30 March 1994 External T.I. 9330105 - LIFE ESTATES & REMAINDER INTERESTS IN REAL PROPERTY

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 where pursuant to the terms of Mr. A's will a Life Estate in farmland is conveyed to his spouse & the Remainder Interest to the children.

Position TAKEN:

Upon Mr.A's death section 43.1 does not apply in respect of the life estate. Subsections 70(6), 70(6.2) & 70(5) may apply depending on the facts.

Subsection 70(9) applies re the remainder interest but if an election is made 70(5) applies.

On Mrs. A's death there is no capital loss re the expired life estate and no bump-up in ACB to the children re their interest.

Reasons FOR POSITION TAKEN:

Department's position in previous correspondence.

            933010
XXXXXXXXXX  W.P. Guglich

Attention: XXXXXXXXXX

March 30, 1994

Dear Sirs:

Re: Use of Life Estates and Remainder Interests in Real Property

This is in reply to your letter of October 4, 1993, concerning the income tax consequences arising from the use of a testamentary life estate/remainder interest arrangement.

Unless as otherwise stated all references to statute are to the Income Tax Act S.C. 1970-71-72,c.63 as amended consolidated to June 10, 1993 (the "Act").

You have described the following hypothetical situation:

"Mr. A owns farmland which has an adjusted cost base of $250,000 and which has appreciated in value since its acquisition in 1993 to its present fair market value of $1,000,000. Mr. and Mrs. A have two adult children who wish to farm the land. Under his Will, Mr. A directs that upon his death, his executors shall convey a life estate in the farmland to his spouse and the remainder interest to his children. There is no trust involved. It is assumed that on Mr. A's death, the fair market value (the "FMV") of the life estate is $300,000 and the fair market value of the remainder interest is $700,000."

Our comments respecting the issues you raised follow:

1.What are the tax consequences on the death of Mr.A?

We agree that section 43.1 of the Income Tax Act does not apply where the transferor does not retain a life interest in the property. In addition section 43.1 does not apply on death.

Upon his death, where the conditions in subsection 70(9) of the Act are met, Mr. A pursuant to paragraph 70(9)(b) shall be deemed to have disposed of the remainder interest in the farmland immediately before his death and to have received proceeds of disposition equal to the adjusted cost base (the "ACB") and the children shall be deemed to have acquired the farmland for an amount equal to those proceeds. However, the legal representative of Mr. A may elect to have the proceeds be an amount that is between the FMV and the ACB. Where the conditions of subsection 70(9) of the Act are not met, Mr. A would pursuant to paragraph 70(5)(a) of the Act be deemed to have disposed of the remainder interest in the farm land for proceeds equal to the FMV and the children pursuant to paragraph 70(5)(b) shall be deemed to have acquired the such remainder interest at FMV.

As for the life interest conveyed to the spouse, where subsection 70(6) of the Act applies, Mr. A pursuant to paragraph 70(6)(d) shall be deemed to have disposed of the life interest in the farmland immediately before his death and to have received proceeds of disposition equal the adjusted cost base and his spouse shall be deemed to have acquired the property for an amount equal to those proceeds. Where the conditions in subsection 70(6) of the Act are not met or where the legal representative of Mr. A elects under subsection 70(6.2), subsection 70(5) will apply and as a result Mr. A shall be deemed to have disposed of the life interest in the farmland immediately before his death and to have received proceeds of disposition equal to the FMV. Mrs. A shall be deemed to have acquired the life interest in the farmland at a cost equal to its FMV.

2.Would the tax consequences on Mr. A's death be different if the life estate was rolled to Mrs. A pursuant to paragraph 70(6)(a) of the Act and the remainder interest was rolled to the children pursuant to subsection 70(9)?

Please refer to our comments above. The comments in paragraph 9 of Interpretation Bulletin IT-268R3 only apply where the transfer is under subsection 73(3) of the Act. Subsection 73(3) of the Act does not apply on death.

3.What are the tax consequences to Mrs. A on her death?

On the death of Mrs. A her life interest in the estate expires. Consequently for income tax purposes there would be no deemed disposition immediately before death and no capital loss would be available to Mrs. A respecting the life interest.

4.Is there a loss of cost basis to the children on the death of Mrs. A?

There is no provision in the Act to provide to the children a bump-up in their ACB of the farmland to reflect the increased value of their interest on the death of Mrs. A. Section 43.1 of the Act does not apply where the life interest expires at death.

5.How does one determine the FMV of the remainder interest and the life interest?

It is our view that in valuing the FMV of the life interest and the remainder interest acquired by Mrs. A and the children respectively, upon Mr. A's death, one would first calculate the FMV value of the life interest acquired by Mrs. A and deduct this value from the FMV of the farmland to determine the FMV of the remainder interest acquired by the children.

We trust our comments will be of assistance to you.

Yours truly,

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