Dear Sirs:
Re: Change in use of Real Property
This is in reply to your letter of August 29, 1991 concerning the application of the change in use rules in subsections 45(1) and (2) of the Income Tax Act (the "Act") to the series of transactions described below.
Facts
1.
2. 24(1)
3.
Issues
l. Is a life estate in real property an eligible capital expenditure as defined in paragraph 14(5)(b) of the Act.
2. When the Property is leased will a change in use occur in either the life estate in the Property or the remainder interest in the Property or in both.
3. If a change in use will occur, how is the life estate in the Property to be valued at the time of conversion.
4. If a change in use will occur, is it possible to elect, pursuant to subsection 45(2) of the Act, for a change in use not to have occurred.
Our Comments
The situation outlined in your letter appears to relate to specific proposed transactions with identifiable taxpayers. Confirmation of the tax consequences relating to specific proposed transactions will only be provided in response to a request for an advance income tax ruling. The procedures for requesting an advance ruling are set out in Information Circular 70-6R2 dated September 28, 1990. We can, however, offer the following general comments.
Nature of a Life Estate in Real Property
A life estate in real property is a type of an interest in real property. It is a freehold estate in time in real property for an indefinite period of time. It is distinguishable from a fee simple interest in real property which is a freehold estate in time for an infinite period of time. It is also distinguishable from a leasehold interest in real property which is an estate in time but not a freehold interest in real property. It is also distinguishable from an easement or covenant both of which are an interest in real property but less than an estate. It is our opinion that a life estate in real property is a capital property and is not an eligible capital expenditure as defined in paragraph 14(5)(b) of the Act.
Change in Use
24(1)
Valuation of a Life Estate in Real Property
Questions concerning the valuation of property for tax purposes should be directed to the valuation section of the appropriate Revenue Canada, Taxation District Office. We can, however, offer the following general comments.
It is our opinion that the value of a life estate in real property at a particular time is the difference between the current value of the real property and the value of the remainder interest in the real property. The fair market value of the remainder interest in the real property is determined by what a typical purchaser would currently pay for fee simple ownership in the property subject to a life estate of certain identifiable persons. This is the future value of the present worth of the real property calculated using the life expectancy of the life tenants and an appropriate discount rate.
Subsection 45(2) Election
Where there has been a change in use of a property from personal use to business or investment use, a taxpayer may, pursuant to subsection 45(2) of the Act, elect in his return of income for the year not to have made the change in use. This election has the effect of avoiding the deemed disposition that would otherwise result under paragraphs 45(1)(a) and 13(7(b) of the Act. Capital cost allowance with respect to the property may not be claimed while a subsection 45(2) election is in force since the property is considered a personal use property.
These comments represent our general views with respect to the subject matter of your letter. The facts of a particular situation may yield a different result. The foregoing comments are not rulings and, in accordance with the guidelines set out in Information Circular IC 70-6R2 dated September 28, 1990, are not binding on the Department.
We trust these comments will be of assistance to you.
Yours truly,
for DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch