22 January 1996 Internal T.I. 9530067 - GIFT OR SALE?

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

Had a particular property not been disposed of prior to death, would the fact that, by virtue of the deceased Will, the property would have been bequeathed to the same beneficiary, be an influencing factor in determining whether the disposition should be treated as being a gift when, in fact, the deceased sold the property prior to death to a son/grandson for $1,000 which was far less than FMV.

Position:

Not a factor. The Will provides direction to the executor of the estate to distribute property left after death and does not have force to negate or change actions taken by the deceased prior to death. The Will only applies to property held on death and does not apply to property sold or gifted prior to death. The estate cannot distribute something it does not have.

Reasons:

A determination must be made based on the actual facts relating to the disposition. The transfer document states that "for and in consideration of the sum of One thousand dollars ($1,000) paid by the Purchaser to the Vendor on or before the execution of these presents (receipt whereof on the part of the vendor is hereby acknowledged) the Vendor as beneficial owner hereby sells, assigns, transfers and conveys...".

							January 22, 1996

	XXXXXXXXXX Tax Services		HEADQUARTERS
A. M. Brake
	Attn: XXXXXXXXXX			(613) 957-8953

Verification and Enforcement Div

							953006

Land Bequeathed, Gifted or Sold?

This is in reply to your memorandum of November 9, 1995, requesting our comments on a situation described as follows:

1.Grandparent's Will dated XXXXXXXXXX provides for the bequest of a parcel of land to a son and a parcel to a grandson.

2.On XXXXXXXXXX the properties were conveyed to the son and grandson for consideration of $1,000 each per Registry of Deeds information. There was no indication of the actual value of the properties. The grandparent died on XXXXXXXXXX.

3.We have no indication that the dispositions were ever reported on the grandparent's final return or as deemed dispositions at death and, for discussion purposes, we will assume that they were not.

4.On XXXXXXXXXX the son passed away and his subsection 70(1) return reports a fair market value ("FMV") of $XXXXXXXXXX.

5.The grandson reported a partial disposition

XXXXXXXXXX

6.The ACB of the three dispositions are based on the FMV of the properties at the time of conveyance from the grandparent to the son and grandson. The representative maintains that these values are appropriate because it was intended that the properties would have been bequeathed upon the death of the grandparent. It was the grandparent's decision to transfer the properties at the time rather than waiting until death. The representative contends that the two $1,000 amounts were gifts to the grandparent, and token amounts to allow legal conveyances. Also, the conveyances of the properties were gifts within the family and not representative of any valuation of the properties as might occur in an open market sale and purchase situation.

In response to the purchaser's representations, you have asked if a particular property had not been disposed of prior to death, would the fact that, by virtue of the Will of the deceased, the property would have been bequeathed to the same beneficiary, be an influencing factor in determining whether the disposition should be treated as being a gift when, in fact, the deceased sold the property prior to death to a son/grandson for $1,000 which was far less than FMV.

Our Comments

Should the properties have been bequeathed or gifted, the ACB to the recipient will, by virtue of paragraph 69(1)(c), be the FMV at the time of transfer, whereas, if it is decided that the properties were sold for $1,000 each, the ACB will be $1,000, notwithstanding that the FMV was far in excess of that amount.

A Will only provides direction to the executor of the estate to distribute property left after death and does not have force to negate or change actions taken by the deceased prior to death. The Will only applies to property held on death and does not apply to property sold or gifted prior to death. The estate cannot distribute something it does not have.

In the case of a gift or a sale at less than FMV, the grandparent, by virtue of section 69 of the Act, was deemed to have received proceeds of FMV and should have reported capital gains in the year of disposition. It is difficult to accept that the persons involved were not aware that there would be tax consequences to the grandparent on the disposition either by way of sale, gift or on death, which occurred in the same year, and also within the same time frame of filing the appropriate tax returns. The fact that the grandparent did not report the capital gains on the disposition would not cause the son or grandson to be denied FMV as their ACB, if the properties had been acquired on January 18, 1984 by way of gift. However, should the property have been acquired by way of sale, the Act does not provide for an ACB of more than the purchase price paid.

In our view, the properties were not acquired by way of bequest and the terms of the Will have no bearing on whether the disposition was by way of sale or gift. A determination as to whether there was a sale or gift must be made based on the actual facts relating to the disposition. A gift is a voluntary transfer of property without valuable consideration. A gift can be said to have been made where property is transferred by a donor; the transfer is voluntary; and no consideration or benefit accrues to the donor or to anyone designated by the donor as a result of the transfer.

The transfer document states that "for and in consideration of the sum of One thousand dollars ($1,000) paid by the Purchaser to the Vendor on or before the execution of these presents (receipt whereof on the part of the vendor is hereby acknowledged) the Vendor as beneficial owner hereby sells, assigns, transfers and conveys...". Certainly, in substance, this is nothing more than a normal purchase and sale agreement with a clearly stated selling price of $1,000. There is nothing to indicate that there was a gift of property or that the $1,000 was a gift to the grandparent, as outlined in the Exhibit 1 letter written by the grandson, or that the property was worth more than $1,000. If the consideration had been stated as a nominal amount of $1.00, one could conclude that the value of the property was more than the stated consideration and that, in fact, there was a gift or possibly other unspecified consideration. If they wanted to properly inform anyone interested in reading the transfer indenture, it could have been worded differently to reflect that it was a gift. For example, we note that the wording in Exhibits 5 and 6, which you included for comparison, use the words "... owner assigns and conveys" and "hereby conveys, assigns, transfers and assents", respectively, in respect of conveyances. While the $1,000 paid may have been much less than the FMV at the time, it is, nevertheless, consideration which defeats the contention that the disposition was a gift.

The fact that the unchanged Will, as it now turns out, would have bequeathed the property upon death does not, in our view, have any significance in relation to the actual sale of the property or to the gifting of the property had it actually been gifted rather than been sold for consideration which happens to be far less than FMV but certainly within the realm of consideration rather than nominal. In our view, the property was not gifted but rather was in fact sold at less than FMV.

In summary, in our view, the lands were sold at a price that was less than FMV. While the Act deems proceeds to have been FMV, there is no mechanism to give the son and the grandson more ACB than the $1,000 each they paid for the property regardless of whether the grandparent reported any gain. The intended transfer by the Will was frustrated by virtue of the fact that the property mentioned therein had already been legally disposed of and was no longer a property of the estate. While the properties were sold to the intended beneficiaries, they could have been sold to another party either at arm's length or to another related person and such a transaction would not have been overruled by the provisions of the Will. The Will applies only to property held at the date of death and does not apply to properties sold or gifted prior to death.

R. Albert
for Director
Business and General Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch