File #: 11750-2 (rw)
Ss. 123(1), 155, 167(2), 269
Dear Mr. XXXXX
We are replying to your memorandum addressed to Stan Farber dated November 26, 1993 and which was subsequently forwarded to our Division. We apologize for the delay in our response.
In your memorandum, you have requested our comments concerning a number of situations involving estates. As the letters submitted by the two law firms, XXXXX and XXXXX contain very limited information regarding the situations, we have provided comments to the extent possible. In some instances, we have assumed certain facts in order to provide you with what we hope is a more useful discussion of the issues raised. However, you may wish to provide only general information in your responses to the clients since any detailed analysis can only be based on speculation as to the actual facts and is, in our view, unwarranted unless they provide you with additional informational.
I. Letter From XXXXX
Our comments follow each reproduction of the descriptions of the situations contained in the letter.
1. The widow spouse received a portion of the real property as an outright bequest. The widow spouse is a GST registrant. The widow spouse in turn transferred the property to her two daughters and retained a life interest in the property. This property will be rented out and farmed by a third party. Please advise who would be the party responsible for GST.
It is not clear what has taken place in this situation. From the wording of the question, it appears that, prior to his death, an individual owned a farm property either solely or as a tenant in common and not as a joint tenant. Assuming that this is the case, upon the death of the deceased, the property passed to his executor and formed part of the estate. Under the existing Excise Tax Act (the "ETA"), this transfer of the property is a supply for GST purposes which is deemed by the current paragraph 267(1)(a) to be for nil consideration. However, the April 23, 1996 Notice of Ways and Means Motion (the "NWMM") introduces a new section 267 which will replace the current provision retroactive to December 17, 1990. Assuming that the proposed amendment in the NWMM is enacted in its present form, the application of the new section 267 will result in there being no supply of the property by the deceased to the estate or the executor.
Beyond that, the question does not provide sufficient information for us to determine what events or transactions have taken place in order to assess the GST consequences. Therefore, we have assumed, for the time being, that the estate distributed the property to the wife by transferring to her the legal title after the administration was complete and, subsequently, she conveyed a remainder interest to her daughters while reserving for herself a life estate. We have also assumed that neither the wife nor the daughters will at any time farm the property themselves.
The Department has previously taken the position that the transfer of legal title to a beneficiary of an estate is a distribution from a trust to which section 269 of the ETA applies. The new section 267.1 proposed in the NWMM confirms this interpretation by clarifying that a trust includes an estate of a deceased individual for the purposes of section 269. Consequently, assuming the above facts, the distribution is a supply of real property made by the estate to the wife for consideration equal to the amount determined to be the proceeds of disposition under the Income Tax Act. Since the property is used in a commercial activity, the supply would appear to be taxable. However, since the wife is a GST registrant, she would self-assess the tax as required by subsections 221(2) and 228(4). Although the NWMM proposes to amend subsection 228(4), those amendments are not retroactive and will not apply here.
Before we continue our analysis of the facts as assumed above, we wish to make an important note regarding the term "estate" which is used frequently in this letter. In some instances, such as in the previous three paragraphs, we use "estate" to refer to the whole of the property or assets of the deceased. In this sense, the estate is, by definition, a person and is treated in the same manner as a trust for GST purposes.
Alternatively, "estate" is used in a property law context to refer to the duration of an owner's interest in property. Under English property law, only the Crown is an absolute owner of land. Thus, the most any person could receive in a grant of land by the Crown is the right to the land for a period of time. The length of time that a person had to the land is known as the estate. For our purposes here, there are two types of estate which are relevant: the fee simple and the life estate. The fee simple represents the greatest interest in land a person can hold in that the estate will continue so long as the holder of the fee simple has an heir who can inherit the property. The life estate, on the other hand, is of a more limited duration. The life estate terminates upon the death of the holder of the estate.
It is possible for the holder of a fee simple to divide up this estate into smaller ones. For example, the owner may create one life estate or several successive ones. Because all life estates will eventually come to an end, there must be a person who holds the remainder of the fee simple and who will receive possession of the property when all prior estates have terminated. It should be noted that, at the time the lesser estates are created, each life tenant as well as the holder of the fee simple in remainder receives a presently existing interest in the land. However, only one of these estate holders at a time is vested with the right to the immediate possession of the property; each of the others' right to possession is deferred until all estates which precede their own have terminated.
Applying these principles to the facts as assumed above, after the distribution of the property by the estate to the wife, the wife becomes the owner of the fee simple. Consequently, she would be the supplier of the property under the lease with the third party and would be required to collect and account for GST on the supply.
Subsequently, when the wife conveys the property to her daughters, she is actually transferring the fee simple in remainder while retaining a life estate for herself. As the life tenant, the wife has the right to the use and enjoyment of the property during her lifetime. Therefore, she would continue to supply the property by way of lease to the third party and her GST obligations in that regard remain unchanged.
In addition, the transfer of an estate in remainder would constitute a supply of real property since "real property" is defined in subsection 123(1) of the ETA to include "... every estate or interest in real property, whether legal or equitable ...". The supply of the remainder interest raises several issues. First, the property in this case is being used by the wife in a commercial activity since it is farmland which is rented out to a third party. Consequently, the supply of the remainder interest to the daughters would presumably be taxable as it does not appear to fit within one of the exempting provisions contained in Schedule V. Although there may not be actual consideration given by the daughters for the supply, because the supply is not an arm's length transaction, section 155 would deem the consideration to be equal to the fair market value of the remainder interest unless the daughters acquired the property for consumption, use or supply exclusively in the course of their commercial activity. If section 155 does apply, there is a secondary question of how to determine the fair market value of the remainder. Nevertheless, assuming that the fair market value is not nil, the daughters may be required to pay tax in respect of the supply and the mother may be required to collect the tax.
Another issue concerns whether the daughters are engaged in commercial activity in respect of the supply of the remainder interest such that they may claim an ITC for any tax paid on the supply. Whether an estate holder who is not entitled to immediate possession of the property is engaged in commercial activity with respect to the property will depend on the facts of each case. However, in many instances, it appears that the estate holder will find it difficult to establish that there is commercial activity. This is because, given the Department's interpretation of "commercial activity", the ability of the estate holder to engage in such activity in relation to the property is restricted without current possession of the property.
In this case, even if we assume that the daughters intend to continue renting out the property when their mother's life estate ends, they may not be able to establish that there is commercial activity in relation to the remainder interest at the time the supply occurs. As a result, the daughters may not be able to claim an ITC for tax paid in respect of the supply until such time as they are able to establish commercial activity, which may not be until the life estate terminates if they choose to keep the remainder interest and not sell it.
All of our comments to this point have been based on the assumption that the estate distributed the property to the wife who subsequently conveyed the remainder interest to the daughters. However, if the wife had transferred the remainder interest prior to distribution by the estate, a somewhat different analysis is required. Under such a scenario, the wife would have only had a beneficial interest in the property while it was still part of the estate. The Department has previously taken the position that an estate is a trust and that the beneficial interest of a beneficiary of a trust is an "interest in a trust" for the purposes of the definition of "financial instrument" in subsection 123(1). An amendment to the definition of "financial instrument" proposed in the NWMM confirms this interpretation by expressly including an estate of a deceased individual in the definition. Consequently, the transfer of the remainder interest by the wife while the property is still subject to the trust would be an exempt supply. The estate would then distribute a life estate to the wife and the remainder to the daughters. Section 269 would apply to the distributions. The above discussion regarding commercial activity would be relevant to determining the implications of the supply of the remainder interest by the estate to the daughters.
Please note that there may be factual situations other than the two considered above that, depending on the actual circumstances, may require a different analysis. We have not attempted to address these other possibilities here as we perceive them to be less likely to occur. If, however, you find that the actual facts are different from those we have assumed, we would be pleased to consider them at that time.
2. A nephew of the deceased received a parcel of land as a specific bequest and the property was transferred into his name. Would the estate or the nephew be responsible for GST?
Section 269 would apply to the distribution of the property from the estate to the nephew. The tax status of the supply would be determined using the normal rules. However, pursuant to section 269, the consideration for the supply is deemed to be equal to the amount determined under the Income Tax Act to be the proceeds of disposition of the property. Also, subsections 221(2) and 228(4) may be applicable.
3. The widow spouse received a life interest in the remaining property of the estate and upon her death, the property will be transferred to the residual beneficiaries. Who would be the party responsible for GST?
See our above responses.
II. Letter From XXXXX
The facts as stated in the submission are as follows:
XXXXX died on December 14, 1991 and XXXXX died on December 17, 1991. The final beneficiaries of both estates were their two daughters and one son XXXXX XXXXX had farm lands which at date of his death were being rented to his son, XXXXX, and it was always the family's intention that XXXXX would carry on the farm. It was arranged that XXXXX would put his inheritance from the estate back into the farm and to finance the balance by way of mortgage of the farm lands to his sisters. Once the arrangement was concluded with the Executors and Beneficiaries that XXXXX would acquire the farm land, XXXXX indicated to the Executors that he wished for estate purposes to have the title in joint names with his wife. XXXXX is not registered for GST and takes no active part in the farm operation. XXXXX receives no income from the farming business and did not contribute funds to the acquisition through the estate.
Response
Based on the above facts, there are several significant issues which could potentially be raised. For example, the fact that there are two estates involved as well as the nature of the transactions which occur in relation to the property while the estates are being administered are two items which merit further consideration for the purposes of determining any GST implications. However, we are unable to do this with the limited information provided. Furthermore, judging by the letter, the client seems to be concerned only with the question of whether XXXXX and the estate could use the election contained in subsection 167(2) such that no tax would be payable when the property is distributed to him and his wife. Consequently, we have provided comments only to that extent.
Policy #P-031 "Supply of Business Assets of Deceased" states, in effect, that where a beneficiary of an estate receives a supply of property which exceeds the amount the beneficiary was entitled to under the deceased's will or under the laws of succession to property, subsection 167(2) would not apply to the supply. Based on this policy, the estate and the XXXXX may not have been eligible to use the subsection 167(2) election in relation to the distribution of property.
Even if the purported election is found to be invalid, the estate and/or the XXXXX may not be required to collect and pay, respectively, tax on the supply as a result of subsections 221(2) and 228(4). If XXXXX was a registrant, he may have been required to file a GST 60. The Department has a policy which permits administrative tolerance regarding the late filing of GST 60 forms. In addition, we expect that Policy #P-183, which has been released in draft form, will be amended to allow the farming spouse in a joint tenancy to use the GST 60 on behalf of the non-farming spouse as well. You may wish to consult these policies for further information.
III. Letter From XXXXX
The following facts are contained in the submission:
XXXXX died July 6, 1978 and left a life interest in his estate to his wife XXXXX. By Agreement for Sale dated XXXXX purchased certain lands from the Estate of XXXXX. XXXXX continued to make payments on this agreement until XXXXX[.] At that time his mother, XXXXX, died ending her life estate in the Estate of XXXXX became a beneficiary of the Estate of XXXXX and he arranged to apply his interest in the estate on the original Agreement for Sale and to pay out the balance by way of mortgage.
For estate planning reasons, it was decided that the lands would be transferred to XXXXX and his wife XXXXX jointly. There were some delays in the estate administration and final registration was completed in XXXXX[.] Both XXXXX were (and still are) registered for GST.
Response
We do not understand the situation which is presented here. There are insufficient facts to answer a number of important questions concerning what has transpired. For example, if only a life estate was given to XXXXX by XXXXX, what happened to the remainder? What is the property that is subject to the Agreement for Sale between XXXXX and the estate? If XXXXX held the remainder interest in the estate, why was the Agreement for Sale necessary? Was it for the purchase of the life estate from his mother? These questions, as well as a number of others, are all relevant as they have a direct impact on how this situation should be analyzed. Without the necessary information, we regret that we are unable to provide you with an analysis of the transactions which have taken place except to say that it appears that section 269 of the ETA would apply to the distribution of the property by the estate to XXXXX[.] For more information regarding the operation of section 269, please refer to our response to situation #2 of the XXXXX letter above. If section 269 is applicable, XXXXX would likely be able to file a GST 60 in respect of the supply as they are registrants.
We trust you have found our comments helpful. If you have any questions, please contact Robert Wong at (613) 952-9577.
Yours truly,
H.L. Jones
Director
General Applications Division
GAD #: 746 (reg)
| c.c.: |
N. Staple
M. Bloom
J. Bain
R. Wong |
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