13 March 2001 External T.I. 2001-0065365 - SALE OF HOUSE

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:

Taxpayer or taxpayer's wife purchased a new residential home and on behalf of a friend who could not arrange financing. The cost of the home was approximately $117,000. The friend contributed $10,000 towards the purchase price with the taxpayer or his wife paying the rest by way of a $100,000 mortgage and $7,000 of their own funds. The friend was to make all the mortgage payments and repay the $7,000.

Less than two years later, the friend "purchased" the home for consideration of the outstanding balance of the mortgage, $7,000 and the amount of a number of mortgage payments that were missed. At that time, the appraised value of the house was $155,000.

Would the "purchase" of the home by the friend result in a capital gain for the taxpayer?

Position TAKEN:

General comments provided.

Reasons:

Question of fact. Insufficient information provided to make a determination.

XXXXXXXXXX 2001-006536
T. Young, CA
March 13, 2001

Dear XXXXXXXXXX:

Re: Sale of House

This is in reply to your letter of January 15, 2001, requesting our opinion on the sale of a house.

In your letter, you stated that you and your wife purchased a house on behalf of a friend who could not arrange financing. The cost of the home was approximately $117,000. Your friend contributed $10,000 towards the purchase price with you and your wife paying the rest by way of a $100,000 mortgage and $7,000 of your own funds. The house was registered in your wife's name. Your friend was to make all the mortgage payments and repay the $7,000.

Approximately one-and-one-half years later, your friend purchased the home from you and your wife for consideration of the outstanding balance of the mortgage, the amount of mortgage payments that he missed and $7,000. At that time, the house was appraised at $155,000. You have inquired if the difference between the $117,000 and the fair market value of $155,000 would result in a taxable capital gain to you or your wife.

Our Comments

Written confirmation of the tax implications inherent in particular transactions is given by this directorate only where the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R4, dated January 29, 2001. Therefore, since the particular transactions are completed, as in your situation, further enquiries should be addressed to the Calgary Tax Services Office. It should be noted that it would be necessary to review all relevant documentation before a definitive determination of the tax implications could be made. Therefore, we can only provide you with the following general comments.

Generally, to calculate a capital gain or loss on the sale of a capital property, you would subtract the total of the adjusted cost base (ACB) of the house and any outlays and expenses involved in selling the house, from the proceeds of disposition. We have enclosed a copy of Guide T4037 "Capital Gains 2000", which explains the rules for calculating capital gains and losses.

Your stated concern is that the proceeds of disposition will be considered to be $155,000 instead of the actual consideration that you received as described above. Generally, as long as the buyer and seller of property are dealing with each other at arm's length, the proceeds of disposition would be the amount actually received for the property. In general terms, the appraised value would not be relevant to the calculation unless the buyer and seller are not dealing at arm's length.

Arm's length is an expression used to describe a situation in which each party to a transaction acts in their own self-interest. Related persons are not considered to deal with each other at arm's length. Related persons include individuals connected by blood relationship, marriage, or adoption (legal or in fact). Also, a corporation and a shareholder who controls the corporation are related. Unrelated persons usually deal with each other at arm's length, although this might not be the case if, for example, one is under the influence or control of the other.

It is unclear from your letter who was the beneficial owner of the house prior to the time when your friend refinanced the mortgage. For example, your friend may have acquired beneficial ownership directly from the builder with you and your wife simply providing financing. If this were the case, then the refinancing of the mortgage and repayment of amounts owed to you and your wife may not have been a disposition resulting in a possible capital gain or loss. Alternatively, if you or your wife were the beneficial owner of the house, the house may have been a rental property, which could have other income tax implications to you or your wife. To address these issues, you may wish to contact a tax and/or legal advisor.

We trust our comments will be of assistance to you.

Yours truly,

John Oulton, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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