19 November 1996 GST/HST Interpretation 11750-5-2 - Transfer of Remainder Interest in Farmland With Life Interest Retained

                                                                        November 19, 1996

Dear XXXXX:

I refer to XXXXX facsimile message of September 20, 1995 concerning the application of the Goods and Services Tax (GST) to a transfer of farmland by a farmer who retains a life interest.

Our understanding of the facts is as follows:

Statement of Facts:

1. A farmer who is a GST registrant transfers a farm to his son, who is not a GST registrant, while retaining a life interest for himself and his spouse, who is not a GST registrant.

2. The farmer will continue to work on the farm and receive the farming income and also remain registered. The son is not involved in farming and does not intend to become so involved.

Issue

1. Is there a supply of a remainder interest in the farm from the farmer to his son, for GST purposes? If yes, what is the value of the consideration?

2. Is there a supply of a life interest in the farm from the son to the farmer, for GST purposes? If yes, what is the value of the consideration?

GST Treatment

1. Supply of remainder interest

Paragraph 123(1)(a) of the Excise Tax Act ("the Act") states that "real property" includes "every estate or interest in real property, whether legal or equitable". The supply of a remainder interest in the farmland by the farmer to his son would therefore be considered a supply of real property.

Section 10 of Part I of Schedule V to the Act exempts certain sales of farmland. One of the conditions that must be met for the exemption to apply is that the recipient is acquiring the farmland for his own personal use and enjoyment. Since the son is not "using" the property in any way, given the nature of the remainder interest, the exemption does not apply. As a consequence, the transfer of the remainder interest in the farmland would be considered a taxable supply of real property.

Under section 155 of the Act, the value of the consideration for such a non-arm's length transaction is deemed to be the fair market value of the remainder interest in the farm.

2. Keeping a life interest

The farmer, who owned the farm in fee simple, divided his interest into a life estate and a remainder interest and transferred the latter to his son. This transfer results in the son receiving present ownership of an interest in the farm but with possession deferred until the death of his father. The retention of the life interest by the farmer is not a supply since the farmer already owned the interest to start with.

In short, for GST purposes, there is no supply of a life interest in the farm provided to the father.

3. GST Registration for the son

As the son is not engaged in any commercial activity, he may not register for GST purposes. Consequently, since the supply of the remainder interest is a taxable supply, the son will be liable for GST on the fair market value of the remainder interest in the farm, with no provision for rebate or ITC eligibility.

Should you have any further questions or require clarification on the above, please do not hesitate to contact me at (613) 952-9587.

Yours truly,

Bao Tran
Policy Officer
Financial Institutions & Real Property Division
GST Rulings and Interpretations

ON OFFICE COPY

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b.c.c.:   H.Q.Quality Assurance