A farmer disposes of his principal residence to a family farm corporation while retaining a life estate in it until he and his spouse die.
After noting that when the farmer disposed of his remainder interest, while retaining the life estate, s. 43.1(1) applied so that he was deemed to have disposed of his life estate in the property for proceeds of disposition equal to its fair market value at that time, and was deemed by s. 43.1(1) to have reacquired the life estate immediately after that time at a cost equaling such proceeds, CRA went on to refer to s. 43.1(2)(b), and stated:
Paragraph 43.1(2)(b) applies if there is a non-arm's length relationship between the person who holds a residual interest in the real property immediately before the individual's death and the holder of the life estate. In the situation as you described it, the taxpayer or his or her spouse holds a residual interest in the principal residence prior to death and the holder of the residual interest is a family farm corporation that is controlled by the taxpayer's son. Thus, the taxpayer and the corporation are "related persons" by virtue of subparagraph 251(2)(b)(iii) … ..
Consequently, the lesser of the amounts set out in subparagraphs 43.1(2)(b)(i) and (ii) will be added to the ACB of the residual interest held by the corporation.