CRA discusses the application of s. 43.1 where a remainder realty interest is transferred to a personal trust and there is a subsequent life interest surrender

CRA ran through a simple example illustrating what happens if the life-estate-in-realty rules in 43.1 are partially or fully applicable.

Parent transfers a remainder interest, having an FMV of $200,000, in a residence having an FMV of $250,000, to a personal, inter vivos trust of which an adult child is the sole beneficiary and retains a life estate in the residence with an FMV of $50,000. 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 re-acquired it 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 usual conditions were satisfied, the capital gains realized from the deemed disposition of the life estate, and the disposition of the remainder interest to the trust, could be sheltered by the principal residence exemption.

Since the life interest of Parent was terminated by moving out rather than “as a result of an individual’s death,” so that the s. 43.1(2)(a) rollover did not apply, s. 69(1)(b) deemed Parent to receive FMV proceeds for the life interest, so that Parent realize a further gain if the life interest had appreciated in its FMV.

If (to vary the facts) Parent stayed in the residence until death, s. 43.1(2)(a) would deem 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 $50,000 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).

Neal Armstrong. Summary of 15 June 2022 STEP Roundtable, Q.9 under s. 43.1.