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:
Father disposes of the remainder interest in his principal residence (the “Residence”) to his adult daughter (who already has her own residence) and retains a life interest in the Residence. They both subsequently sell their interests. How does principal residence exemption apply to the subsequent disposition?
Position TAKEN:
1. Based on the limited information provided, it appears that any gain which the daughter may realize on the disposition of her remainder interest in the Residence would not qualify for the principal residence exemption.
2. Insufficient information provided to establish whether the father’s gain from the disposition of his life interest in the Residence can qualify for the principal residence exemption.
Reasons FOR POSITION TAKEN:
1. The Residence cannot qualify as the daughter’s “principal residence” as defined in section 54 since, for instance, the Residence was not ordinarily inhabited by the daughter, by her spouse or former spouse, or by a child of the daughter.
2. We were not in a position to establish whether the father was the beneficial owner of the Residence while he held a life interest in the Residence. Such a determination is a question of fact.
XXXXXXXXXX 5-981153
M. Azzi
Attention: XXXXXXXXXX
September 9, 1998
Dear Sir:
Re: Principal Residence Exemption
This is in reply to your letter of April 30, 1998, wherein you requested our views on the application of the principal residence exemption to the disposition of a life interest in a property.
In the scenario outlined in your letter, a father disposes of the remainder interest in his principal residence (the “Residence”) to his (adult) daughter and retains a life interest in the Residence. The daughter already has a residence of her own. You indicate that the father claims the principal residence exemption in respect of the disposition to the daughter. [From the information provided, it appears that the disposition of the remainder interest to the daughter occurred after December 20, 1991, such that section 43.1 of the Income Tax Act (the “Act”) applied to deem the father’s life interest to also have been disposed for fair market value (“FMV”) at the time of disposition of the remainder interest, and to have been reacquired immediately after that time for that same FMV.] The father subsequently finds that he is unable to maintain the Residence and moves to a senior’s home. As a result, the father and daughter sell their respective interests in the Residence. You enquire as to how the principal residence exemption will apply in respect of the second disposition.
Based on the limited information provided, it does not appear that the Residence can qualify as the daughter’s “principal residence” as defined in section 54 of the Act since, for instance, regardless that the daughter may be considered to have the legal ownership of the property, the Residence was not ordinarily inhabited by the daughter,
by her spouse or former spouse, or by a child of the daughter. Consequently, any gain which the daughter may realize on the disposition of her remainder interest in the Residence would not, in our view, qualify for the principal residence exemption provided under paragraph 40(2)(b) of the Act.
As regards the father, he would be entitled to claim the principal residence exemption in respect of a gain on the disposition of his life interest in the Residence if, inter alia, he was the beneficial owner of the Residence. The subject of beneficial ownership is discussed in paragraph 4 of Interpretation Bulletin IT-437R. 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. It is a question of fact as to whether the owner of the life interest in a property could be considered the beneficial owner of the property. We are therefore not in a position to comment on whether the father, in the above scenario, is the beneficial owner of the Residence.
However, if it is established, based on the facts of this case, that the father was the beneficial owner of the Residence while he held a life interest in the Residence, he would be entitled to claim the principal residence exemption in respect of the disposition of his interest, but only to the extent provided in paragraph 40(2)(b) of the Act. That is, the exemption would only reduce the father’s gain otherwise determined on the disposition of his life interest in the Residence; it would not reduce the gain on the entire Residence (i.e., the gain on both the father’s and daughter’s interests in the Residence) as suggested in your letter. Furthermore, generally, for each year the principal residence exemption is being claimed by the father in respect of the disposition of his life interest, the Residence would have to qualify as his principal residence as defined in section 54 of the Act. In this regard, we would note that the time between the father’s departure from the Residence to the sale of the Residence, and whether there was a change in use of the Residence to income-producing, would be relevant factors in determining whether the father “ordinarily inhabited” the Residence in a particular year. Elections pursuant to subsection 45(2) of the Act may also have to be considered.
As a final comment, we do not necessarily agree with your closing statement that a capital gain on the disposition of the father’s life interest will only arise “if the father’s life expectancy had increased between the time at which the life interest was created and the time at which the life interest is sold”. This is a valuation issue that would also have to factor in, inter alia, the value of the housing unit at the time the life interest is sold which may have increased significantly.
We trust that these comments will be of assistance.
Jim Wilson
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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