Income Tax Considerations In Structuring Real Estate Transactions With Life Interest

A life interest in real estate provides an exclusive right to use a property during the lifetime of the holder of the interest. Often, an individual will incorporate a life interest on a transfer of a property by way of gift to a relative in order to ensure that the individual has use of the property during their lifetime, to know for certain who will own the property when they die, and to avoid probate fees upon death. Historically, life interests were used to avoid income tax on a deemed disposition at death, but section 43.1 of the Income Tax Act was introduced in 1992 to prevent such tax planning opportunities. Nevertheless, the strategy remains popular, and there are many issues to address in order to structure real estate transactions with a life interest in a tax-effective manner.