9 December 1998 Internal T.I. 9828797 - LIFE INTEREST 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: (1) Does section 43.1 apply when the taxpayer gives an interest in a real property called “estate pur autre vie” (i.e., the donee has a right to the real property until the death of another person)?

(2) What are the tax implications in such a situation?

Position: (1) No.

(2) The donor could have a gain or loss on the disposition of the interest to the donee. The interest retained will be subject to tax when deemed disposed on the death of the donor.

Reasons: (1) Section 43.1 only applies when a life interest or estate pur autre vie is retained by the owner of the real property.

(2) The ordinary rules of the Act apply to the two properties that are created by such a transfer of the rights in a property.

		December 9, 1998

	Toronto Centre TSO	HEADQUARTERS
	Ms Naomi Tsuji	Jacques E. Grisé
	Verification and Enforcement	957-2059
	     Division
		982879

Section 43.1

This is in reply to your November 4, 1998 fax which included a copy of a letter of July 13, 1998 from XXXXXXXXXX concerning section 43.1 of the Income Tax Act (the Act).

XXXXXXXXXX presents the situation whereby person A is presently the owner of real property in fee simple. A wishes to convey, for natural love and affection with no monetary consideration, a life estate in the real property to person B, for the life of A. A will retain the remainder interest. Upon the death of A, the life estate to B would be terminated and the real property would revert to the estate of A in fee simple. B is to use the property as B’s principal residence. You have indicated that B was married to A’s daughter before the latter’s death.

Our comments should only be viewed as general in nature since we would need to view all the pertinent documents and ascertain the particular facts of a situation prior to establishing a definitive position. We have assumed that the real property in question is not inventory to A and is a capital property.

We agree with your correspondent’s view that section 43.1 of the Act would not have application to the situation presented. Section 43.1 of the Act would only apply if A “retains a life estate or an estate pur autre vie”. In the situation presented by XXXXXXXXXX, B is to receive an interest in the real property referred to as an “estate pur autre vie” (B’s interest).

Such a scenario could result in a capital gain or loss to A at the time of the disposition to B. Paragraph 69(1)(b) and section 43 of the Act would likely apply to establish the proceeds of disposition and the adjusted cost basis of the interest, respectively. On the other hand, where a child or other relative is allowed to reside in a taxpayer’s real property without transfer of any interest in the real property, the taxpayer would have no gain or loss at that time. However, as set out in the 1997 Rental Guide, the taxpayer would not be able to claim a rental loss in respect to such a the property.

In the situation presented by XXXXXXXXXX, the holding of A and B’s respective interest in the real property throughout the period the interest in the property is held by B, would not seem to attract any income tax consequence during such period. Upon the death of A, B’s interest in the real property will expire and automatically merge with the interest retained by A. Since B would not be considered to have disposed of B’s interest, there would be no tax consequence to B. Also, paragraph 70(5)(a) of the Act would apply, so that A would be deemed to have disposed immediately before A’s death of the interest retained by A for proceeds equal to the fair market value of that interest immediately before A’s death.

We hope the above comments will be of assistance in your reply to Mr. McCutcheon.

J.F. Oulton, CA
Manager
Business, Property and
Employment Income Section III
Income Tax Rulings and
Interpretations Directorate

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