28 April 1994 External T.I. 9323985 - DEEMED DISPOSITION OF LIFE INTEREST

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:

Application of section 43.1 restricted to capital gains and

does not apply for capital cost allowance purposes.

Position TAKEN:

Disposition for capital gains purposes only

Reasons FOR POSITION TAKEN:

Subdivision c rules apply to taxable capital gains and

allowable capital losses. If it had been intended that

there be a deemed disposition and deemed acquisition for
capital cost allowance purposes there would have been a
corresponding provision in section 13 similar to subsection
13(4) in relation to section 44. (If included it could

cause a tax free bump to the capital cost of the assets).

5-932398
XXXXXXXXXX A.M. Brake

Attention: XXXXXXXXXX

April 28, 1994

Dear Sirs:

Re: Paragraph 13(21)(d) and Section 43.1 of the Income Tax Act

This is in reply to your letters of August 18 and 30, 1993, requesting clarification of the above-noted provisions with
respect to the disposition in a non-arms length transfer of the remainder interest of depreciable property to a child of the transferor. Specifically, as to whether section 43.1 will trigger proceeds or deemed proceeds of disposition, for purposes of paragraph 13(21)(d), in respect of the fair market value (FMV) of the remainder interest which continues to be held by the taxpayer.

Reference to statute provisions such as section, subsection, etc., mentioned herein will in all cases, unless otherwise stated, relate to the Income Tax Act S.C. 1970-71-72, c.63 as amended, consolidated to June 10, 1993.

Although you have asked for a technical interpretation, the situation presented appears to be an actual fact situation.

Should this situation involve a proposed transaction, you may wish to submit all relevant facts and proposed transactions for a binding advance income tax ruling.

However, should this situation involve actual taxpayers and completed transactions you may wish to submit all relevant
facts and documentation (including company names and identification numbers) to the appropriate District Taxation
Office for their comments. We are, however, prepared to provide some general comments.

Our Comments

Section 43.1 does not deem any disposition or proceeds in respect of the residual interest transferred to the child, but rather deems only in respect of the life estate. Hence, in our view, the transfer of the residual interest to the child would be an actual disposition and would result in proceeds or deemed proceeds of disposition equal to the FMV of the residual interest at that time and the adjusted cost base (ACB) thereof, as provided by section 43, would be such portion of the ACB to the taxpayer at that time of the whole property as may reasonably be attributed to that part. It would follow, therefore, that the balance of the ACB would relate to the retained life estate which in fact was not disposed of.

With respect to the residual interest, given that we have a disposition of depreciable property and actual proceeds or deemed proceeds of disposition for purposes of paragraph 13(21)(d) and 54(h), it would follow that those proceeds (up to the prorata portion of the capital cost of the depreciable asset which was partially disposed of) would be credited to the appropriate capital cost allowance class (the "Class"). Whether or not this would result in a recapture would depend on the balance of the Class at year end.

Section 43.1 deems the life estate (which in fact was not disposed of) to have been disposed of for FMV at the time of the disposition of the residual interest and to have been reacquired immediately after that time for that same FMV.

When you consider the actual disposition in conjunction with the deemed disposition, the overall picture is clearly that a capital gain has resulted in the hands of the transferor equal to that which would have resulted had the property been disposed of in its entirety at FMV in an arms length transaction.

If it were not for the preamble of section 43.1 which reads, "Notwithstanding any other provision of this Act...", the ACB of the deemed reacquired depreciable property would be based on its capital cost as provided by paragraph 54(a).

In our view, this preamble ensures that no other provision can negate what is about to be deemed but does not extend
the deeming provision beyond the purview of Subdivision C of the Act captioned, "Taxable Capital Gains and Allowable Losses".

The foregoing comments are given in accordance with the practice of providing opinions referred to in paragraph 21 of Information Circular 70-6R2 dated September 28, 1990 and are not binding on Revenue Canada, Taxation.

We trust that you will find our comments of assistance.

Yours truly,

R. Albert
for Director
Business and General Division
Rulings Directorate
Legislative and Intergovernmental
Affairs Branch