25 March 2009 External T.I. 2008-0291091E5 - Life and remainder interests in residence

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.

Principal Issues: Whether there would be any income tax consequences if the Taxpayer were to transfer the remainder interest in his mother's principal residence back to his mother.

Position: Yes.

Reasons: See response.

									2008-029109
XXXXXXXXXX 								André Gallant
(613) 957-8961
March 25, 2009

Dear XXXXXXXXXX :

Re: Life interest and remainder interest in a principal residence

This is in response to your letter of August 19, 2008, and is further to our telephone conversation on March 13, 2009 (Gallant/XXXXXXXXXX ), regarding the income tax consequences with respect to two different transactions involving the life interest and the remainder interest in a principal residence.

Our understanding of the facts is as follows:

1. In September 2005, the Taxpayer was gifted the remainder interest in his mother's principal residence (the "House") in which the mother retained the life interest.

2. The mother is considering moving from the House to the city. Before such a move, the Taxpayer is considering gifting the remainder interest in the House back to his mother.

3. Subsequent to the Taxpayer's transfer of the remainder interest back to the mother, the mother will sell the House to a third-party shortly thereafter.

You are asking whether there would be any income tax consequences if the Taxpayer were to transfer the remainder interest in the House back to his mother.

Our Comments

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office (the "TSO"). We are, however, prepared to offer the following general comments, which may be of assistance.

When an individual (e.g. the Taxpayer's mother) disposes of the remainder interest in real property, while retaining the life estate, by way of an inter vivos gift to another person, subsection 43.1(1) of the Income Tax Act (the "Act") generally applies with the result that the individual is deemed to have disposed of his or her life estate in the property for proceeds of disposition equal to its fair market value at that time. (Subsection 43.1(1) does not apply to a transfer by way of gift included in "total charitable gifts" or "total Crown gifts" as defined in subsection 118.1(1) or to a disposition as a result of a transaction to which the rollover rules in subsection 73(3) would otherwise apply.) Subsection 43.1(1) also deems the individual to have reacquired the life estate immediately after that time at a cost equal to the proceeds of disposition. As a result, any gain accrued on the entire property is recognized for tax purposes at that time by the individual. However, where the property qualifies as the individual's principal residence during the period in which it was owned by the individual, the individual may claim the principal residence exemption to reduce or eliminate any gain that would otherwise be subject to tax. For a discussion of the principal residence exemption, see Interpretation Bulletin IT-120R6, Principal Residence. It is our understanding that the principal residence exemption was claimed in 2005 on the transfer of the remainder interest in the House to the Taxpayer.

Pursuant to paragraph 69(1)(c) of the Act, the individual (the Taxpayer) who acquires the remainder interest in the property by way of gift is deemed to acquire that interest at a cost equal to the fair market value of the remainder interest at that time.

Because the Taxpayer would transfer his remainder interest in the House by way of gift to his mother, paragraph 69(1)(b) would apply to deem the Taxpayer to have received proceeds of disposition equal to fair market value and paragraph 69(1)(c) would deem the mother to have acquired the remainder interest at a cost equal to fair market value. We would also note that any capital gain realized by the Taxpayer on the disposition of the remainder interest to his mother would have to be included in income and, if the remainder interest is personal use property of the Taxpayer, any capital loss on the disposition would be deemed to be nil by virtue of subparagraph 40(2)(g)(iii) of the Act.

Based on the limited information provided, it does not appear that the House can qualify as the Taxpayer's principal residence as defined in section 54 of the Act since the House was not ordinarily inhabited by the Taxpayer, by his spouse or former spouse, or by a child of the Taxpayer. Consequently, any gain which the Taxpayer may realize on the disposition of his remainder interest in the House would not qualify for the principal residence exemption provided under paragraph 40(2)(b) of the Act.

After receiving the remainder interest in the House back from the Taxpayer, the mother would have all the rights of ownership in the House. Upon the sale of the House to a third-party, the mother would compute any capital gain or loss by subtracting from the proceeds of disposition the adjusted cost base and the costs of disposition of the House. Her adjusted cost base of the House would be equal to the fair market value of the life interest retained upon the transfer of the remainder interest to the Taxpayer in 2005 plus the fair market value of the remainder interest when she re-acquired the remainder interest from the Taxpayer. If the mother were to realize a capital gain on the sale of the House to a third-party, she may be entitled to claim the principal residence exemption on the whole House, provided that she meets all the requirements for the exemption in paragraph 40(2)(b).

We trust that these comments will be of assistance.

Yours truly,

S. Parnanzone
For Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch