Principal Issues: [TaxInterpretations translation] When transferring his interest in a residence to his son, will the father have to include an amount as a taxable capital gain in the calculation of his income?
Position: Question of fact. It is necessary to determine whether a counter-letter exists to counteract the apparent act. If so, the CRA will then have to determine whether the father has acted as a true co-owner since the purchase of the residence or whether it is clear from the actions of the parties that the son is the sole beneficial owner.
Reasons: Income Tax Act and Civil Code of Quebec.
XXXXXXXXXX 2009-031416
December 8, 2009
Dear Sir,
Subject: Transfer of an interest in a principal residence
This is further to your letter dated November 22, 2008 in which you requested our opinion on the above subject. We apologize for the delay in responding to your question.
Unless otherwise indicated, all statutory references herein are to the provisions of the Income Tax Act (the "Act").
More specifically, you described a situation where your son, by himself, signed, in XXXXXXXXXX, an agreement to purchase a property located in XXXXXXXXXX (the "Home") in the city of XXXXXXXXXX in the Province of Quebec. The acquisition of the Home was formalized on XXXXXXXXXX. In order for mortgage financing to be granted, you agreed to be the joint purchaser of the residence with your son. On XXXXXXXXXX, you and your son signed a solemn declaration. In this declaration, you sought to specify the following:
- that, since the purchase of the Home in XXXXXXXXXX, the right of ownership belonged exclusively to your son;
- that your son was solely responsible for the principal and interest payments on the mortgage and all costs related to the ownership and maintenance of the house; and
- that, since the purchase, your son had the exclusive right to live in the Home and to receive the rental income.
You also attached to your request certain documents, such as your son's income tax returns and some of his bank statements to show that he was the only one since XXXXXXXXXX to pay the expenses related to the Home as well as the only one to receive rental income from the Home.
Between XXXXXXXXXXX, your son lived in the house. In XXXXXXXXXX, your son acquired a second property, located on XXXXXXXXXX Street in the City of XXXXXXXXXX in the Province of Quebec. Since that time, and to this day, we have assumed that the Home is no longer your son's principal residence.
You are about to transfer your interest in the Home to your son, so that he will be the sole owner and borrower. You wish to know if, following this transfer, you will have to include an amount as a taxable capital gain in computing the calculation of your income for the year in which the transfer takes place.
Our Comments
As stated in paragraph 22 of Information Circular 70-6R5 of May 17, 2002, it is the practice of the Canada Revenue Agency not to issue written opinions on proposed transactions otherwise than by way of advance income tax rulings. Furthermore, when it comes to determining whether a completed transaction has received the appropriate tax treatment, the decision is first made by our Tax Services Offices following a review of all facts and documents, which is generally carried out in the course of an audit engagement. However, we can offer the following general comments which we hope you will find useful. These comments may, however, in certain circumstances, not apply to your particular situation.
In Quebec law, as a general rule, the owner of a property is the person in whose name the property is registered. In this case, the facts described seem to indicate that the Home property was registered in the name of you and your son. Since a taxpayer generally realizes a capital gain on the disposition of a capital property, you should, at first glance, include an amount in your income tax return for the year in which you transfer your interest in the Home to your son as a taxable capital gain.
However, the parties may seek to amend the apparent contract - the notarial deed - between themselves by means of a counter letter. According to Article 1451 of the Civil Code of Québec, simulation exists where the parties agree to express their true intent, not in an apparent contract, but in a secret contract, also called a counter letter. As between the parties, the counter letter prevails over the apparent contract. It should be clarified that a counter letter can take the form of either a written or an oral contract.
On the issue of the enforceability of a counter letter against a taxing authority, the Federal Court of Appeal held that, in its role as assessor, the taxing authority (read the Canada Revenue Agency) must ascertain the true legal relationship between the parties and assess accordingly. Thus, before deciding whether it agrees to be bound by a counter letter, the CRA should consider all the facts, including whether the party wishing to transfer its interest has acted as a beneficial co-owner or whether the transferee should be considered the sole owner since the original acquisition date. The Civil Code of Québec does not provide that a counter letter must be made by means of a notarial act on the date of initial acquisition.
In this case, if a counter letter exists between you and your son - evidenced either by a verbal agreement or by the statutory declaration - the CRA will have to determine whether it agrees to be bound by this counter letter. This determination is a factual one that will seek to determine, among other things, whether your son has acted as the sole owner of the Home since the date of initial acquisition. In such a case, no capital gain would be realized upon the transfer of your interest in the Home to your son.
We hope that the above comments will answer your questions.
Sincerely,
François Bordeleau
Manager
Business and Partnerships Section
Income Tax Rulings Directorate.