18 March 2002 External T.I. 2001-0087375 - REMAINDER IN REAL PROPERTY LOANBACK

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues:

Whether a gift of a remainder interest in real property to a non-arm's length qualified donee, with the life interest retained by the donor, would in and of itself result in the application of clause 118.1(16)(c)(ii)(A).

Position: Generally no.

Reasons:

Where a remainder interest in real property can be separated from the life interest in the real property, they are considered separate properties for the purposes of subsection 118.1(16). The use of the life interest in the real property by a 118.1(16) non-arm's length donor would generally not be viewed as a "use of the remainder interest" which is the property owned by the donee following the gift.

XXXXXXXXXX 		2001-008737
			Alison Campbell
March 18, 2002

Dear XXXXXXXXXX:

Re: Application of Subsection 118.1(16) of the Income Tax Act (the "Act")

This is in your reply to your letter of June 6, 2001 wherein you requested a technical interpretation of the application of subsection 118.1(16) of the Act. The particular situation outlined in your letter appears to relate to a factual one, involving a specific taxpayer. It is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advance income tax ruling submitted in accordance with Information Circular IC 70-6R4. However, we are prepared to offer the following general comments which may be of assistance.

When subsection 118.1(16) applies, it reduces the fair market value of a gift made to a qualified donee for purposes of determining a donation tax credit under subsection 118.1(1) of the Act. The possible application of subsection 118.1(16) should be considered whenever a donee holds a non-qualifying security as defined in subsection 118.1(18) or, where the donor or a person or partnership not at arm's length with the donor, uses property of the donee under an agreement that was made or modified in the 60 months proceeding the time of the gift.

Your particular question relates to whether, when an individual donates the remainder interest in real property and retains the life interest, the donor would be considered to be using property of the donee such that clause 118.1(16)(c)(ii)(A) would apply to reduce the fair market value of the gift. It is our general view, that the use of the life interest in a property does not result in the use of the remainder interest. Therefore, the use of the life interest in a real property following the donation of the remainder interest in the property is not a transaction that in and of itself would cause clause 118.1(16)(c)(ii)(A) to apply.

Interpretation Bulletin IT-226R "Gift to a Charity of a Residual Interest in Real Property or an Equitable Interest in a Trust" provides general information on the requirements for a donation of a remainder interest in real property to qualify as a gift for tax purposes, as well as the tax implications of making gifts of residual interests in real property to a charity. We enclose a copy of the bulletin for your reference.

We would note that in order to include an amount in the calculation of an individual's "total charitable gifts" within the meaning of that term in subsection 118.1(1) of the Act, the fair market value of the gift must be determined. In this regard there would appear to be a number of factors that would have to be taken into account in determining what a typical purchaser would currently pay for the remainder interest in the property knowing that it is subject to the life estate of a certain identifiable person or persons, including but not limited to:

a) expected term of the life interest,

b) reasonable discount rate,

c) ability of the life tenant to use the property as security for debts,

d) costs of potential re-zoning or alteration of the property at the time the life interest ceases in order to make the property ready for the intended use by the holder of the remainder interest, (for example, if the remainder interest holder wants to convert the property to parkland requiring the removal of existing buildings, this would be factored into what they would be willing to pay for the remainder interest today),

e) requirements to maintain and insure the property, and

f) any terms and conditions imposed within the life-lease agreement.

The foregoing comments represent our general views with respect to the subject matter. While we hope our comments are of assistance to you, as indicated in paragraph 22 of Information Circular 70-6R4, the above comments do not constitute an income tax ruling and accordingly are not binding on the CCRA.

Yours truly,

F. Lee Workman
Manager
Financial Institutions Section
Income Tax Rulings Directorate
Policy and Legislation Branch