Two Canadian-resident spouses (A and B) acquired a cottage as co-owners for $400,000. The purchase price was funded with a $100,000 cash payment made by A, and as to $300,000 with the proceeds of a mortgage loan for which they were solidarily liable.
In Situation 1, their co-ownership agreement did not specify their respective co-ownership interests (or their respective shares of any sales proceeds), so that each was presumed under the Civil Code to own 50% of the cottage. On a subsequent sale of the cottage for net proceeds of $700,000, they shared those proceeds equally. CRA indicated that, in the absence of any indication of a loan, it was reasonable to assume that the $100,000 initial payment was a gift by A to B as to $50,000. The ACB of the interest of each in the cottage would be $200,000. On the subsequent sale, s. 74.2(1) would apply to attribute ¼ (i.e., $50,000/$200,000) of B’s taxable capital gain to A.
Situation 2 was the same, except that the co-ownership agreement specified that on any sale of the property, the first $100,000 of proceeds plus a predetermined return was to be paid to A, with the balance of the net sales proceeds split on a 50-50 basis. Here, CRA assumed that the initial payment by A represented a loan to B as to ½ and that the return received by A on the sale of the property for $700,000 represented interest on that loan. Here, again, s. 74.2(1) generally would apply to attribute ¼ of B’s taxable capital gain to A, given that the requirements of s. 74.5(2)(c) for timely payment of interest on that loan would not have been satisfied.