Principal Issues: [TaxInterpretations translation] Can the creation of a usufruct in a foreign jurisdiction be equated with the creation of a trust in Canadian tax law? If so, what are the connecting criteria that must be considered? If not, what would the tax consequences be of the transfer of the usufruct?
Position: Question of fact.
Reasons: Where a usufruct is not governed by the law of the Province of Quebec, subsection 248(3) is not applicable. In this context, it must be determined whether the creation of a usufruct results in a disposition for the purposes of the Act. This determination should be made in the light of the treatment under the laws of the foreign jurisdiction of the division of the ownership rights.
Federal Tax Roundtable, 5 October 2012
2012 APFF Conference
Question 19 Treatment of a foreign usufruct
Foreign estate planning utilizes the division of the rights to property such as the donation of the bare property with usufruct reserved.
Given that certain civil mechanisms governed by the law of the Province of Quebec such as succession, substitution and usufruct are treated as a trust under subsection 248(3) of the Income Tax Act, what happens where a usufruct is created in a foreign jurisdiction, for example under the French Civil Code?
Subsection 43.1(1) has a very limited scope of application because it provides for a deemed disposition at FMV when a property is transferred but with the transferor retaining a life estate.
Question to the CRA
Could the creation of a usufruct be treated as the creation of a trust in Canadian tax law?
If so, what are the connecting factors (by virtue of Quebec's rules of private international law) that must be considered?
If not, what are the tax consequences of establishing a usufruct?
CRA Response
Where a usufruct is not governed by the laws of Quebec, subsection 248(3) ITA is not applicable. Consequently, in the situation of a usufruct governed by the French Civil Code, we are of the view that the creation of such usufruct would not generally be treated as the creation of a trust under Canadian tax law.
In this context, it would be necessary to determine if the creation of the usufruct entailed a disposition for purposes of the Act. This determination should be made in the light of the treatment under the laws of the foreign jurisdiction of the division of the ownership rights.
François Bordeleau
(613) 957-8972
October 5, 2012
2012-045128