7 May 1999 GST/HST Interpretation HQR0001534 - Transfer of Beneficial Interest

Dear XXXXX

Thank you for your memorandum of December 23, 1998 (with attachments) concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to the transfer of beneficial interests in real property with respect to two cases dealt with by your office. With respect to those two cases, we would advise that we are generally in agreement with the resultant letters.

Case A - XXXXX ("the estate")

The facts presented by the client are as follows:

1. XXXXX died on August 1, 1995.

2. At the time of her death, XXXXX owned a property of approximately XXXXX acres which was occupied by XXXXX as their principal residence. Part of the XXXXX acres was used by the adjoining farm business and operation conducted by XXXXX XXXXX on the adjoining land of approximately XXXXX which is registered in XXXXX name alone. XXXXX husband of XXXXX is currently a GST/HST registrant.

3. Under the provisions of the Last Will and Testament of XXXXX acre XXXXX parcel inclusive of the principal residence of XXXXX is to be transferred to XXXXX subject to a life interest in favour of XXXXX[.]

4[.] XXXXX owns another vacant parcel of land of approximately XXXXX acres which he currently uses as part of his farming operation and which he utilizes for the purpose of crops.

5. XXXXX is not registered for GST/HST purposes.

6. It is also understood that neither XXXXX nor the estate is registered for GST/HST purposes.

7. All of the parcels of land are understood to be located in the XXXXX[.]The client presented the following proposed transactions:

1[.] XXXXX will transfer the XXXXX acre parcel which includes the principal residence of XXXXX and the late XXXXX to XXXXX to a XXXXX interest and XXXXX as to a XXXXX interest. The client is suggesting the retention of the XXXXX interest by XXXXX only for the purposes of preserving the severance between the XXXXX acre parcel and the XXXXX acre parcel.

2[.] XXXXX would convey the XXXXX parcel to XXXXX and would reserve a life interest in the parcel for the purposes of being able to continue to farm the parcel subject to the ability of XXXXX to utilize a part of the property to build a home on approximately XXXXX for his principal residence. In order for XXXXX to build his new residence, he would have to place a mortgage on the property in the estimated range of XXXXX to which XXXXX would have to postpone his life interest if the mortgage company were willing to advance the necessary funds. There is also the ultimate transfer [sic] on the death of XXXXX when the life interest terminates.

Case B - XXXXX

Situation 1:

1. An individual has a XXXXX partnership interest in a land subdivision and a XXXXX interest in another subdivision. The individual is in the business of land development. Both the partnership and the proprietorship are registered for GST/HST purposes.

2. Currently the individual's spouse does not own any portion of these land subdivisions. The spouse is neither engaged in any other commercial activity nor registered for GST/HST purposes.

3. The individual has quickly failing health and wishes to put all assets in joint names with the spouse for estate purposes. This transfer may or may not be for consideration based on fair market value or for nil or nominal consideration.

Situation 2:

1. An individual and the individual's spouse own a commercial building in XXXXX in partnership. The partnership is not registered for GST/HST purposes as the rent received from the building is less than $30,000 per year.

2. The building is being rented to a company owned jointly by the partners.

3. The partnership wishes to put an addition on the building and is considering registering for GST/HST purposes, hence charging GST on the rent and getting input tax credits for the addition.

Interpretation Requested

With respect to the above cases, you wish to know the following:

1. Is there a transfer of a beneficial interest upon the cessation of use by an individual of real property as a result of the death of the individual where the individual held only a life or other beneficial interest in the real property?

2. If there is a beneficial interest transferred, upon what, if any, value would GST/HST apply, and how is such value determined?

3. Is a beneficial interest present at or immediately after the time of death of an individual and, if so, what is the value of the interest or how is the value to be determined?

Interpretation Given

Based on the information provided it is our view that:

1. In the fact situation outlined in Case A, the distribution of the XXXXX acre parcel by the estate is deemed by section 269 of the Excise Tax Act ("the Act") to be a supply of a life estate to XXXXX and a supply of the fee simple in remainder to XXXXX XXXXX. As each recipient receives a presently existing interest in the land, the transfer of both beneficial interests (i.e. the life estate and the remainder interest) takes place at the time of the distribution. At the time of the death of XXXXX his beneficial interest would terminate; XXXXX own beneficial interest would at that point vest in him the right to possession of the property. Under proposed transaction 2 in Case A XXXXX is transferring XXXXX in fee simple (legal and beneficial interests) to XXXXX. He is transferring the fee simple in remainder of the other XXXXX acres to XXXXX while retaining a life estate for himself. Again, while the right to possession of the XXXXX does not vest in XXXXX until the time of XXXXX death, the remainder interest is transferred immediately. XXXXX beneficial interest essentially dies with him; it is XXXXX own beneficial interest that will entitle him to possess the property. Under the joint tenancy arrangements in Case B, there are no transfers of interests, either legal or beneficial, at the time the first spouse dies. The survivor becomes the sole owner of the property by operation of law.

2. The supply of the life estate and the supply of the fee simple in remainder of the XXXXX acre parcel deemed under section 269 of the Act to be made by the estate to XXXXX and XXXXX, respectively, are further deemed by that section to be for consideration equal to the amount determined under the Income Tax Act to be the proceeds of disposition of those interests in the property. The supply of the fee simple in remainder of the XXXXX from XXXXX to XXXXX is assumed to be a non-arm's length transaction. Accordingly, section 155 of the Act would deem the consideration to be equal to the present fair market value of the remainder interest. The supply of the fee simple absolute of the XXXXX from XXXXX to XXXXX would be exempt from GST in accordance with section 10 of Part I of Schedule V to the Act.

3. In Case A, in both the fact situation and the proposed transactions XXXXX beneficial interests as life tenant will terminate upon his death (note that after the proposed transaction regarding the XXXXX lot this would only relate to the XXXXX fee simple still held by XXXXX beneficial interests as remainderman will survive him and form part of his estate. If XXXXX interests are sold by his estate at arm's length, for GST/HST purposes the value will be the consideration for the sale; if they are sold at other than arm's length to a person who is not registered or will not use the property exclusively in commercial activities, the value will be the fair market value; if they are distributed by the estate, the value will be as determined under section 269 of the Act.

In Case B, in both situations the beneficial interest of the first spouse to die terminates with the death of that spouse. Assuming no further transactions take place in the interim, the beneficial interest of the survivor will form part of the survivor's estate. The value of the latter interest will be the value of the property.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 954-3772.

Yours truly,

John Bain
Real Property Unit
Financial Institutions and Real Property Division
GST/HST Rulings and Interpretations Directorate