XXXX
R. B. Day 957-2136
FEB 25 1988
Dear XXXX
We are writing in reply to your letter of September 25, 1987, wherein you requested our views regarding the income tax implications for the following hypothetical situations:
1. Mr. and Mrs. A purchased a matrimonial home in 1967 as their principal residence, for $55,000. The principal residence was registered in Mrs. A's name alone, and in 1972 it had a fair market value of $80,000 and has a present fair market value of $500,000. Mrs. A has recently transferred the principal residence to the names of Mr. A and Mrs. A as joint tenants for estate planning purposes in order that the property may pass pursuant to the rule of survivorship on the death of either spouse. It is your understanding that the principal residence is exempt from the capital gains tax provisions of the Income Tax Act (the "Act").
It is our opinion that no capital gain will be realized by Mrs. A as a consequence of the change in registration from sole ownership of the property by Mrs. A to joint ownership of the property by Mr. and Mrs. A. However, as of the date of this transfer Mrs. A will, pursuant to subsection 73(1) of the Act, be deemed to have disposed of a one-half interest in the property for proceeds equal to one-half of its adjusted cost base ("ACB"). In this case the ACB of the property disposed of would be equal to $40,000 (one-half of the value of the principal residence at December 31, 1971). Mr. A will be deemed to have acquired the property at that time for an amount equal to those deemed proceeds, namely $40,000.
For purposes of computing any future capital gains on the disposition of this principal residence, subsection 40(4) of the Act will, by virtue of the application of subsection 73(1) of the Act, deem Mr. A to have owned the property throughout the period Mrs. A owned it (i.e. since 1967) and it shall be deemed to be Mr. A's principal residence for any taxation year in which it was Mrs. A's principal residence.
2. In 1954, Mr. A purchased one lot for $1,200 which he sold at fair market value to his two children in 1971. It is your understanding that the transfer of this seasonal property from the father to the two children at fair market value has no relevance to capital gains tax if it was transferred prior to the legislation coming into effect, and that when the property is eventually sold by the children, that disposition will have capital gains tax implications for them.
Whether or not the disposition of this property would result in a capital gain or an income gain would involve a finding of fact after examining the financial and income tax histories of each child. However, assuming that the eventual disposition of this property would not be considered an adventure in the nature of trade or a business related transaction for either child, it would appear that the children would be able to report any gain from the disposition as a capital gain which may be offset by the allowable exemption provided by the capital gains deduction.
We also confirm your understanding that there are no capital gains implications for the transfer of the property prior to 1972.
3. Mr. A also purchased in 1978 a further cottage lot with a cottage situated thereon for $58,000. This seasonal property continues to be registered in Mr. A's name and has a present fair market value of $148,000. Mr. A proposes to transfer this seasonal property to Mrs. A for the consideration of $1 and natural love and affection.
Upon the transfer of the property to Mrs. A, Mr. A will, pursuant to subsection 73(1) of the Act, be deemed to have disposed of the property for proceeds equal to its ACB which, in this case, is $58,000. Mrs. A will be deemed to have acquired the property at that time for an amount equal to $58,000. No capital gain would be realized by Mr. A at the time of this deemed disposition.
For purposes of the computation of any future capital gains on the disposition of this property, subsection 40(4) of the Act will, by virtue of the application of subsection 73(1) of the Act, deem Mrs. A to have owned the property throughout the period Mr. A owned it (i.e. since 1978) and it shall be deemed to be Mrs. A's principal residence for any taxation year in which it was Mr. A's principal residence.
4. Mr. A also purchased in 1984, a lot for $11,000 which has a present fair market value of $20,000 and he proposes to transfer this lot as well to his wife for the nominal consideration of $1 and natural love and affection.
Upon the transfer of this property to Mrs. A, Mr. A will, pursuant to subsection 73(1) of the Act, be deemed to have disposed of the property for proceeds equal to its ACB which, in this case, is $11,000. No capital gain would be realized by Mr. A at the time of this disposition.
Yours truly,
for Director Small Business and General Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch