| 19(1) | File No. 5-8385 |
| D.J. Lightheart | |
| (613) 957-8953 |
March 28, 1990
Dear Sirs:
We are responding to your letter of July 14, 1989 concerning the tax consequences of the death of a member of a joint tenancy. We apologize for the delay.
In the situation which you have described non-arm's length parties own property that is capital property or depreciable property. One joint tenant paid for the property entirely; the other joint tenant did not contribute to the purchase price. Subsequently, the joint tenant who did not pay for the property dies. On death, the joint tenancy ceases to exist and the surviving joint tenant becomes the sole owner of the property. You have suggested that for the purposes of determining any tax liability under subsection 70(5) of the Income Tax Act (Canada) (the "Act") the interest of this deceased joint tenant would be nil. As will be evident from the following comments we do not agree with your view.
All references to statute are to the Act.
In order to respond to your question, it is necessary first to consider the tax consequences of the original purchase of the property. Interests in jointly held property are treated as divisible for tax purposes. The acquisition of a property by two joint tenants would be viewed as the acquisition by each of a half-interest in the property. If no consideration is paid by one joint tenant, the conveyance to joint title would constitute a gift by one joint tenant to the other of a half-interest in the property. Paragraph 69(1)(b) provides that the disposition will give rise to proceeds of disposition equal to the fair market value of the one-half interest which was transferred.
The tax liability of the joint tenant making the gift will be determined with reference to the difference between the deemed proceeds of the half-interest gifted and the adjusted cost base of such interest. To determine the adjusted cost base of the interest which is being transferred, section 43 provides that the adjusted cost base is such portion of the adjusted cost base of the whole property as may reasonably be regarded as attributable to that part. If the property was acquired from an arm's length vendor, the simultaneous transfer by way of gift to the other joint tenant should not result in any immediate tax liability as presumably the adjusted cost base will equal the fair market value at the time of transfer. When the gift of a half-interest in the property occurs, paragraph 69(1)(c) deems the cost of the interest acquired by the joint tenant recipient to be equal to the fair market value of the interest at that time.
On death, subsection 70(5) deems the deceased to have disposed of his joint interest in the property immediately before death for its fair market value. If the surviving joint tenant was the deceased's spouse, subsection 70(6) permits a rollover of the property at the deceased's adjusted cost base unless an election is made to have subsection 70(5) apply in any other case, the tax liability of the deceased will be based on the difference between the fair market value of his half interest in the property the adjusted cost base thereof.
The attribution rules of sections 74.1 to 75.1 may have application depending on the facts of a particular situation. Also depreciable property will receive similar tax treatment with the possible additional effect of recapture of capital cost allowance previously taken.
While we hope that our comments will be of assistance to you they do not constitute an advance income tax ruling and are not binding on the Department in respect of a specific situation.
Yours truly,
for DirectorFinancial Industries DivisionRulings Directorate