Principal Issues: [TRANSLATION] Would the CRA consider the alienation of a building for $1 for the benefit of a recipient, whether related or not to the transferor, as being a gift for the purposes of paragraph 69(1)c)?
Position: [TRANSLATION] The question of whether there is a sale or a gift of property is a mixed question of fact and law.
Raisons: [TRANSLATION] Mixed question of fact and law, which includes matters of private law in the province where the legal act(s) take(s) place.
Financial Strategies and Financial Instruments Roundtable, October 10, 2014
2014 APFF Conference
Question 8
Sale of an immovable for $1 between persons not dealing at arm's length
Where a person sells an immovable to a person with whom it is not dealing at arm's length for $1, subsection 69(1) deems a disposition at the FMV by the seller and no price adjustment is made for the purchaser. The effect of this measure is to double-tax the gain on the immovable (in the hands of the seller, and of the buyer when the latter disposes of it). In contrast, under subsection 69(1) if the property is the subject of a gift between the two persons not dealing at arm’s length, the result will be a deemed disposition at fair market value to the seller and an equivalent cost to the buyer.
Often, the $1 sale denotes an intention to donate, but for a variety of economic or legal reasons taxpayers make a sale rather than a gift. Unfamiliarity with the tax impact can result in an undue cost, namely, double taxation for a taxpayer.
The Quebec Revenue Agency ("ARQ") acknowledged that in certain situations, the sale of an immovable at a nominal price (such as a sale for $1) could result in an intention to donate if certain criteria are met. Their position is detailed in the Interpretation Bulletin of Revenu Québec Imp. 422-1 /r1: Disposal of an immovable for inadequate consideration, as of March 31, 2008:
DISPOSITION FOR ONE DOLLAR
5. Where a deed of sale indicates that the price of the property transferred is one dollar ($1.00), the amount indicated is purely symbolic. There is every reason to believe that this is a gift and not an act by onerous title. However, where the price of one dollar ($1.00) and other good and valuable consideration is mentioned, it may be a true sale. In such a case, it is not necessarily a gift; it could be a sale in which the price is not disclosed.
Gift
6. Where a taxpayer disposes of an immovable for one dollar ($1.00), to a person with whom the taxpayer is or is not dealing at arm’s length, and the disposition is in fact a gift, the disposition and acquisition of the property are deemed to be made at the fair market value of the property at the time of the disposition or acquisition, in accordance with paragraphs a and c of section 422 of the TA.
Question to the CRA
Would the CRA consider the application of a position, similar to that of Revenu Québec, that a transfer of an immovable for $1 to a person with whom the transferor does or does not deal at arm’s length can be a gift?
CRA Response
The question of whether a transaction is a sale or a gift is a mixed question of law and fact which must be resolved in the light of all the relevant facts. In particular, account must be taken of the terms of the contracts, the particular circumstances and the applicable private law.
The Act (Footnote 1) does not define the terms "sale" or "gift". In such a case, section 8.1 of the Interpretation Act (footnote 2) provides that, unless otherwise provided by law, if in interpreting an enactment it is necessary to refer to a province’s rules, principles or concepts forming part of the law of property and civil rights, reference must be made to the rules, principles and concepts in force in the province at the time the enactment is being applied.
If a property is disposed of according to the rules, principles and concepts in force in Québec, we must refer to civil law, in particular the Civil Code of Quebec (footnote 3), to determine whether this transaction can be considered a sale or gift.
The C.C.Q. provides for several types of gifts, such as pure and simple gifts, indirect gifts, disguised gifts, remunerative gifts and gifts with a charge. All these gifts may be gifts for the purposes of the ITA.
Thus, the determination of the nature of a particular transaction, as sale or gift, must be made on the basis of the genuine legal relations between the parties. In the absence of an express provision to the contrary in the ITA or a finding that the transaction is a sham, the genuine legal relations must be respected in tax matters.
However, in spite of the legal obligations of the parties to a transaction, the general anti-avoidance provision could be applied in the case of transactions resulting in an abuse in the application of the provisions of the Act.
Randa El-Kadi
613- 957-8976
October 10, 2014
2014-053862
FOOTNOTES
Due to our system requirements, footnotes contained in the original document are reproduced below:
1 Income Tax Act (R.S.C., 1985, c. 1 (5th Supp.)) (hereinafter, the "Act”)
2 Interpretation Act (R.S.C., 1985, c. I-21)
3 Civil Code of Québec, L.Q., 1991, c. 64 (hereinafter, the “C.C.Q”).