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Are you considering brownfield development?


What are brownfields?

“Brownfields” are abandoned, idled, or underused properties where expansion or redevelopment is complicated by real or perceived environmental contamination as a result of historical land use practices. Brownfields can include obvious uses such as old factories, dry cleaners and gasoline stations, but also less obvious uses such as former schools. Many brownfields are ideally located in downtowns, along waterfronts or in/adjacent to existing residential areas. It is conservatively estimated that there are at least 30,000 brownfield sites in Canada1.

Brownfield sites present both potential liabilities and financial opportunities for current owners, investors and developers. The key challenges to cleaning up and redeveloping brownfield sites include:

  • the cost of required environmental studies and site remediation;
  • difficulty obtaining project financing from traditional sources of development capital; and
  • fear of regulatory (government) and civil liability due to environmental contamination.

Numerous studies have shown that the costs to develop brownfields can be significantly greater than greenfields. Yet, numerous brownfield sites across Ontario and Canada have been successfully cleaned up and redeveloped for a range of residential, commercial and industrial uses. This demonstrates that the challenges to brownfield redevelopment can in fact be successfully overcome.

Yes! Over 50 Ontario municipalities now offer grants, loans, development charge reductions, property tax assistance, and planning and building permit fee reductions for the undertaking of required environmental site assessments and the remediation and redevelopment of brownfield sites. These municipalities offer these financial incentives through what is known as a “community improvement plan”, as well as enabling provisions in their development charges by-laws. Some municipalities even offer reduced parking and parkland dedication requirements on brownfield sites that are being redeveloped.

Even if your site is not a brownfield, it may be eligible for financial assistance if it is in a downtown or commercial area. Over 100 municipalities in Ontario now offer grants, loans, development charge reductions, and planning and building permit fee reductions for facade and building improvements, residential intensification and new development in their downtown areas and other commercial areas. Some municipalities also offer reduced parking requirements in their downtown areas.

In recent years, a number of Ontario municipalities have also begun to offer large grants and development charge reductions for industrial and office development that brings employment to their employment areas. These grants and development charge reductions are available for previously occupied buildings/sites as well as vacant sites.

The value of these incentive programs for your project can range from tens of thousands to millions of dollars depending on the size and type of project. Maximizing the potential financial value of these incentive programs for your project requires an expert knowledge of:
  • which municipalities offer these incentive programs, and the range of eligible costs and development types;
  • incentive program application forms and processes;
  • grant and loan agreements that must be entered into with the municipality; and 
  • documentation and submission requirements.

The accounting and tax treatment of financial incentives will depend on the terms of the particular incentive. One common incentive available is a Municipal Tax Increment Grant (TIG). In very general terms, this type of grant is often based on a percentage of the property tax increase resulting from the substantial improvement, development or redevelopment of the related property, but not exceeding certain development costs. Note that the terms of a TIG will vary by municipality, and other factors such as the location of the property. The following discussion of accounting and tax considerations is restricted to TIGs.

The accounting guidance for private entities following Part II of the CPA Handbook–Accounting Standards for Private Enterprises (ASPE) is found under section 3800–Government Assistance. The first question the accountant faces is whether the grant should be accrued. The conditions of the grant should be reviewed carefully to assess whether there is “reasonable assurance” that the owner or developer has complied with and will continue to comply with all the conditions for receipt of the grant as required under section 3800.26.

Every agreement is different so it is important to review all the terms and conditions. In order to record an accrual, it is necessary to be able to quantify the grant amount.

Quantification would likely require a property assessment from MPAC so that the grant amount may be calculated.

ASPE section 3800 is silent on the measurement of the grant receivable. However, a TIG receivable is considered a financial asset under section 3856. Therefore, the receivable would be recorded initially at fair value and subsequently measured at amortized cost. Determining fair value would typically be calculated by discounting the expected cash flows using a market rate of interest.

Since the TIG is a longer term receivable, should an allowance for uncollectable grant receivable be established? Most agreements provide that the grant is only paid if the municipality collects the tax. However, since municipal taxes are fully secured against the property, collection is virtually assured and an allowance is not supported.

Examine the economic circumstances related to a company's entitlement to the TIG to determine the accounting treatment. A TIG relating to a current expense would be accounted for as a reduction of the expense.

If the TIG is on account of remediation to property that is a fixed asset of the owner, it would be recorded as a reduction of the value of the land. A fixed asset is either property for your own use or property that you will be renting or leasing to a third party.

If the TIG is on account of property that is inventory to the owner, i.e. land developer/builder, then the TIG will reduce the cost of redevelopment. This means that the reduced costs are taken into income as building lots or units are sold to third parties in the usual manner.

On the surface, paragraph 12(1)(x) of the Income Tax Act suggests that only amounts of assistance received, such as a municipal government grant, would be included in income. However, the received basis as set out in paragraph 12(1)(x) generally applies if there are no other provisions of the Income Tax Act that apply for purposes of determining taxable income. Where subsection 9(1) of the Income Tax Act already requires the inclusion of the grant in taxable income, paragraph 12(1)(x) will not be applicable. Based on case law, a taxpayer's profit from the business or property under subsection 9(1) should be calculated using “well accepted principles of business”. This usually means following generally accepted accounting principles (GAAP) and specifically, ASPE unless it can be argued that “well accepted principles of business” differs from GAAP/ASPE. Given that the terms of a TIG will vary by municipality (and other factors), the facts and circumstances of each TIG will need to be considered to determine the most appropriate treatment for tax purposes.

Where the TIG is treated as a reduction in the cost of a capital asset (i.e. land), the TIG should have no tax impact until the asset is sold. In addition for capital assets, the tax treatment should not create a negative cash impact.

In situations where the TIG is on account of inventory and the developer is able to apply the grant to development charges (and therefore receive the grant at the development stage), there is also no cash impact.

In many situations, a TIG will be paid over 10 years to a developer. Therefore, if the development is sold out in the first few years after the TIG is triggered and causes the recognition of income before 10 years has passed, there will likely be a negative cash flow impact. In such a case, income tax would generally be payable on the grant even though the cash has not been received. Most of the TIGs we have seen exceed $1 million and many times the project profit does not exceed the grant amount, thereby creating a cash flow problem.

To minimize the negative cash flow, we should consider if there are any reserves available. As discussed previously, an allowance for doubtful collections would not be available. However, there may be an argument to claim a reserve for tax purposes for amounts not collected related to real property sold. If it is possible to claim such a reserve, it may help reduce the negative cash flow under certain circumstances, but not in all situations.

A possible solution is to sell the TIG. The TIGs are legally transferrable and there appears to be a market for the sale of the future cash flow since the payer is a municipality. Of course the income stream will be discounted, and there may be tax consequences on the sale.

Other issues related to brownfields?

Brownfields by their nature present greater business risk and can be a challenge for the following reasons:

  • Projects are generally much longer term than other developments.
  • The longer term creates increased market risk as time may change the demand for your project due to economic or other reasons.
  • The longer term also exposes the owner to greater interest rate risk in addition to higher carrying costs.
  • Actual remediation costs are subject to estimates with a significant amount of uncertainty. These are sometimes dealt with using unrealistic contingencies.

Therefore, with the above in mind it is prudent to properly structure these investments to mitigate some of the risks of brownfield redevelopment.

How we can help

Our access to leading Canadian experts on municipal incentive programs can give your project the edge needed to maximize the value of available municipal incentive programs.

About BDO

One of the nation's leading accounting firms, BDO Canada provides assurance, accounting, tax, and advisory services. As a member of the BDO international network, which spans more than 150 countries and 1,400 offices, BDO provides seamless and consistent cross-border services to clients with international needs.

About RCI Consulting

Luciano Piccioni, President of RCI Consulting, has over 25 years of experience in planning and economic development in both the public and private sectors. Luciano is recognized as one of Canada's leading experts in community improvement planning and municipal incentive programs. He has successfully applied for municipal incentive programs on behalf of numerous developers and has prepared far more CIPs than any other consultant in Canada.

1. National Roundtable on the Environment and the Economy, 2003.

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