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:
Ruling requested regarding the ownership and principal residence status of property transferred from parents to children where a remainder interest is transferred to the children with retention of a life interest in the property by the parents.
1) At what date is the property deemed to be that of the children?
2) Do the parents have beneficial ownership of the property, and if so, would it still constitute the principal residence of the parents.
3) If the property qualifies as the parent's principal residence, can they make an election under 45(2) with a change from personal use of the property to rental income purposes
Position TAKEN:
1) Parents will be considered to have disposed of the property pursuant to 54(c) of the Act at the time of the transfer of the fee simple estate in the property to the children.
2) Beneficial ownership is a question of fact. No definitive response.
3) It is possible to make a 45(2) election when there is a change in use from personal use to income producing whether or not the property qualifies as a principal residence.
Reasons FOR POSITION TAKEN:
1) Both life estates and remainder interests constitute capital property.
Previous correspondence - 912658, 3-2926, EC3033, 942917
950163
XXXXXXXXXX D. Zion
Attention: XXXXXXXXXX
March 24, 1995
Dear Sirs:
Re: Ownership of Property
We are writing in response to your letter of January 13, 1995, wherein you request an advance income tax ruling on behalf of your clients ( XXXXXXXXXX ), regarding the ownership and principal residence status of their property.
As noted in Information Circular IC 70-6R, "Advance Income Tax Rulings" dated September 28, 1990 and Special Release thereto dated September 30, 1992 confirmation of the tax consequences of specific transactions is only given by way of an advance tax ruling and is restricted to proposed transactions. The situation described in your letter involves completed transactions and accordingly, as we advised you in our telephone conversation of February 3, 1995 (Zion/XXXXXXXXXX), we are unable to provide you with an advance ruling as requested. We are prepared, however, to provide general comments with respect to the issues raised.
As we understand the situation, in 1985 your clients' parents gifted your clients fee simple remainder interest in the parents' principal residence, reserving a life estate in the property. Both the transfer of the remainder interest and the retention of the life estate were registered at the appropriate land registry office. Since the time of the transfer of the remainder interest one of the parents has passed away and the other parent moved into a home for seniors in March 1994. The property was subsequently rented with the rental income belonging to the parent. It was confirmed in the above-noted telephone conversation that the parents were responsible for all expenses and retained any income which might arise out of their life interest in the property.
Section 43.1 of the Income Tax Act (the Act) would not apply to the situation under review because it is applicable to dispositions and terminations occurring after December 20, 1991.
It is our view that, in the circumstances, each of a life interest and a remainder interest in real property constitutes a capital property. At the time of the transfer of the fee simple estate in the property to the clients, while still retaining a life interest therein, the parents will be considered to have disposed of the property pursuant to previous paragraph 54(c) of the Act. The transfer will have taken place for proceeds, or deemed proceeds, of disposition equal to the fair market value of the fee simple in remainder at the time of the transfer, and the adjusted cost base (ACB) thereof, as provided by section 43 of the Act, would be such portion of the ACB of the whole property as may reasonably be attributed to that part at that time.
The value of a life estate in real property at a particular time is the difference between the current value of the real property and the value of the remainder interest in the real property. The fair market value of the remainder interest in the real property is determined by what a typical purchaser would currently pay for fee simple ownership in the property subject to a life estate of certain identifiable persons. This is the future value of the present worth of the real property calculated using the life expectancy of the life tenants and an appropriate discount rate.
Interpretation Bulletin IT-437R discusses in paragraph 4, the subject of beneficial ownership. A property can be beneficially owned by an individual who is not the legal owner if the individual enjoys many of the rights and privileges and assumes some of the responsibilities of ownership. The main characteristics of ownership discussed in the bulletin include the right to possession, the right to collect rents, the right to call for mortgaging of the property, the right to transfer title by sale or by will, the obligation to repair and maintain the property, and the obligation to pay property taxes. We are thus not in a position to give a definitive response as to whether or not the parents are beneficial owners of the property and thus eligible for the principal residence exemption.
In our view, when there is a conversion of the life estate in the property from a personal use property to an income producing property, the provisions of paragraph 45(1)(a) of the Act will be applicable with respect to the life estate in the property. The remainder interest in the property is a separate property from the life estate in the property in this situation and, accordingly, the remainder interest in the property will not be affected by the change in use by the owner of the life estate in the property.
Where there has been a change in use of a property from personal use to business or investment use, a taxpayer may, pursuant to subsection 45(2) of the Act, elect in his or her return of income for the year not to have made the change in use. It is not necessary that the personal use property qualify as a principal residence in order to elect under this provision. This election has the effect of avoiding the deemed disposition that would otherwise result under paragraph 45(1)(a) of the Act. Capital cost allowance with respect to the property may not be claimed while a subsection 45(2) election is in force since the property is considered a personal use property.
We regret that our reply could not be more definitive but we trust that the foregoing information will be of some assistance to you.
Your deposit will be returned under separate cover.
Yours truly,
P.D. Fuoco
for Director
Business and General Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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