Life Estate and Remainder Interest

 
 
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 Tips and Traps | Land Transfers and GST | Quota | Tips and Traps | Capital Gains Exemption - Qualified Farm Property and Quota
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Life estate and remainder interest is a concept that involves splitting one property title into two separate titles. Normally, the parents retain a life interest and the child receives the remainder interest in the property.
On the eventual passing of the life interest holder, the life interest simply disappears and the child receives full title. The death of the life interest holder does not constitute a transfer of property, and as a result, this event would normally result in no taxes or probate fees.
The parents can have use of the property for their lifetime, with the assurance that the child will get the title upon their deaths. This strategy often meets the parents’ objectives of ensuring a source of income and control during their lifetime while giving peace of mind to their children.
The children are assured that regardless of what changes might be made to their parents’wills, the children will end up owning the farmland. Following this strategy while the land is being farmed would avoid future concerns about qualifying for rollover to a child if the land was rented out in later years.

Tips and Traps
  • The concept is a useful method of crystallizing the capital gains exemption. However, the transfer must be structured as a sale (otherwise a rollover will automatically result under Subsection 73 (3.1)).
  • Normally, a GST input tax credit can be used on a real estate transfer to allow the purchaser to remit the GST and claim an input tax credit where the purchaser is using the property in a commercial activity. In the case of a remainder interest, the child cannot use the property in a commercial activity while a life interest exists, unless the child leases the property from the parent (which mitigates the GST issue).
  • The Canada Revenue Agency does not have a clear policy on the treatment of GST on the transfer of a remainder interest. For now, the Canada Revenue Agency appears to allow a child to claim an offsetting input tax credit on form GST 34E. See sections on Land Transfers and GST.
  • This method of ownership can result in difficulty in using the property as collateral for a loan without the consent of both life interest and remainder interest holders. This situation could be seen as an advantage as it alleviates the parent's concerns on future financing while both parties are still alive.
  • The consent of both the life interest and remainder interest holders is necessary to avoid difficulty in selling the property during the lifetime of both parties. Again, this situation may be viewed as either an advantage or disadvantage, depending on the viewpoint.
  • Should the parent subsequently decide to sell/transfer the life interest to the child before the parents' death, the interest could be sold or rolled over to the child under Subsection 73 (3.1) if the appropriate qualifications are met. The cost of the life interest (assuming Section 43.1 applied at the time of sale of the remainder interest) is the fair market value of the interest at the date of sale of the remainder interest. Therefore, a sale at a later date would usually result in proceeds less than cost (due to the ever decreasing life expectancy of the parent).

Land Transfers and GST
GST on purchases of commercial real property (by a GST registrant) are reported by the Purchaser on their GST returns for the period that includes the date of purchase. Assuming the property is going to be used in a commercial activity, an offsetting input tax credit is available. As a result there is no requirement to pay GST to the vendor on the purchase.

Quota
A farm quota is a right granted by the government that allows a producer to sell certain specified farm commodities. For tax purposes, quota is treated as an intangible asset. When a quota is purchased, three-quarters of the quota cost is added to the Cumulative Eligible Capital (CEC) account. Regardless of whether the farmer calculates tax on the cash or accrual basis, the purchase cost is the amount paid plus any other amount owing or outstanding because of the quota purchase.
At the end of the year, the balance of the CEC account is amortized on the declining balance basis at a maximum rate of seven per cent per year. In other words, seven per cent of the value of the CEC account is recorded as an expense similar to capital cost allowance. The balance in the CEC account is similar to the undepreciated capital cost of a depreciable asset.
When a farm sells quota the tax rules are quite complex. In general terms the sale of quota results in two income sources. The first is an income inclusion reflecting the amortization taken (if any) on the original purchases of quota. The second is an income inclusion which may be eligible for the capital gain exemption in the case of an individual or treated as business income in the case of a corporation.

Tips and Traps

  • ansfer to a corporation - a farmer can roll a quota into a corporation and claim the enhanced capital gains exemption on the increase in value. However, the increase in value of the quota (the "bump") cannot be added to the CEC pool and depreciated. This "bump" will, however, reduce any gain on a future sale by the company, and often a tax-paid shareholder loan can be created on transferring the quota to a company (allowing the farmer to draw cash against this loan without further personal tax)
  • Increases in value - if a farmer anticipates a future increase in the value of a quota, it would be beneficial to hold the quota personally rather than in a corporation. This would ensure that any gains on sale would qualify for the capital gains exemption provided the exemption still exists
  • Income from the sale of quota by a company (where the quota was used in an
  • active business) will qualify for the small business deduction and normally be taxed at approximately 14 per cent.
  • In many operations (especially poultry), it may be beneficial on a sale to ensure the allocation of proceeds separately between buildings and quota in the sale agreement. This allocation would ensure the appropriate portion is allocated to quota (which may be eligible for the exemption in the case of an individual) and would minimize recapture on buildings.
  • Remember that personally owned quota does not rollover to a child on the death of a former

    Capital Gains Exemption - Qualified Farm Property and Quota
    The definition of Qualified Farm Property includes an eligible capital property, providing the property was owned for a period of at least 24 months prior to the sale. A situation could arise where some quota was owned for more than 24 months and some was acquired within 24 months. In this instance, the Canada Revenue Agency has given comfort in some situations that the portion of the gain that qualifies for the exemption would be determined by pro-rating the gain over the total quota and claiming the exemption on the portion that had been held for 24 months.

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    For more information about the content of this document, contact Joel Bokenfohr.
    This document is maintained by Nicole Halvorson.
    This information published to the web on July 23, 2014.