Principal Issues: [TaxInterpretations translation] Tax treatment of an amount disbursed for the acquisition of a usufruct or right of use.
Position: No deduction on acquisition or on payment. On disposition of the holding, which may occur at the end of the usufruct or right of use, the payer may suffer a capital loss.
Reasons: For property subject to a usufruct or right of use after 1990, subsection 248(3) applies and the property is deemed disposed of to a trust. The trust is not a personal trust because an interest is acquired for consideration. The payer therefore holds a capital interest whose cost is equal to the amount paid or payable for the acquisition.
XXXXXXXXXX 2006-021463 Sylvie Labarre, CA September 13, 2007
Dear Sir,
Subject: Amount disbursed for the acquisition of a usufruct or right of use
This is in response to your email of November 17, 2006, in which you requested our opinion regarding the tax treatment of an amount disbursed for the acquisition of a usufruct or a right of use within the meaning of the Civil Code of Québec. We apologize for the delay in responding to this request.
A taxpayer sold to a corporation carrying on a farming business the usufruct or right of use, within the meaning of the Civil Code of Québec, for the use of land together with the buildings constructed on the land. The taxpayer deals at arm's length with the corporation. The usufruct or right of use was granted for a term of 25 years in consideration of $30,000 payable in 6 annual instalments.
Our Comments
As stated in paragraph 22 of Information Circular 70-6R5 dated May 17, 2002, it is the practice of the Canada Revenue Agency (CRA) not to issue written opinions on proposed transactions otherwise than through advance rulings. Furthermore, when it comes to determining whether a completed transaction has received appropriate tax treatment, that determination is made first by our Tax Services Offices as a result of their review of all facts and documents, which is usually performed as part of an audit engagement. However, we can offer the following general comments that we hope may be helpful to you. These comments may, however, under certain circumstances, not apply to your particular situation.
You are asking us about the tax treatment of either a usufruct or a right of use created under the Civil Code of Quebec. Whether it is a usufruct or a right of use, the tax treatment will be the same. Subsection 248(3) of the Income Tax Act (the "Act") will apply to a property subject to a usufruct or right of use after 1990. Thus, the usufruct or right of use is deemed to be a trust. The owner of the property will be deemed to have disposed of it to a trust, which will likely have tax consequences. The owner of the property and the corporation will be deemed to receive an interest in the trust. This trust will not be a personal trust because the corporation paid an amount to obtain this interest. Therefore, the corporation will be deemed to have a capital interest costing $30,000.
The cost of the interest will not be deductible in computing the income of the corporation when the shareholding is acquired or when the six annual instalments are paid. The corporation will take into account the amount paid to acquire the usufruct or right of use of the property when disposing of the capital interest, for example, when the usufruct or right of use of the property ends. This disposition of the capital interest could result in a capital loss due to the disbursement.
We hope that these comments are of assistance.
Best regards,
Alain Godin
for the Director
International Operations and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch.