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 CCRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.
Principal Issues: Tax consequences where pursuant to a will a life interest in real property is conveyed to a spouse while the remainder interest is conveyed to a child.
Position: Subsection 70(6) and 70(5) will generally apply respectively to the life and remainder interest on death. On the death of the life interest holder, any resulting capital loss on the deemed disposition of the life interest may be denied by virtue of subparagraph 40(2)(g)(iii) of the Act. The Act does not provide for an increase in the adjusted cost base of the child's remainder interest.
Reasons: Position taken in previous correspondence.
XXXXXXXXXX 2002-015472
Karen Power, CA
(613) 957-8953
October 4, 2002
Dear XXXXXXXXXX:
Re: Life Estate
This is in reply to your letter of July 23, 2002, requesting information on the tax consequences surrounding the proposed sale of a property. You described the following situation:
1. In XXXXXXXXXX, your mother ("Mrs. X") passed away. Upon Mrs. X's death, her will provided that her husband ("Mr. X") would receive a life estate in a residence located at XXXXXXXXXX (the "Property") and her adult daughter ("Ms. A") would receive the remainder interest in the Property.
2. Following Mrs. X's death, a formal life estate agreement was drawn up and a life estate caveat was attached to the title of the Property. Ms. A was registered as the owner of the Property.
3. On XXXXXXXXXX, Mr. X passed away. After Mr. X's death, Ms. A owned the Property free and clear.
4. The Property has increased in value since XXXXXXXXXX and does not qualify as Ms. A's principal residence.
Written confirmation of the tax implications arising from proposed transactions is given by this Directorate only where the transactions are the subject matter of an advance income tax ruling request pursuant to Information Circular 70-6R5 Advance Income Tax Rulings (enclosed), dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant tax services office. However, we are prepared to provide you with some general comments which may be of assistance.
Pursuant to subsection 70(5) of the Income Tax Act (the "Act"), a deceased taxpayer is deemed to have disposed, immediately before his or her death, of each capital property owned by the taxpayer for proceeds of disposition equal to the fair market value (the "FMV") of the property immediately before death. Accordingly, the deceased is generally taxed on any capital gain that accrued to the date of death.
However, subsection 70(5) of the Act does not apply in respect of any capital property of the deceased taxpayer that is, as a consequence of the death, transferred or distributed to the taxpayer's spouse or common-law partner who was resident in Canada immediately before the taxpayer's death, unless an election is made under subsection 70(6.2) of the Act to have subsection 70(5) apply. Where no election is made, pursuant to subsection 70(6) of the Act, such transfers or distributions are generally deemed to be made for proceeds of disposition equal to the property's adjusted cost base (the "ACB") to the taxpayer immediately before his death. Accordingly, any capital gain that accrued prior to the date of death will be taxed in the hands of the transferee when he or she subsequently disposes of the property.
In the situation you describe, Mrs. X would have been deemed to dispose of the Property immediately before her death. A valuation of the life interest in the Property would presumably have been required in order to properly determine the deemed proceeds of disposition of the Property for Mrs. X since subsection 70(6) of the Act would have applied to the life interest in the Property that was gifted to Mr. X and subsection 70(5) would have applied to the remainder interest gifted to Ms. A (we have presumed that no election was made under subsection 70(6.2) of the Act with respect to the transfer to Mr. X).
When a life interest or a remainder interest in property is acquired by an individual as a consequence of a person's death, the adjusted cost base of that individual's interest in the property is determined under subsection 70(5) or (6) (as is applicable in the circumstances) at the time of the person's death. Paragraph 70(5)(b) of the Act provides that Ms. A would have acquired the remainder interest in the Property at a cost equal to its FMV immediately before Mrs. X's death.
It is our opinion that the FMV of a remainder interest in a real property at a particular time is equal to the FMV of that real property minus the FMV of the life interest therein. The calculation of the FMV of the life interest would usually be based on the following elements: FMV of the real property, a reasonable rate of interest, life expectancy of the beneficiary of the life interest at the date of transaction, and any other factors relevant to the specific case (as indicated in paragraph 5 of the enclosed Interpretation Bulletin IT-226R).
On the death of Mr. X, his life interest in the Property expires and Ms. A becomes the holder of the whole Property. Mr. X would be deemed pursuant to subsection 70(5) of the Act to have disposed, immediately before his death, of his life interest for proceeds of disposition equal to the FMV of the life interest immediately before his death. Such a deemed disposition would likely result in a capital loss, however, such capital loss is deemed to be nil by reason of subparagraph 40(2)(g)(iii) of the Act which denies a capital loss on the disposition of any personal-use property.
There is no provision in the Act by which an amount may be added to the adjusted cost base of Ms. A's remainder interest in the Property upon the expiry of the life interest in the Property.
In general terms, the capital gain to be realized by Ms. A on the ultimate disposition of the Property after the death of the life interest holder, will be equal to the proceeds of disposition for the Property less Ms. A's adjusted cost base in the Property (as determined upon Mrs. X's death in XXXXXXXXXX) and any selling costs. Only 50% of any resulting gain is taxable and included in income.
We trust that our comments are of assistance to you.
Yours truly,
Milled Azzi, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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