Parent transfers a remainder interest in a home (the “Residence”), having a fair market value (“FMV”) of $250,000, to a personal, inter vivos trust (the “Trust”) of which an adult child (the “Child”) is the sole beneficiary and retains a life estate in the property with an FMV of $50,000, so that the remainder interest has a FMV of $200,000. Parent later moves out of the Residence and disposes of the life estate to the Trust to enable the sale of the Residence to a third party for $400,000.
CRA noted that by virtue of having disposed of the remainder interest in the residence to the trust and retained the life estate, Parent was deemed by s. 43.1(1) to have disposed of the life estate for proceeds of disposition equal to $50,000, and to have been deemed to have acquired such interest at a deemed cost of $50,000. S. 69(1)(b)(i) or (ii) deemed the proceeds of disposition of the remainder interest to be $200,000 and, if the trust received the remainder interest by way of gift, it was deemed under s. 69(1)(c) to have acquired it at a cost of $200,000. Provided the “principal residence” conditions were satisfied, the capital gain realized by Parent on the deemed disposition of the life estate, and on the disposition of the remainder interest to the Trust, would be sheltered by the principal residence exemption.
CRA noted that since the life interest of Parent was terminated by moving out rather than as a result of Parent’s death, so that the s. 43.1(2)(a) rollover did not apply, s. 69(1)(b) applied to deem receipt by Parent of FMV proceeds, so that Parent would realize a further gain if the life interest had appreciated in its FMV (and if there was instead a loss, such loss would be denied under s. 40(2)(g)(iii).)
If Parent instead stayed in the residence until death, s. 43.1(2)(a) deemed Parent to have disposed of the life estate immediately before death for proceeds equaling the ACB of the life estate (being the deemed cost that had previously arisen under s. 43.1(1)(b)) and (since Parent and the trust were deemed not to deal with each other at arm’s length) s. 43.1(2)(b), on the termination of the life estate, would add an amount to the ACB of the residence equal to the ACB of the life estate in the property immediately before the death (or a lesser amount if the fair market value of the residence as a whole has decreased since the initial transfer of the remainder interest). The Trust could not claim the principal residence exemption.