26 April 2006 External T.I. 2005-0138381E5 - Life Interest and Qualified Farm Property

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.

Principal Issues:

1) Is a life interest in real property a real property for the purposes of the definition of QFP?

2) Can the taxpayer claim the qualified farm property deduction on the gifting of the life interest to the beneficiaries of the remainder interest in the property?

Position:

1) YES.

2) Question of Fact.

Reasons:

1) The life interest holder and the remainder interest holders own the property in joint tenancy.

2) Where a taxpayer acquires a life interest in real property and the life interest was acquired after 1987, the life interest will qualify as QFP if it meets the farming use test as set out in paragraph (a)(vi) of the definition of QFP.

							2005-013838
XXXXXXXXXX 						Luisa A. Majerus, CA
(613) 832-3488
April 26, 2006

Dear XXXXXXXXXX:

Re: Life Interest and Qualified Farm Property

This is in reply to your letter dated June 22, 2005, requesting our views on whether a particular property is eligible for the capital gains deduction for qualified farm property under subsection 110.6(2) of the Income Tax Act (the "Act"). We apologize for the delay in our response.

Specifically, the taxpayer ("TP") was bequeathed, in 2003, a life interest in farm property of the TP's deceased spouse. The adult children of the deceased spouse are the beneficiaries of the residual interest in the farm property. The farm property is real property. It constituted "qualified farm property" in the hands of TP's deceased spouse within the definition of this expression in subsection 110.6(1) of the Act. TP wants to gift the life interest to the adult children. You are requesting our views on whether the life interest is real property and whether or not TP can use the deduction for qualified farm property, under subsection 110.6(2) of the Act, to offset any taxable capital gain resulting from the disposition for income tax purposes.

Our Comments

The situation outlined in your letter appears to involve 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 advanced income tax ruling, as explained in Information Circular 70-6R5, "Advanced Income Tax Rulings." Should your situation involve a specific taxpayer and a completed transaction, all relevant facts and documentation should be submitted to the local Tax Services Office for their views. Although we cannot comment on your specific situation, we are prepared to provide the following general comments, which may be of assistance.

Subsection 110.6(1) of the Act contains the definition of "qualified farm property" ("QFP"). Under the definition, a property owned by a taxpayer that is real property may qualify as QFP if it was used in the business of farming in Canada by the individual or, amongst others, by the spouse or common-law partner, or a child or parent of the individual. The farming use test in respect of real property last acquired after June 17, 1987, is set out in subparagraph (a)(vi) of the definition of QFP.

A life interest in real property is considered to be real property for the purpose of the definition of QFP. Accordingly, the deduction under 110.6(2) of the Act may be available to a taxpayer in respect of taxable capital gains arising from the disposition of a life interest in real property. Since TP acquired a life interest in real property and the life interest was acquired in 2003, the life interest will qualify as QFP if it meets the farming use test as set out in paragraph (a)(vi) of the definition of QFP.

It is a question of fact whether or not the gifting of the life interest by TP to her adult children is a disposition for income tax purposes. A "disposition" is defined in subsection 248(1) of the Act to include "any transaction or event entitling a taxpayer to proceeds of disposition" and excludes "any transfer of property as a consequence of which there is no change in the beneficial ownership of the property."

We trust this information is helpful.

Yours truly,

Sandy Parnanzone
For Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch