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:
1 - Do the principal residence rules apply on death of an individual.
2 - Do attribution rules apply to a loan or gift of money to an adult child.
Position:
1 - They do
2 - They do not if it is an outright gift and they may if it is a loan.
Reasons:
1 - Paragraph 40(2)(b) refers to the disposition of a property that was the taxpayer's principal residence. There is no exception in the law as a result of the taxpayer dying.
2 - Subsection 56(4.1) clearly only applies to interest free or low interest loans. In order for attribution to apply on a loan, one of the main reasons for making the loan must be to reduce or avoid tax.
970092
XXXXXXXXXX Jacques E. Grisé
April 8, 1997
Dear XXXXXXXXXX:
Re: Principal Residence and Transfers of Property
This is in reply to your letters of January 7 and 24, 1997 concerning the income tax rules relating to a principal residence and transfers of property to a spouse or children.
Principal Residence
Generally, a family house occupied by an individual and the individual's spouse and children will not attract income tax when it is actually disposed of (e.g., sold) or deemed to be disposed of (e.g., immediately before an individual's death) by the individual. Such a property, transferred by way of a gift to a child or children (by will or otherwise) is acquired by the child or children at a deemed cost equal to the fair market value of the property at the time of the gift or death. The tax consequence of any capital gain or loss on the subsequent disposition of the property by a child or children will depend on whether or not the house is used as a principal residence. In any event, the capital gain or loss would be calculated using the deemed cost at the time of acquisition by the child or children.
To illustrate the general rules stated above, consider an example with the following factors:
-In 1973 Mr. X, a Canadian resident, purchases land and a house (the property) for $20,000 which he inhabits.
-In 1975 Mr. X marries Mrs. X and in subsequent years they become the parents of two daughters. The family resides in the house purchased by Mr. X in 1973.
-In 1997, Mr. X dies. Pursuant to Mr. X's will, the property is transferred to Mrs. X. Immediately prior to Mr. X's death, the property had a fair market value of $150,000. Mrs. X continues to inhabit the property with one of her daughters.
-In 2003, Mrs. X dies and leaves the property to her two daughters who are over the age of 18. The fair market value of the property immediately prior to Mrs. X's death was $200,000. One of the daughters continues to inhabit the property.
-In 2008, the daughters sell the property for $220,000. One of the daughters continued to inhabit the property until the time of sale.
-At all times in the example, the property is the only dwelling house owned by the family members.
1997 tax results
Mrs. X is deemed to have acquired the property at a cost equal to the adjusted cost base of the property to Mr. X immediately before his death (i.e., $20,000). Also, Mrs. X is deemed to have owned the property throughout the period the property was owned by Mr. X and the property is deemed to have been Mrs. X's principal residence for that period.
2003 tax results
The property is deemed to be disposed of by Mrs. X immediately before her death for proceeds of disposition equal to $200,000. The capital gain of $180,000 ($200,000 - $20,000) which would otherwise be determined is reduced to nil as a result of the capital gain calculation in respect of a principal residence. The daughters are deemed to acquire the property for a cost equal to $200,000 ($100,000 each), the fair market value of the property immediately before Mrs. X's death.
2008 tax results
The daughter who continued to inhabit the property, would not have any capital gain as a result of disposing the property since the property was ordinarily inhabited by her and was designated by her as her principal residence. The other daughter would have a capital gain of $10,000 ($110,000 - $100,000). The principal residence exemption would not apply since the house was not ordinarily inhabited by her during the years it was owned by her.
General
Substantially the same results would have occurred if Mr. X chose, on his death, to have transferred the property to a trust in favour of Mrs. X or if the example had shown Mr and Mrs X purchasing a house in joint tenancy or some other form of co-ownership. Please refer to pages 9 and 27 of the attached 1996 T3 Guide and Trust Return for information relating to a principal residence owned by such a personal trust. Also attached for your information is a copy of Interpretation Bulletins IT-120R4 and IT-366R.
Transfers or loans of property
Generally, the income on property that has been transferred or loaned by a taxpayer to a spouse or a related minor (e.g., a taxpayer's child who is under 18 years of age) is deemed to be the income of the taxpayer rather than that of the spouse or child. Similarly, if property is loaned by a taxpayer to a non-arm's length party other than in the above-mentioned situations (e.g., a loan to a taxpayer's child over 17 years of age), the income from such property will be that of the taxpayer if one of the main reasons for the loan is to reduce or avoid tax on income from the property or substituted property. The latter attribution rule applies only to loans and therefore is not applicable where property is transferred outright.
When the attribution rules apply, only the income from the property or substituted property is attributed. The income derived from the investment of the income from transferred or loaned property is not attributed to the transferor or the person who loaned the property. This may be illustrated by using an example similar to the one in your January 7 letter. The following factors are assumed:
-An amount of $100,000 is loaned interest free to a child of the taxpayer who at all times was under 18 years of age.
-All amounts are invested at 10% per annum.
-All income amounts are reinvested.
-The income tax rate for the taxpayer and the child is 30%.
Year 1
The taxpayer pays income tax on the $10,000 income which amounts to $3,000 ($10,000 x 30%). The child is not taxable on the $10,000 income.
Year 2
Again, the taxpayer pays income tax on the $10,000 income from investing the $100,000 at 10% and not the child. The child would be responsible for the tax on the investment of the $10,000 income received in year 1. The tax would amount to $300 ($1,000 x 30%).
Year 3
The taxpayer rather than the child would continue to be responsible for the income tax on the $10,000 investment income from investing the $100,000. The child would be responsible for the income tax on the investment of the $10,000 income from year 1 and the $11,000 income from year 2. The tax would amount to $630 ((1,000 + 1,100) x 30%).
General
The attribution rules would likely not apply if the child in the example were at least 18 years of age. The attribution rule would only apply if one of the main reasons for the loan is to reduce or avoid tax on income from the property. This would not be the case in the example since it is assumed that the rate of income tax is the same for both the taxpayer and the child.
Your suggestions on the improvements of the guides and bulletins relating to principal residences and the transfer or loan of properties have been forward to the appropriate sections for consideration in the next revision of the relevant documents.
Please call Jacques Grisé at 957-2059 should you have any questions on the information provided in this letter or the attached documents.
Yours truly,
John F. Oulton
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
Enclosures
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© Her Majesty the Queen in Right of Canada, 1997
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 1997
Email this Content