Principal Issues: In a situation where a non-resident relative makes a gift in kind of a rental property situated in a foreign country to a Canadian resident individual, what would be the cost amount of the property, and what amount would be included in the undepreciated capital cost in respect of the building? Is the answer different if the property were inherited by the Canadian resident individual on the non-resident relative’s death?
Position: See details in the response.
Reasons: Consistent with previous positions.
2024 STEP CRA Roundtable – June 4, 2024
QUESTION 12. Acquisition from Non-Resident Relative
A non-resident relative (the “non-resident”) makes a gift in kind of a rental property situated in a foreign country to a Canadian resident individual (the “Canadian"). Assume for illustration the cost and fair market value (“FMV”) (in Canadian dollars) is:
COST FMV Land $ 400,000 $ 600,000 Building $ 1,000,000 $ 1,400,000
Assume depreciation on the building was claimed by the non-resident in the foreign country but not in Canada, since the relative was a non-resident of Canada and the building is not located in Canada.
For the Canadian, what would be the cost amount of the property, and what amount would be included in the undepreciated capital cost (“UCC”) in respect of the building?
Would the answer be different if the property were inherited by the Canadian as a consequence of the death of the non-resident? In this situation, assume that the property will form part of the deceased non-resident’s estate (the “estate”), and will subsequently be distributed from the estate to the Canadian in complete or partial satisfaction of their capital interest in the estate.
CRA Response
The cost amount of the land and building for the Canadian receiving it from a non-resident relative for the general application of the Act and the part of it included for capital cost allowance purposes depend on whether the properties are gifted or inherited.
The following chart indicates what the cost amount to the Canadian would generally be and what portion would be included in UCC in either circumstance:
Property gifted Property inherited
Cost amount Cost amount Cost amount Cost amount included in included in UCC UCC
Land $ 600,000 N/A $ 600,000 N/A Building $ 1,400,000 $ 1,200,000 $ 1,400,000 $ 1,400,000
This response assumes that the non-resident trust rules set out in section 94 are not applicable to the estate and that the estate is factually non-resident. We have also assumed that the estate is a personal trust pursuant to the definition in subsection 248(1), and understand that the elections in subsections 107(2.001) and 107(2.002), and subsections 107(4) to 107(5) are not applicable. Further, we have also assumed that the land and building are capital property to the non-resident and the estate pursuant to the definition in section 54.
Since the land and the building were gifted, the Canadian recipient was deemed to acquire them at their respective FMV under paragraph 69(1)(c) for the purposes of applying the provisions of the Act, unless expressly otherwise provided. Accordingly, the cost amount and the undepreciated capital cost of the building to the Canadian would generally be its FMV at the date of their transfer, subject to adjustments.
Because the gift is a non-arm’s length transfer, subparagraph 13(7)(e)(ii) would apply on the basis that the building is depreciable property to the Canadian and capital property to the transferor. This reduces the capital cost of the building to the Canadian for the purposes of paragraphs 8(1)(j) and (p), sections 13 and 20, and any regulation relevant to paragraph 20(1)(a). Based on the information provided, the capital cost of the building to the Canadian would be reduced by one-half the amount by which the transferor’s proceeds of disposition of the property (as deemed under paragraph 69(1)(b)) exceeds its cost, resulting in the addition to UCC for the Canadian in respect of the building being $1,200,000 ($1,400,000 – (50% x ($1,400,000 – $1,000,000).
If the land and the building had been inherited as a consequence of the non-resident’s death rather than received as a gift, the Canadian would also be deemed to acquire those properties at a cost amount equal to their FMV immediately prior to the non-resident’s death, pursuant to the application of subsections 70(5) and 107(2). In these circumstances, subparagraph 13(7)(e)(ii) would not apply since paragraph 13(7)(e) provides that the provision is not applicable where a property is acquired as a consequence of the death of the non-resident.
Yannick Roulier
2024-100352