Principal Issues: Consequences to taxpayer as a result of the transfer of remainder interest in her mother's principal residence to her
Position: General comments given regarding the application of section 43.1
Reasons: The law
XXXXXXXXXX 2005-015560 G. Moore (613) 957-9232 July 17, 2006
Dear XXXXXXXXXX:
Re: Life Estate on a Principal Residence
This is in response to your letter of October 19, 2005, inquiring about the income tax consequences of a life estate on your mother's principal residence. Further to our telephone conversation of July 14, 2006, you requested a written summary of our discussion, which is outlined below.
As we understand it, in XXXXXXXXXX, an individual gave her daughter the remainder interest of her principal residence, on which the individual kept a life estate. The life estate allowed the individual to keep the property as her principal residence with full responsibility and control of the property until her death. The individual was still responsible for paying the taxes and other property expenses. In XXXXXXXXXX, the individual became ill and was not capable of living on her own. In XXXXXXXXXX, the individual moved to a seniors' home. In XXXXXXXXXX, the life estate was removed from the property and the property was put up for sale and sold in XXXXXXXXXX. You are asking whether, for purposes of calculating the capital gain on the disposition of the property, the daughter should subtract from the proceeds of disposition the fair market value of the property when it was gifted to her in XXXXXXXXXX, or in XXXXXXXXXX, when the life estate was removed from the property.
Our Comments
The situation outlined in your letter appears to relate to a completed transaction. You should submit all relevant facts and documentation to the appropriate Tax Services Office ("TSO") for their views. A list of TSOs is available on the "Contact Us" page of the CRA website. Although we cannot comment on your specific situation, we are prepared to provide the following general comments, which may be of assistance.
When the above individual disposed of her remainder interest in the property by way of gift inter vivos to her daughter, while retaining the life estate, subsection 43.1(1) of the Income Tax Act (the "Act") would have applied so that the individual would have been deemed to have disposed of her life estate in her property for proceeds of disposition equal to its fair market value at that time. The individual would also have been deemed, by subsection 43.1(1) of the Act to have reacquired the life estate immediately after that time at a cost equal to the proceeds of disposition. As a result, any gain accrued on the entire property would have been recognized at that time (XXXXXXXXXX) by the individual. However, any gain would have been offset by a principal residence exemption since the property was the individual's principal residence. Pursuant to paragraph 69(1)(c) of the Act, the daughter would have been deemed to acquire the remainder interest at a cost equal to fair market value.
Normally the next disposition would occur where the holder of the life estate dies and a rollover would be available to defer gains on the property accruing after the initial division of the property into a life estate and remainder interest. Where, as a result of an individual's death, a life estate, to which subsection 43.1(1) previously applied, is terminated, subsection 43.1(2) would apply. Under subsection 43.1(2) the individual is deemed to have disposed of the life estate at its adjusted cost base and this amount would generally be added to the cost base of the remainder interest held by the surviving taxpayer.
In this case, the individual's life estate is not terminated by death but rather it would appear that the individual disposed of her life estate by gifting it to her daughter in XXXXXXXXXX. Since the life estate was disposed of by way of a gift inter vivos, paragraph 69(1)(b) of the Act would apply to deem the individual to have received proceeds of disposition for it equal to fair market value and paragraph 69(1)(c) would deem the daughter to have acquired it at a cost equal to fair market value. The fair market value of the life interest at the time the individual removed it from the property is a valuation issue on which we offer no comment. Generally, the daughter's gain, if any, arising on the disposition of the property would be equal to the proceeds of disposition of the entire property in XXXXXXXXXX when it was sold less the adjusted cost base of the property. The daughter's adjusted cost base would reflect the deemed costs of the remainder interest and life interest when they were gifted her.
If the property was not the daughter's principal residence because she did not ordinarily reside in it, she is unable to claim the principal residence exemption in respect of the capital gain realized on the sale, as supported by case law. In the court case of Depedrina et al v. The Queen, 2005 DTC 1386, in 1978, the individual's parents signed and registered a deed in respect of the property in which the property was transferred to the individual, his brother and their respective wives ("Children and Spouses"), with a life interest kept by the parents. The life interest expired in 1997 on the death of the individual's mother. In 1998, the children sold the property for $1,850,000. In calculating the adjusted cost base of the property of the Children and Spouses, the Minister of National Revenue took into account the appraised value of the remainder interest in 1978. The Children and Spouses argued that they did not have full ownership of the property in 1978 as their parents retained a life estate in the property. The Minister of National Revenue took the position that the Children and Spouses became owners of the property in 1978 and should be taxed on any gain that arose on the property after that time (excluding the gain based on the value of the life interest in 1978, as a result of the application of subsection 43.1(1) of the Act). The Court found that if the deed the parents signed was effective, the Children and Spouses became owners of the remainder interest in the property in 1978 and that the tax consequences were that the Children and Spouses were to be taxed on the gain that accrued on the property since 1978.
We trust that these comments will be of assistance.
Yours truly,
S. Parnanzone
Manager
Business Incentives and Capital Transactions Section
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch