16 May 2001 External T.I. 2001-0076665 - PRINCIPAL RESIDENCE TRANSFER

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: Whether the transfer of title of wholly owned property to joint ownership constitutes a disposition.

Position: It depends on whether there has been a change in beneficial ownership.

Reasons: By virtue of paragraph (e) of the definition of "disposition" in section 54 of the Income Tax Act, a disposition does not include a transfer of property in which there is a change in the legal ownership without any change in the beneficial ownership. However, in a transfer to a true joint tenancy arrangement, there is a disposition.

XXXXXXXXXX 2001-007666
M. Eisner, CA
May 16, 2001

Dear XXXXXXXXXX:

Re: Joint Ownership - Principal Residence

Your letter of November 22, 2000, addressed to the Vancouver Tax Services Office, has been referred to us for reply. In your letter, you requested our comments with respect to the addition of your children as joint owners of your principal residence for estate planning purposes with a view to reducing probate fees. You indicate that the property would be owned in a joint tenancy, and enquire as to the tax implications at the time of transfer to joint tenancy and at the time of your death.

Our Comments

As requested, we have considered your situation and have provided some comments below. However, we cannot confirm the tax implications of particular transactions unless the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R4 (enclosed). Thus, our comments are of a general nature only.

For general information on the principal residence exemption, we have enclosed a copy of Interpretation Bulletin IT-120R5, "Principal Residence".

For purposes of the following comments, we have assumed that an individual (the "Mother"), who has two adult children, was the sole owner of a residence and that, before and after the change to joint tenancy (the Mother's two children were added as joint owners of the residence), the Mother ordinarily inhabited the residence and that a gain of the Mother on the disposition of the residence would not be subject to tax by virtue of the principal residence exemption in paragraph 40(2)(b) of the Income Tax Act (the "Act").

Paragraph (e) of the definition of the term "disposition" in section 54 of the Act (in subsection 248(1) of the Act in proposed legislation) generally provides that a disposition will not occur as a result of any transfer of property by virtue of which there is a change in legal ownership of the property without any change in the beneficial ownership thereof. It is a question of fact whether there has been a change in the beneficial ownership. In this regard, reference should be made to paragraphs 2 to 5 of Interpretation Bulletin IT-437R "Ownership of Property (Principal Residence)" (enclosed) which generally discusses beneficial ownership.

If beneficial ownership has not changed, no disposition for tax purposes will have occurred on the transfer of the property to a joint ownership arrangement. Therefore, neither child would be faced with a capital gain if the property is sold prior to the Mother's death or on the Mother's death. However, we would caution you, that in such a situation, a true joint tenancy arrangement does not exist.

However, if beneficial ownership does change, it is our view that the transfer of the residence to a joint tenancy ownership arrangement would result in a disposition pursuant to section 54 of the Act of 66.67% of the Mother's interest in the property. Pursuant to paragraph 69(1)(b) of the Act, the Mother's deemed proceeds of disposition would be equal to 66.67% of the fair market value of the property at the time of the disposition. Her adjusted cost base of the interest disposed of would be equal to 66.67% 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 the principal residence exemption.

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, each of the two children would acquire his or her 33.33% interest in the property at the amount equal to one-half of the deemed proceeds of disposition to the Mother. The 33.33% interest retained by the Mother would be subject to the provisions of subsection 70(5) of the Act upon her 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 the Mother to have disposed of her joint interest in the property immediately before 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 children on the Mother's death. In accordance with paragraph 70(5)(b) of the Act, each child would acquire his or her additional interest in the property at one-half of the deemed proceeds under paragraph 70(5)(a) of the Act.

In our view, if the property is sold prior to the death of the Mother, 66.67% of the proceeds of disposition would be allocated to the children's interest, and any increase in value from the date of the transfer of the property into joint ownership (assuming a change in beneficial ownership) would create 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 children (see paragraph 5 of IT-120R5), it is unlikely that either of them would qualify for the principal residence exemption with respect to their share of the gain.

We trust that our comments are of some assistance to you. 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,

Milled Azzi, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch

Encl.

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