11 July 2000 External T.I. 1999-0012395 - farm pro. ... encumbered by mortgage charge

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: Does farm property vest indefeasibly with the beneficiary if it is received subject to a mortgage or charge, the amount of which is described in the will by formula rather than as a fixed amount?

Position: yes

Reasons: The manner in which the amount of the mortgage or charge is determined does not affect the position set out in paragraph 3(d) of IT-349R3 and 8(e) of IT-449R.

XXXXXXXXXX 	1999-001239
		Annemarie Humenuk
Attention:  XXXXXXXXXX 

July 11, 2000

Dear Sirs\Mesdames:

Re: Transfer of Farm Property to a Child Subject to an Equitable Charge

This is in reply to your letter of August 3, 1999, concerning the meaning of the term "vested indefeasibly" as it relates to the transfer of farm property upon the death of an individual. We apologize for the delay in responding.

You ask whether subsection 70(9) of the Income Tax Act (the "Act") would apply to the transfer of farm property to a child of the deceased under the terms of a will if the property so transferred was subject to a charge or mortgage. In particular, you ask whether property so transferred is considered to vest indefeasibly in the beneficiary to whom it is transferred when the property is encumbered by a charge or mortgage, the amount of which is described in the will by formula rather than as a fixed amount. For example, in order to satisfy cash bequests to other beneficiaries, a will might specify that a mortgage or charge equal to a stated percentage of the fair market value of the estate at the time of the individual's death is to be placed on the property prior to the transfer of the property to a particular beneficiary.

As indicated in paragraph 3(d) of Interpretation Bulletin IT-349R3, Intergenerational Transfers of Farm Property on Death, the placement of a mortgage or charge on property transferred to a particular beneficiary would not necessarily cause the beneficiary's interest in the property to be defeasible. The fact that the amount of the encumbrance is described in the will as a formula rather than as a fixed amount does not alter our position in this regard. The example given in paragraph 3(d) of the bulletin attempts to distinguish between a conditional bequest and one that is absolute. When a mortgage or charge of a particular amount is placed on the property before it is transferred to the beneficiary in accordance with the terms of the will, the beneficiary acquires full ownership of the property even though the beneficiary's economic interest in the property is less than the fair market value of the property. In the other example described in paragraph 3(d), the beneficiary's interest in the property may be defeated if the conditions set out in the will are not met (i.e. the other beneficiaries do not receive their bequests). As a result, in the second situation described in paragraph 3(d), the property cannot be considered to vest indefeasibly with the beneficiary who receives the property until such time as the other beneficiaries receive their bequests.

As stated in paragraph 3(d) of IT-349R3, the adjusted cost base of the beneficiary's property as determined under subsection 70(9) of the Act cannot be increased by any amount paid to clear the mortgage or charge on the property so acquired.

We trust our comments will be of assistance.

T. Murphy
for Director
Resources, Partnerships and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch

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