Section 43.1 — Income Tax Act: Life estates in real property

Notwithstanding any other provision of this Act, if at any time a taxpayer disposes of a remainder interest in real property (except as a result of a transaction to which subsection 73(3) would otherwise apply or by way of a gift to a qualified donee) to a person or partnership and retains a life estate or an estate pur autre vie (in this section referred to as the “life estate”) in the property, the taxpayer is deemed to have disposed at that time of the life estate in the property for proceeds of disposition equal to its fair market value at that time;

and to have reacquired the life estate immediately after that time at a cost equal to the proceeds of disposition referred to in paragraph 43.1(1)(a). Where, as a result of an individual’s death, a life estate to which subsection 43.1(1) applied is terminated, the holder of the life estate immediately before the death shall be deemed to have disposed of the life estate immediately before the death for proceeds of disposition equal to the adjusted cost base to that person of the life estate immediately before the death; and where a person who is the holder of the remainder interest in the real property immediately before the death was not dealing at arm’s length with the holder of the life estate, there shall, after the death, be added in computing the adjusted cost base to that person of the real property an amount equal to the lesser of the adjusted cost base of the life estate in the property immediately before the death, and the amount, if any, by which the fair market value of the real property immediately after the death exceeds the adjusted cost base to that person of the remainder interest immediately before the death.