27 November 1996 External T.I. 9620635 - gift of remainder interest of ecologically sensitive LAND

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.Whether, where a remainder interest in ecologically sensitive land is gifted by a corporation to a heritage or conservancy organization, section 43.1 of the Act would apply.

2.Whether the corporation would be considered to have conferred a benefit on its shareholders who will have the right to use the property for their lives.

Position:

1.Section 43.1 would not apply.

2.A benefit would be considered to have been conferred on the shareholders if the corporation retains a life interest pur autre vie.

Reasons:

1.If the corporation retains a life interest pur autre vie, section 43.1 of the Act would not apply, since section 43.1 of the Act does not apply where the remainder interest is donated to a donee described in the definition "total charitable gifts" in subsection 118.1(1) of the Act, which includes Canadian municipalities and registered charities. If the corporation grants to the shareholders and their children a life interest in the property, section 43.1 of the Act would not apply, since the corporation would not be retaining a life interest in the property.

2.If corporate property is made available for the personal use of a shareholder, a benefit under subsection 15(1) is generally considered to have been conferred on the shareholder.

				5-962063
XXXXXXXXXX		C. Chouinard

Attention: XXXXXXXXXX

November 27, 1996

Dear Sir:

Re: Gift of Remainder Interest of Ecologically Sensitive Land - Paragraph 110.1(1)(d) of the Income Tax Act

We are writing in response to your letter of March 25, 1996, addressed to the XXXXXXXXXX Tax Services Office, which was forwarded to us for reply and received on June 6, 1996. You inquire whether, where a remainder interest in ecologically sensitive land is gifted by a corporation to a heritage or conservancy organization, section 43.1 of the Income Tax Act (the "Act") would apply and whether the corporation would be considered to have conferred a benefit on its shareholders who will have the right to use the property for their lives.

In the situation you describe, a corporation owns XXXXXXXXXX acres of land on which are situated a house and other buildings. The corporation intends to gift a remainder interest in the property, which likely qualifies as ecologically sensitive land, to a heritage or conservancy organization. The corporation would grant its XXXXXXXXXX shareholders and their children the right to use the property for the rest of their lives. You indicate that the fair market value of the land is $XXXXXXXXXX, the house and buildings, $XXXXXXXXXX and the remainder interest in the buildings, $XXXXXXXXXX. You also indicate that the amount of the donation would be equal to $XXXXXXXXXX

Our Comments

Written confirmation of the tax implications inherent in particular transactions are given by this Directorate only where the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R2. The following comments are, therefore, of a general nature only, and are not binding on the Department.

Section 43.1 of the Act applies where a taxpayer disposes of a remainder interest in real property, while retaining the life estate or the estate pur autre vie. Where section 43.1 of the Act applies, the life estate is deemed to have been disposed of for fair market value at the time of the disposition of the remainder interest and to have been reacquired immediately after that time for that same fair market value. The transfer of the remainder interest, on the other hand, constitutes an actual disposition. Accordingly, given the actual disposition of the remainder interest and the deemed disposition of the life estate, a taxpayer is considered to have disposed of the real property in its entirety, which may give rise to a capital gain or loss, according to the circumstances.

As regards your query with respect to the application of section 43.1 of the Act, it is not clear from your letter whether the corporation will retain a life interest pur autre vie (namely the joint lives of the shareholders and their children) in the property or whether it will grant to the shareholders a life interest in the property for their lives with the remainder interest to the heritage or conservancy organization. If the corporation retains a life interest pur autre vie, section 43.1 of the Act would not apply, since section 43.1 of the Act does not apply where the remainder interest is donated to a donee described in the definition "total charitable gifts" in subsection 118.1(1) of the Act, which includes Canadian municipalities and registered charities. However, as indicated in paragraph 7 of Interpretation Bulletin IT-226R (a copy of which is enclosed), the part disposition rules in section 43 of the Act would apply in this situation, such that a reasonable portion of the adjusted cost base of the total property immediately before the disposition would have to be attributed to the remainder interest in computing the capital gain or loss. The proceeds of disposition of the remainder interest in the property and the amount of the gift would be determined in accordance with the guidelines of paragraph 5 of IT-226R.

