE CREDIT S

Thesubjectofthissectionistheland-richandcash-poortaxpayerwithenviron-mental motivations. Such individuals are often held out as the type of taxpayer

110 CanadianLandTrustAlliance,Canadian Land Trust Standards and Practices(SmithsFalls,ON:CanadianLandTrustAlliance,December2005)(updatedJune2007)(http://www.clta.ca/en/pdf/0607standardspractices.pdf ).

111 LandTrustAlliance,“Accreditation”(http://www.landtrustalliance.org/learning/accreditation/2008-accreditation-indicator-practices).

112 IRCsection501(c)(3)governsexemptorganizations,andIRCsection509(a)(2)containsapublicsupportfundingtestforpubliccharities.

113 Thethresholdtestundertheregulationisnotveryhigh.Thisrequirementis“consideredtobemet”iftheorganizationisoperatedprimarilyorsubstantiallyforoneofthefourconservationpurposesinIRCsection170(h)(4)(A).

114 Stewardshipfundingisadifficultissue.Recommendationsofthe2005Senatecommitteeincludedrevokingthetax-exemptstatusoforganizationsthatfailtomonitortheirlandholdings,establishingguidelinesformonitoringprograms,implementinganaccreditationprogramtoensurethatrecipientorganizationshavethecapacitytocarryouttheirresponsibilitiesaslandstewards,limitingdeductionsforsmalldonations,andprovidingforpre-approvalofcertaindonations.SeeNancyA.McLaughlin,“ConservationEasements—ATroubledAdolescence”(2005)vol.26,no.1Journal of Land, Resources, and Environmental Law47-56,at54.


whomconservationorganizationswanttoencouragetomakegiftsoflandandcon-servationeasements,butwhomaybestymiedbyinequitiesinthecurrentCanadianincometaxprovisions.UsingtheexampleofaSaskatchewanfarmerwhoearnsamoderateincome,table1comparesthecurrentCanadianprovisionswiththreeap-proachesmodelledafterColorado’screditprogram:115

1. a20-yearcarryforwardperiod; 2. atransferablecreditwitha5-yearcarryforwardperiod;and 3. a refundable credit of up to $50,000 per year with a 5-year carryforward

period.

Underthethirdapproach,eachyearthedonorwouldchoosetotakeeithertheusualconservationeasementcreditortherefundablecredit,whicheverwastothetax-payer’sadvantage.

Taxpayer Profile116

JackhasbeeninvolvedinmixedfarmingonacoupleofsectionsoflandintheaspenparklandregionofSaskatchewanforthelast32years.Muchoftheland,whichhasbeeninhisfamilyforseveralgenerations,isincultivationorusedashayland;how-ever,twoquartersectionsremainintheiroriginalnativeprairieconditionandincludeseveralaspenbluffsandwetlands.Ducks,geese,andotherwildlifeareabundantonthisland.Jackcurrentlyusesthesenativequartersectionsforgrazingcattle.Hetakesspecialcaretomanagehislandinanenvironmentallysustainablemanner.

Inspeakingwithalocallandtrustaboutproperhabitatstewardshippractices,JackhearsabouttheEGP.Hedecidestogivethegroupaconservationeasementonthetwonativequartersectionstoprotectthelandfromcultivationwhilemaintainingmoder-ategrazingrightsasasustainablemanagementtool.Thetwoquartersectionsareinanurban-ruralareawherethereissignificantdevelopmentpressure.

Thelandoriginallycost$100,000andwasworth$1.25millionpriortotheimpos-itionoftheeasement.Theappraisedvalueoftheeasementis$1million,sothatwiththeeasement,thelandisvaluedat$250,000.Jack’sannualtaxableincomeis$40,000.EnvironmentCanadahascertifiedthatthelandmeetsitscriteriaregardingecologicalsensitivityandthatthefairmarketvalueoftheconservationeasementis$1million.117

115 Forthisexample,wedidnotimposethe$750,000per-easementfairmarketvaluecapusedinColorado,becausewewantedtoisolatetheeffectofthethreeapproaches.Also,acapatthefederallevelmaybeviewedasasignificantdisincentivetolargegifts.ThecapwouldnothavethiseffectatthestatelevelintheUnitedStatesbecausestatetaxratesarecomparativelylow.Also,asnotedearlier,theColoradorefundablecreditisavailableonlyifthereisastatedeclaredbudgetsurplus(seesupranote68andtheaccompanyingtext).

116 ThefactsinthisexamplearebasedonadonationscenariodescribedontheEGPWebsite,supranote4:“DonationandIncomeTaxScenarios,”developedbyKarenCooperforEnvironmentCanada.

117 ITAsubsection118.1(12)providesthatthefairmarketvalueofagiftofaconservationeasementwillgenerallybetheamountbywhichthefairmarketvalueofthelandisreducedbythegivingoftheconservationeasement.


Thecalculationsinthetablearebasedonthefollowingassumptions:

1. Jack’scombinedfederal-provincialmarginaltaxrateis26percent.Sincehisincomeisbarelyoverthelowerlimit,wehaveusedthe2009federalrateof15percentandtheSaskatchewanrateof11percent.

2. Generally, the amount of the donation claimed for the non-refundabledonationtaxcreditwouldbedeterminedaftertakingintoaccountthenon-refundable tax credits that the taxpayer is entitled to claim that are noteligibletobecarriedforward.Thisexampledoesnottakeintoaccountanynon-refundabletaxcreditstowhichthedonormaybeentitled,suchascreditsrelatingtothebasicpersonalamount,CanadaPensionPlan,oremploymentinsurancecontributions.

3. Jackchoosestoapplythemaximumvalueofthedonationallowabletogen-eratetaxcreditsduringtheyearofthedonation.Theamountavailableforcarryforward isbasedon this assumption, even though thedonorhas theoptionofusinglessthanthemaximumamountintheyearofthegift.

4. Theadjustedcostbaseofthepropertyisitsacquisitioncost.Inreality,theremaybeanumberoffactorsotherthanacquisitioncostthataffectaproperty’sadjustedcostbasefortaxpurposes.

5. Thelanddoesnotmeetthecriteriaforqualifiedfarmproperty;accordingly,thecapitalgainsdeductionforsuchpropertyisnotavailable.118

Thetaxconsequencestothedonorandthecosttothegovernmentundereachoftheapproachesshowninthetablecanbesummarizedasfollows:

n Current Canadian provisions.ApplyingthecurrentCanadianprovisions,Jackdoesnotpaytaxinthedonationyearandreceivesrelieffromcapitalgainsonthetransfertothelandtrust.Ifhecontinuestoearn$40,000ayear,hewillnotpaytaxforthenextfiveyears.However,attheendofthesix-yearperiod,$857,692ofthevalueofthedonationwillexpirewithoutprovidinganyfurthertaxbenefittoJack.Thecurrenttreatmentistheleastcostlytothegovernment.

n 20-year carryforward.Usinga20-yearcarryforward,Jackwillnotpayanytaxfor21years.ThekeyadvantagetoJackinthisscenarioisthat,attheendofthelongercarryforwardperiod,hewillhaveused$531,600ofthedonationvalue,leavingonly$218,400unused.119

n Transferable credit.Jack’sdecisiontosellaportionofhischaritabledonationcreditrequirestaxplanningtoensurethatheretainsenoughofthedona-tioncreditamounttoeliminatehistaxesowedonthetaxableincomeheearns

118 SeeITAsubsections110.6(1),thedefinitionof“qualifiedfarmproperty,”and110.6(2).

119 TheUSfederalcarryforwardof15yearswouldallowJacktouse$342,000,leaving$408,000unused.


TAB

LE 1

Co

mpa

riso

n of

Cur

rent

Can

adia

n Ta

x B

enefi

ts o

f an

Ease

men

t Don

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enefi

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20

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rca

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5-ye

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ard

do

llars

Taxa

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inco

me

....

....

....

....

....

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40

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40

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Cap

italg

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from

gift

ofc

onse

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ion

ea

sem

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....

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920,

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920,

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920,

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920,

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ble

capi

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ain

....

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ni

lni

lni

lni

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....

....

....

....

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nil

nil

240,

000

nil

Taxa

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inco

me

....

....

....

....

....

....

...

40

,000

40

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28

0,00

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Inco

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tax

paya

ble

(fed

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23

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111

3,95

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976,

282

722,

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218,

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439,

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300,

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(The

tabl

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con

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nth

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age.

)


fromthecreditsaletoathird-partytaxpayer.Toaccomplishthis,Jacksells$700,000ofhis$1milliondonatedvalue(whichwouldotherwisegenerateafederal-provincialcreditof$307,964forJack)toanothertaxpayerfor$240,000(assuminganapproximate20percentdiscount).The$240,000thatJackre-ceivesfromthesaleofthedonatedvalue($307,964credit)isassumedtobetreatedasordinarytaxableincomeinkeepingwiththeUStreatment.120Byretaining$300,000ofdonatedvalueforhisownuse,Jackstillhasataxcreditsufficient to eliminate the tax payable on his income from the credit sale.Underthisscenario,afterthedonation,Jackhasaworkingfarmand$240,000cashforinvestment.Thetaxpayerwhopurchasesisassumedtousetheentiretaxcredit.Thisscenarioisthemostcostlytothegovernment.

n Refundable credit.TherefundablecreditscenarioeliminatesJack’staxliabilityinthefirstyearandgiveshim$39,600ofimmediatecash.Ineachofthefivesubsequentyears, Jackbotheliminateshis tax liabilityonhisearningsandreceivesanadditionalcashrefundof$39,600.

a OnlyaportionofthecapitalgainisattributedtothedispositionoftheconservationeasementbyvirtueofaspecificruleforpartialdispositionsofecologicalgiftsinITAsubsection43(2).Inthisexample,thecapitalgainof$920,000iscalculatedbyfirstdeterminingtheproportionofthegiftinrespectofthevalueoftheland($1,000,000/$1,250,000=80%).Thecapitalgaininrespectofthegiftoftheconservationeasementwillthereforebe80percentofthecapitalgainhadtheentirepropertybeendisposedof[80%×($1,250,000−$100,000)=$920,000].bInternalRevenueService,OfficeofChiefCounsel,Memorandum AM2007-002,January11,2007andMemorandumCCA200211042,March18,2002,statethatthesaleofataxcreditisataxableeventunderIRCsection1001,generatingordinaryincomeandnotcapitalgain,andthatthetaxpayer’sbasisinthecreditiszero,sothattheentireamountreceivedistaxable:seeC.TimothyLindstrom,A Tax Guide to Conservation Easements(Washington,DC:IslandPress,2008),143.Incontrast,theVirginiastatuteexplicitlystatesthatthecredittransferanditsapplicationagainsttaxliabilitydoesnotcreateagainorlossforeitherthetransferororthetransferee:VirginiaCodesection58.1-513.E.SeethediscussioninEleanorWestonBrown,“TransferableConservationEasementTaxCredits...TheVirginiaExperience,”inJacquelineCottrell,JanetE.Milne,HopeAshiabor,LawrenceKreiser,andKurtDeketelaere,eds.,Critical Issues in Environmental Taxation, International and Comparative Perspectives,vol.VI(Oxford,NY:OxfordUniversityPress,2009), chapter30,691.cWehaveusedacombinedfederal-Saskatchewanmarginaltaxrateof44percent.dCalculatedusingafederal-Saskatchewancombinedcreditrateof26percentonthefirst$200and44percentontheremainder.eAssumesthattaxableincomeremainsthesame.fCombinedtotalof$123,200usedbyJackinthecurrentyearand$8,728infutureyearsplus$307,964usedbythepurchaser.

TABLE 1 Concluded

120 Presumably,theproceedsfromthesaleofthetaxcreditistreatedasordinaryincomeintheUnitedStatesbecausepropertyheldforlessthanayearistreatedasordinaryincome.InCanada,thenatureofthepropertydetermineswhetheritisonaccountofcapitalorincome,andthelengthoftimethatthepropertyisheldisonlyonefactor.Otherissuesthatariseincludehowtodeterminetheadjustedcostbase,ifany,andwhetherthesalesproceedsconstituteanadvantagewithinthemeaningoftheproposedsplit-receiptingamendments(seesupranote31).


Inthenextsection,wedrawonthisexampleandtheresultsoutlinedabovetoassessdifferentpolicyoptions,bearinginmindthatthereisalreadysomeinterestinCanadaatthepoliticallevelinadoptingtransferableincometaxcreditsalongthelinesoftheapproachtakeninseveralUSstates.

IMPROV ING THE C A N A DI A N TA X INCENTI V E FO R CO NSERVATIO N E A SEMENT S A ND THEIR A SSO CI ATED ECO LO GIC A L SERV ICE S

Theenvironmentaleffectivenessofanylandconservationtaxincentiveshouldbemeasuredbythenumberofacresprotected,thequalityofthehabitatpreserved,andtheextentoftheecologicalservicesderivedfromtheprotectedland.Canada’sEGPalreadyhasimportantfeaturesthathelptoguaranteethequalityofdonatedconservationeasementsandinsulatetheprogramfrommanyofthecriticismslev-elledatthetaxincentiveprogramsintheUnitedStates.BysituatingtheEGPwithinEnvironmentCanada,usingapre-certificationecologicalassessmentandappraisalevaluationprocess,andusingmorenarrowlydefinedecologicalobjectives,CanadahasagreaterassurancethantheUnitedStatesthatitstaxincentiveprogramdeliversrealenvironmentalbenefits.FurtherproposalstoincreasetheincentivesofferedtoconservationeasementdonorsinCanadaarelesslikelytoattracttheoften-repeatedcriticismintheUnitedStatesthateasementsaremerelytoolsto“enhancethewealthofdevelopersorprotecttheviewshedoflargelandownersatpublicexpense”121andatinflatedvalues.

Fromataxequityperspective,Canada’suseofthehighestmarginaltaxratetocalculatethevalueofthedonationtaxcreditforalltaxpayerscomparesfavourablywiththeUSdeductionwherethetaxbenefitdependsonfactorsthatarepersonaltothedonoranddivorcedfromthevalueoftheconservationresourcesprotected—forexample,whetherthetaxpayeritemizesdeductions,andthetaxpayer’smarginaltaxrate.122Canadafurtherfacilitateseasementdonationsfortaxpayersatallincomelevelsbycompletelyremovingtheannualincomelimitimposedonothercharitablegifts.

However,asthecomparisonintable1demonstrates,alongercarryforwardperiodsuchasthatprovidedinColoradoandinthecurrentUSfederalprovisionshasthepotentialtoachievegreaterequity,overtime,formoderate-andlow-incomeCanad-iantaxpayersthanisprovidedbythecurrentCanadiancredit.Credittransferabilitygoeseven further; itenablesmoderate-and low-incometaxpayers to structureaconservationeasementdonationandcreditsaletransactiontobothmaximizethetaxbenefitandreceivecashforanyunusedbenefit.Thisputssuchtaxpayersonamoreequalfootingwithhigh-incomedonors.Transferablecreditsmayalsoincrease

121 KingandFairfax,supranote25,at68.

122 NotethatCanadausesthelowestmarginalrate(15percentin2009)tocalculatethevalueofthedonationtaxcreditonthefirst$200ofthedonationamount.Inthecontextofthehighfairmarketvaluesofconservationeasements,thisfirst-tiercreditvaluehasnorealeffect.Foradiscussionoftheupside-downeffectoftheUSincentive,seeMcLaughlin,supranote16,at29-31.


accessibilityformoderate-andlow-incometaxpayersbyprovidingfundstooffsetthesignificanttransactioncostsassociatedwithconservationeasementdonations,suchassurveys,appraisals,andfeesforlegalandtaxadvice.

Itisinterestingtocomparelongercarryforwardperiodswithtransferablecredits.Fromataxequityperspective,transferablecreditsseemmorebeneficial,sincetax-payersfromanyincomelevelcouldmaximizetheeconomicbenefitfromthedonationofaconservationeasementthroughacreditsale.Transferabilityalsoinitiallyseemseffectiveinachievingthetaxincentive’senvironmentalgoals,sinceresearchintheUnitedStates tentativelydemonstratesasignificantboost ineasementdonationsfollowingitsintroduction.123However,severalcaveatsareinorder.

First,theassumptionthatthereisalargecontingentofenvironmentallymotiv-atedland-richcash-poordonorsstymiedbythecurrentsystemisanecdotal.Itisjustaslikelythatthetaxpayersbestsituatedtotakeadvantageoftransferablecreditsarehigh-incometaxpayerswithaccess to taxadvisersandbusinessplanners,andwithreadyaccesstohigh-incomeacquaintances,family,andfriendsinterestedinpurchasingtaxcreditsatadiscount.

Second,theUSresearchthattrackedincreasesinconservationeasementdona-tionsaftertransferablecreditswereintroducedisbasedonlimitedandincompletedata.124Theresearchmaynotbesufficientlylongitudinaltoaccountforinitialup-surges indonationsby landownerswhowerewaiting forproposed legislation totakeeffectbeforemakingaplanneddonation.Theresearchalsodoesnotappeartohavecontrolledforother,morelocalfactorssuchasregionaldevelopmentpressuresorlocalattitudestowardtheneedtoprotectrural landsfromsuburbandevelop-ment.125Nordiditconsidertheeffectoflongercarryforwardperiods.

Third, transferablecreditscomewitha significantlyhigherfiscalexpenditurecommitment and theneed for tighterdefinition and standards to avoidpossibleabuse.Policymakerswouldneedtoconsiderfiscalconstraintsandwhetherthereshouldbeper-easementorother typesof caps,provisionsdealingwithmultipleeasements on the same property, and anti-abuse provisions to prevent propertysubdivisionaimedatartificiallycreatingmultiplelotsformultipleeasementdona-tions.AfterVirginiaintroducedtransferability,theupsurgeineasementdonationcreditscausedbudgetaryconcernsandpromptedthelegislaturetoinstituteanan-nualstatewidecap.126Carefulmonitoringandtrackingmechanismswouldalsobeneededtopreventduplicateclaims.

123 Pentz,supranote64.Seesupranotes71to73andtheaccompanyingtext.

124 Researchlimitationsincludeincompletestatisticaldatafrommanyofthestateprogramsstudied.Estimatesweresometimesbasedoninterviewswithlandconservationprofessionals.Insomeinstances,theresearchersappearedtouseopinionsofexpertsinonestatetoexplaintrendsinotherstates.Pentz,supranote64,at14.

125 McLaughlin,supranote16,at24,commentingonthedramaticjumpinthenumberofeasementprojectsundertakenbytheVirginiaOutdoorsFoundationsince1999.

126 Brown,supranote67,at693.


Fourth, transferability adds transaction costs and requires increased capacitywithin the land trust community. In the United States, two different choicesemerged:inColorado,forexample,bothfor-profitbrokersandnon-profitentitiesareusedtofacilitatecreditsaletransactionsandfilingcreditclaims,whileinVir-giniamosttransactionsarearrangedbytheVirginiaOutdoorsFoundation.Privatebrokersinvolveprivatebenefitsintheformofcommissionsandapossibleincreasedincentiveforinflatedappraisalvalues.However,choosingalandtrustasthebrokerrequires a land trust community with sufficient resources and infrastructure toevaluateanddocumenttransactions;accesstopotentialpurchasers;andtheabilitytocarefullymonitorandavoidconflictsofinterestinvolvingsizabledonations.

Inadditiontothesecaveats,allowingtransfersofcharitablecreditstounrelatedpartieswouldbeasignificantdeparturefromCanada’sgeneralprohibitionagainsttransferringtaxattributesbetweenunrelatedpersons.Currently,theITAdoesnotincludeanyprovisionsallowingtransfersofcharitabledonationtaxcreditsordeduc-tions—althoughparagraph88(1)(e.6)permitsanyunuseddeductionsbyasubsidiarycorporation tobe transferred to theparentcorporationupon thewindupof thesubsidiary.Itisnoteworthythat,inordertostopparagraph88(1)(e.6)frombeingusedtotradeincharitabledonations,ITAsubsection110.1(1.2)wasintroducedinthe2004federalbudget.127ThisprovisionreflectsthegeneralfiscalpolicyinCanadaagainstthetransferoftaxattributesbetweenunrelatedentities;infact,thelanguageoftheprovisionmirrorsthelanguageusedinsubsection111(5),themainprovisionoftheITArestrictingthetransferofbusinessorpropertylosses.ItisdoubtfulthattheDepartmentofFinancewouldbeveryreceptivetoatransferabletaxcreditordeductionin lightofthestrongfiscalpolicyevidencedbyprovisionssuchastheloss-transferrestrictions.

A longercarryforwardperiod,on theotherhand,has theadvantageofbeingsimpletoinstitutewithoutdepartingfromtheusualmodeofrecognizingcharitablecontributions.Thisfactalonemaymakethischangemorepoliticallyfeasible.There

127 Canada,DepartmentofFinance,2004Budget,NoticeofWaysandMeansToAmendtheIncomeTaxAct,March23,2004,resolution(24).Thisamendmentwasnecessarybecauseotherwiseacorporationcouldtransferacharitabledeductiontoanothernon-arm’s-lengthcorporationthroughaseriesofcomplexcorporatereorganizationmanoeuvresthatreliedupontheapplicationofparagraph88(1)(e.6).Newsubsection110.1(1.2)providesthat,notwithstandingthelanguageinparagraph88(1)(e.6),afterachangeincontrolofacorporationhasoccurred(generallyasaresultofacorporatereorganization),nodeductionsareavailableinrespectofgiftsmadebeforetheacquisitionofcontrol.TheDepartmentofFinance,Draft Regulations and Explanatory Notes Relating to Income Tax(Ottawa:DepartmentofFinance,September2004),clearlyindicatesthatit“isnotintendedthatthetaxbenefitfromthisdeductionbemadeavailable,indirectly,toapersonwhocouldnototherwiseusetheresultingdeduction.”IncasetheDepartmentofFinance’sobjectiontothetradingofthecharitabledonationdeductionremainedunclear,theprovisioncontainsanti-avoidancelanguagethatalsodeniesacharitabledonationdeductioninrespectofagift“incircumstanceswherecontrolofacorporationisacquiredbeforeadonationofpropertybythecorporation,butincontemplationofthatgiftbeingmade.”


isrecentprecedentintheCanadiancontextwiththeextensionofthelosscarry-forwardperiodto20yearsformosttypesofbusinessandpropertylosses.128Applyingtheecologicalgiftscreditagainsttaxpayableeachyearcanreinforceandtherebymo-tivateandsustaintheongoingrelationshipbetweenthelandownerandtheeasementholderforalongerperiod.Thisismoreinkeepingwiththebehaviouralresearchonenvironmental financial incentives, which suggests that periodic reinforcement isimportanttosustainconservationbehaviours.129Bycontrast,theimmediatecashoutfromthesaleofatransferablecreditfront-endloadstheeconomicincentiveanddoesnotbuildtherelationship.Again,thebehaviouralresearchsuggeststhatthistypeoffront-endloadingisapoordesignwheretheobjectiveistomaintainalong-termorongoingrelationshipsuchasaconservationeasement.

Longer carryforward periods still have the obvious limitation that the creditexpiresondeath,makingthedonationvalueuncertain.Anintergenerationaltrans-ferof anyunused credits to an inheriting landowneron thedeathof thedonorwouldmaintainthecreditvalue.Itwouldalsoprovidethesubsequentlandownerwithfinancialrecognitionoftheongoingecologicalservicesprovidedbythelandandanincentivetoworkwiththeeasementholdertomaintaintherelationship.Asdiscussedearlier,pressurebysubsequentlandownerstoremoveorconstrictcon-servationeasementsonlandthattheyinheritisarecognizedproblem.

Onewaytoputcashinthehandsofaland-richcash-poordonorwouldbetousetheproposedsplit-receiptingamendments,whichwouldallowthelandtrusttopaythedonoraportionoftheeasementvalueincash.Ofcourse,thisassumesthatthereareresourcesavailabletodoso.Inthisregard,theCanadiangovernmenthasarecenthistoryofestablishinggrantprogramstofacilitatelandconservationtrans-actions.130Thisapproachhasthefurtheradvantageofallowinglandtruststoseekoutappropriatedonorsusingawellthoughtoutconservationplanratherthanre-spondingtodonorinitiatives.

Neither transferabilitynor longercarryforwardperiodsaddress thepersistentconcernoverdoneestewardshipcapacity.Stimulatingmoreeasementactivity,withoutatthesametimeaddressingthisissue,islikelytosimplycompoundthestewardshipproblem.Asnotedearlier,EnvironmentCanadaisencouragingeasementholderstooperateinaccordancewithhighstandardsandbestpracticesbyrequiringeco-logical gift recipients to adopt CLTA standards andpractices.131However, at this

128 See,forexample,ITAparagraph111(1)(a)regardingnon-capitallosses.Thisamendmentwasintroducedinthe2006federalbudget,supranote55,andenactedbySC2006,c.4,section57(1).

129 Stern,supranote11,at562.

130 InMarch2007,thegovernmentsignedafundingagreementwiththeNatureConservancyofCanada(NCC)toprovide$225millioninmatchingfundsforconservationinitiativesledbytheNCC.TheNCCcansubgrant$15millionofthesefundstootherorganizations.Thefundswillbeusedtosupportspecificland-securementprojects.SeetheNatureConservancyofCanada,“NaturalAreasConservationProgram”(http://science.natureconservancy.ca/federalprogram_en.html).

131 Seesupranote110andtheaccompanyingtext.


point,adoptingtheCLTA’sstandardsisstillanunenforceablepledgesincetheCLTAdoesnotyethaveanyaccreditationorauditprogram.

Toensurethatecologicalgiftsareeffectivelymaintained,thetaxincentivepro-gramcouldpromotestewardshipfundingconcurrentlywitheasementdonations.Itistemptingtorequireaconcurrentcashdonationbytheeasementdonor.However,thiscouldcreateanevengreaterbarriertomoderate-andlow-incomelandowners,unlessthecreditdesignproducedsomecashflowbackoramonetaryrebate.132Forexample, a limited refundable credit could provide funds for a cash stewardshipdonation. Alternatively, a limited carryback provision could, in many instances,generatearefund.

CO NCLUSIO N

Enhancingthetaxincentivesforconservationeasementdonationsinordertostimu-late easement activity is justified by essential and pressing environmental goals.Conservationiscostlytolandownersintermsoftheopportunitycostsofforgoingdevelopment.Taxincentivesrespondbypartiallyaddressingthepersistentmarketfailuretocompensatelandownersforpositiveexternalitiesintheformofessentialenvironmental goods and services.Conservationeasementspromote an efficientallocationofresourcesbydividingthepersonalandeconomicusesoflandfromtheconservationuses.Thesimpleapproachofextendingthecarryforwardperiodcom-binedwithsomedegreeofintergenerationaltransferdeservescarefulconsideration.Allowingcarrybacksforalimitedperiodoftimecouldachievetheequivalentofacashsubsidyrebatewithouthavingtocreateaseparaterefundablecredit.

132 Therecouldbeunanticipatedeffectsonsmallerconservationorganizationsthateffectivelyusevolunteertimeandenergyinlieuofcashfundingtomonitorandmaintaineasements.

Charitable Gifts of Conservation Easements: … tax journal / revue fiscale canadienne (2010) vol....

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