14 November 2000 External T.I. 2000-0054905 - DISPOSITION OF INTEREST IN PROPERTY

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:

The income tax consequences of reregistering title to property (principal residence) to include an (adult) child's name with joint tenancy.

Position TAKEN:

Question of fact. In adding another name to the property, there may or may not be a disposition, depending on whether or not there is a change in beneficial ownership. However, in a true joint tenancy arrangement, there has been a disposition of a 50% interest in the property to the recipient at fair market value.

Reasons:

Question of fact. In creating a true joint tenancy arrangement, the title to the property vests immediately to the recipient resulting in a partial disposition.

If the transfer of property results in a change in legal ownership only but not a change in beneficial ownership, then a true joint tenancy arrangement will not have been created. Accordingly, a disposition will not have occurred by virtue of paragraph (e) of the definition of "disposition" in section 54 of the Income Tax Act (proposed legislation will move to subsection 248(1)). .

XXXXXXXXXX 	2000-005490
		Jim Wilson
November 14, 2000

Dear XXXXXXXXXX:

Re: Joint Ownership

We are writing in reply to your letter of November 6, 2000 wherein you indicated that your client is considering adding her son as joint owner of her principal residence for estate planning purposes. You have asked us for our general comments on the tax consequences prior to and after her death. For your reference, we have enclosed a copy of Interpretation Bulletin IT-120R5, Principal Residence. For purposes of this letter, we have assumed that the mother, before and after the change to joint ownership, ordinarily inhabited the housing unit and that the housing unit, with respect to the mother, qualifies for the principal residence exemption.

It is a question of fact whether property has been transferred into a true joint tenancy. However, it is our view that the transfer of the property solely owned by the mother into a true joint tenancy arrangement between the mother and her son, one in which beneficial ownership has changed, would result in a disposition pursuant to section 54 of the Income Tax Act ("Act") of 50% of her interest in the property. Pursuant to paragraph 69(1)(b) of the Act, the deemed proceeds of disposition would be equal to 50% of the fair market value of the property. The adjusted cost base of the interest disposed of would be equal to 50% of the adjusted cost base of the entire property pursuant to section 43 of the Act. Generally, a gain on the disposition of a principal residence would not be subject to tax by virtue of paragraph 40(2)(b) of the Act.

Paragraph 69(1)(c) of the Act provides that property acquired by way of gift is deemed to have been acquired at its fair market value. Thus, the son would acquire a 50% interest in the property at the amount equal to the deemed proceeds of disposition to the mother. The 50% interest in the property retained by the mother would be subject to the provisions of subsection 70(5) of the Act upon death (assuming the property has not otherwise been disposed of before that time); specifically, paragraph 70(5)(a) of the Act would operate to deem her to have disposed of her joint interest in the property immediately before her death for proceeds equal to its fair market value. Generally, this gain would not be subject to tax by virtue of the principal residence exemption. No capital gain would accrue to the son on the mother's death. In accordance with paragraph 70(5)(b) of the Act, the son would acquire his additional 50% interest in the property at the deemed proceeds under paragraph 70(5)(a) of the Act.

If the entire property is sold prior to the death of the mother, again, with respect to the mother's 50% interest, the gain on the disposition of a principal residence would likely not be subject to tax by virtue of paragraph 40(2)(b) of the Act. However, as 50% of the proceeds of disposition would be allocated to the son's interest, any increase in value from the date of the transfer of the property into joint ownership (again, assuming a change in beneficial ownership) would result in a capital gain. As the definition of principal residence in section 54 of the Act would require, among other things, that the home ordinarily be inhabited by the son (see paragraph 5 of IT-120R5), we do not have enough information to determine whether the son would qualify for the principal residence exemption with respect to his share of the gain.

We trust our comments will be of some assistance. If you require further information, we suggest you contact your local tax services office who would be able to provide you with assistance on these matters.

Yours truly,

Jim Wilson
for Director
Business and Publications Division
Income Tax Rulings Directorate
Policy and Legislation Branch

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