If, on the other hand, the corporation grants to the shareholders and their children a life interest in the property, with a remainder interest to the heritage or conservancy organization, section 43.1 of the Act would not apply, since, in addition to donating the remainder interest to a donee, the corporation would be donating the life interest in the property. In this situation, since the corporation would not be retaining any interest whatsoever, it would be considered to have received proceeds equal to, in the case of the life interest, the fair market value of the interest (by virtue of paragraph 69(1)(b) of the Act), and, in the case of the remainder interest, the value of the interest, determined in the manner set out in paragraph 5 of IT-226R. As indicated above, the value of the remainder interest would also be the amount of the gift.

We note that, as regards the amount of the gift and the proceeds of disposition in respect of the remainder interest in the property, you indicate on page 1 of your letter that the total amount of the gift would be $XXXXXXXXXX, yet on page 2 of your letter you state that the proceeds of disposition of the remainder interest would be $XXXXXXXXXX. As indicated above, since the heritage or conservancy organization will not receive full ownership of both the land and the buildings until such time as the interests of the life tenants end, the value of the remainder interest in both the land and the buildings should be determined in accordance with the general approach described in paragraph 5 of IT-226R. Accordingly, the amount of the gift of the remainder interest in the property could not amount to $XXXXXXXXXX, since $XXXXXXXXXX of this amount represents the actual current fair market value of the land. Nor would we agree that the proceeds of disposition of the remainder interest in the property would amount to only $XXXXXXXXXX, as this appears to be the value of the remainder interest in the buildings, excluding the land. In addition, as you indicated, an election under subsection 110.1(3) of the Act could be filed by the corporation if the fair market value of the remainder interest in the property (determined in accordance with the guidelines of paragraph 5 of IT-226R) exceeded the adjusted cost base of the remainder interest to the corporation. The elected amount would be considered as both the proceeds of disposition and the amount of the gift of the remainder interest.

With respect to your query regarding a shareholder benefit, if the corporation retains a life interest pur autre vie in the property and allows the shareholders to use the property during their lives, a benefit under subsection 15(1) of the Act would be considered to have been conferred upon the shareholders. As regards the amount or value of the benefit, we refer you to paragraph 11 of Interpretation Bulletin IT-432R2, a copy of which is enclosed. In addition, you should note that, although subsection 15(1) of the Act would apply only to a person who is a shareholder or to a person who receives a benefit in contemplation of becoming a shareholder, the conferral of a benefit potentially subject to subsection 15(1) of the Act on other persons with a shareholder's direction or concurrence may be taxed as income of the shareholder under subsection 56(2) of the Act. In this respect, where a corporation confers a benefit on a person other than a shareholder, the courts have considered who caused the benefit to be conferred and the purpose of conferring the benefit. Therefore, if the shareholders' children were allowed to use the property, the benefit derived by the children from the use of the property might be taxed in the shareholders' hands.

If, however, it is contemplated that the corporation will gift the entire property to the heritage or conservancy organization and that the organization will grant a life interest to the corporation's shareholders, you should note that the act of granting a life interest may jeopardize the status of the donation as a true gift. A true gift is a voluntary transfer of real or personal property from a donor, who must freely dispose of his or her property to a donee who receives the property given. The transaction may not result directly or indirectly in a right, privilege, material benefit or advantage to the donor or to a person designated by the donor. Further, in order for a donation to be considered a gift, it must be made without conditions, from detached and disinterested generosity, out of affection, respect, charity or like impulses. Accordingly, if the corporation's shareholders were granted a life estate in the property, the donation might not be considered to be a gift, since the donation would result in a benefit to persons related to the donor, namely the shareholders. If the donation was conditional upon the heritage or conservancy organization granting a life estate to the shareholders, it would also fail to meet the requirement that the donation be made without conditions. In addition, the registration of the charity could also be at jeopardy as we would need to consider whether it was devoting all its resources to charitable activities or operating exclusively for charitable purposes.

We trust that these comments will be of assistance.

Yours truly,

R. Albert
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch