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 Department.

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

Principal Issues:

Tax consequences of reacquiring a remainder interest by the life estate holder of a property where subsection 43.1(1) previously applied on the disposition of the remainder interest.

Position:

Normal disposition of remainder interest back to original holder subject to subsection 69(1)

Reasons:

43.1(2) applies only where life interest is extinguished upon death and such is not the case here.

		March 6, 2002

	Calgary Tax Services Office	HEADQUARTERS
Ms. Cinda Clarke	Lena Holloway
	Client Services	613-957-2104

2002-012184

Technical Interpretation Request - Section 43.1

This is in reply to your letter of February 4, 2002, regarding the application of section 43.1 of the Income Tax Act ("Act") to a taxpayer's specific situation. Our comments are based on the information provided in your request and all references hereunder will be to the Act.

Background

An individual disposes of his remainder interest in a XXXXXXXXXX property in British Columbia in XXXXXXXXXX to his XXXXXXXXXX sons. He retains a life estate in the property while he accepts promissory notes from his sons in respect of the remainder interest acquired by them. The sons are registered on title with the land registry authorities of that province. Tax was paid on the disposition. The father intends to retake possession of the entire property.

You have asked what the tax implications are to both the individual taxpayer and his sons given that subsection 43.1(2) addresses the tax implications as a result of the termination of the life estate at death but that this particular life estate will be terminated before death.

Our Comments

When the above individual disposed of his remainder interest in the XXXXXXXXXX property to his sons while retaining the life estate, subsection 43.1(1) would have applied so that any gain accrued on the entire property would have been recognized at that time (XXXXXXXXXX). Normally the next disposition would occur where the holder of the life estate dies and a rollover would be available to defer gains on the property accruing after the initial division of the property into a life estate and remainder interest. Where, as a result of an individual's death, a life estate, to which subsection 43.1(1) previously applied, is terminated, subsection 43.1(2) would apply. Under subsection 43.1(2) the individual is deemed to have disposed of the life estate at its adjusted cost base and this amount would generally be added to the cost base of the remainder interest held by the surviving taxpayer.

In the case presented the individual's life estate is not terminated by death but rather the taxpayer is actually proposing to reacquire the remainder interests from his sons so that he will once again have ownership of the entire property. Depending on whether the sons receive fair market value consideration for their remainder interests, subsection 69(1) may apply. If the remainder interests are acquired for more than their fair market values, paragraph 69(1)(a) would provide that the interests so reacquired would have a cost equal to that fair market value. If the sons dispose of their interests for less than fair market value, paragraph 69(1)(b) would apply to deem them to have received proceeds equal to fair market value. The fair market value of the life and remainder interests at the time the father proposes to reacquire the remainder interest is a valuation issue on which we offer no comment. We would also note that if the remainder interests are personal use property of the sons, any capital loss on the disposition would be deemed to be nil by virtue of subparagraph 40(2)(g)(iii).

We trust that these comments will be of assistance.

For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Legislation Access Database (LAD) on the Canada Customs and Revenue Agency's mainframe computer. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the LAD version, or they may request a copy severed using the Privacy Act criteria, which does not remove client identity. Requests for this latter version should be made by you to Mrs. Jackie Page at (819) 994-2898. A copy will be sent to you for delivery to the client.

Milled Azzi, CA
For Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch

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