Principal Issues: [TaxInterpretations translation] Can the retrocession of the property by the 2 children (held in bare ownership 50%-50%) to the father (holder of a usufructuary title to the property) have tax consequences?
Position: General comments on the calculation of the gain and the calculation of the ACB for the purpose of determining a capital gain.
Reasons: The gain will be a function of the PoD and ACB computed according to the rules in paragraph 107(1)(a) and subsection 107(2).
XXXXXXXXXX 2006-016937
September 25, 2006
Dear Sir,
Subject: Request for Technical Interpretation
Application of subsections 107(1) and 108(1) of the Income Tax Act
This is further to your letter dated 25 January 2006, in which you asked for our opinion on the tax consequences of a certain transaction.
Unless otherwise indicated, all statutory references herein are to provisions of the Income Tax Act (the "Act").
Facts
- XXXXXXXXXX (your "Father") is a pensioner who has lived in the family home since the death of his wife.
- On XXXXXXXXXX, your father, by notarial deed, made an inter vivos gift of the family residence to XXXXXXXXXX (the "Son") and XXXXXXXXXX (the "Daughter"). The bare ownership is vested in each of them at to 50%.
- The transaction provided in clause XXXXXXXXXX of the contract that there was a usufruct in favour of your father on the property.
- On XXXXXXXXXX, you and your sister retroceded the property to your father by notarial deed.
Questions
You wish to know the tax consequences of the retrocession of the property to your father. You wish to know more about a possible capital gain on this transaction.
Our Comments
As stated in paragraph 22 of Information Circular 70-6R5, dated May 17, 2002, it is the practice of our Directorate not to issue a written opinion regarding proposed transactions otherwise than by 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 which may not apply in full to the situation you have submitted to us.
For the purposes of the application of the Act in the province of Quebec, where a property is subject to a usufruct or right of use established for the benefit of a person, subsection 248(3) deems the property subject to the usufruct or right of use to be transferred to a trust. There is then a disposition of the entire property to the trust and the property is deemed to be held in trust and not otherwise. Consequently, the property is held through the trust, your father has an income interest, and you and your sister have a capital interest in the trust.
Based on the information you have provided, we understand that the trust is an "inter vivos trust" as that term is defined in subsection 108(1). In addition, the trust is a "personal trust" as it satisfies the test set out in paragraph (a) of that definition in subsection 248(1).
Tax consequences for the children
On the retrocession to your father on XXXXXXXXXX, the transaction constituted a disposition of a trust interest for the purposes of the Act. In your case, it was a disposition of a capital interest. The first step is to compute the adjusted cost base (your "ACB") of the capital interest in a trust.
Paragraph 107(1)(a) applies in determining the ACB for the purpose of computing the taxable capital gain of a beneficiary who disposes of a capital interest in a personal trust. Note that this paragraph for determining the ACB of the capital interest applies only for the purpose of calculating the capital gain from the disposition. The ACB is calculated under other provisions where the disposition of the capital interest results in the realization of a capital loss.
To continue our analysis, we understand from your letter that the disposition of the capital interest would result in a capital gain. Thus, we will raise the relevant rules for determining the ACB of the capital interest for the purpose of calculating that capital gain.
Paragraph 107(1)(a) provides that the ACB of a capital interest in a personal trust is generally the greater of the ACB of the interest as otherwise computed (in this case, nil having regard to paragraph 107(1.1)(b)) and the cost amount of the interest as determined under subsection 108(1). Subsection 108(1) provides that the cost amount of a capital interest in a trust at a particular time is determined by reference to the trust's money and the cost amount of its other property.
Consequently, in this situation and based on the information you have provided, the ACB of your interest could be the equivalent of your share (i.e. 50%) of the FMV of the property at the time of the transfer by your father in XXXXXXXXXX.
Once the ACB of the capital interest has been determined, the next step is to compute the capital gain or loss on disposition. To this end, it will be necessary to value the FMV of your interest on the disposition, given that the normal transfer rules of subsection 69(1) apply. As a guide, the FMV of the interest can be determined from the FMV of the principal residence, taking into account an adjustment for the value attributed to the usufruct, if any. This means that only the FMV of the bare ownership of the residence must be determined. For simplicity, if we assume that no value is attributed to the usufruct, the FMV of the equity interest will be equal to the FMV of the principal residence at the time of the retrocession.
In your situation, it would be possible to compute a capital gain equal to the difference between the FMV of the principal residence at the time of the transfer (XXXXXXXXXX) and the FMV of the property at the time of the transfer by your father (XXXXXXXXXX). The computed capital gain must be apportioned between you and your sister according to your respective shares, i.e., 50%.
As you can see, your questions raise a number of tax issues. As our comments are intended to be of a general nature, we have attempted to discuss the general rules of the tax implications that may apply in your particular situation. These comments are not advance income tax rulings and are not binding on the Canada Revenue Agency with respect to any particular factual situation.
We hope that these comments are of assistance.
Best regards,
Phil Jolie
Director
Business and Partnerships Division
Income Tax Rulings Directorate