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.
Principal Issues: Can an individual transfer a rental property to the individual's spouse or common-law partner on a "rollover" basis so as to defer taxation on capital gains?
Position: Yes , but attribution will apply.
Reasons: ITA 73(1) provides for an automatic rollover, unless an election is made not to have the ITA 73(1) provisions apply.
XXXXXXXXXX 2003-004974
S. Parnanzone
February 24, 2004
Dear XXXXXXXXXX:
Re: Technical Interpretation Request: Property Disposition
We are replying to your correspondence of November 18, 2003 regarding the above-noted subject.
You wish to transfer title to a rental capital property, a townhouse built in 1979, from yourself to your spouse with the intent to reduce any future tax on the rental income. Your understanding is that you will be able to make the transfer to her on a tax-free basis but that you will have to report any capital gain when, in the future, she will sell the property to a third party. It appears from your letter that you believe that, after the transfer, your spouse would be taxed on the rental income from the property.
Your enquiry concerns your understanding regarding the tax-free "rollover" to your spouse, and the requirement for you to report the transfer and any capital gain she may realize on the sale of the property.
For purposes of our comments below, we will assume that the rental building is the only depreciable property in its class and that both you and your spouse are resident in Canada. We also assume that you will be transferring both legal and beneficial ownership (see Interpretation Bulletin IT-437R) of the property to your spouse such that the transfer will result in a disposition for purposes of the Income Tax Act ("Act"). Such determination requires a review of all facts of each case.
Your request is in the nature of tax consultation. Considering the nature of the tax issues involved in your enquiry and the fact that the Canada Revenue Agency does not provide tax planning advice, you may wish to consider consulting a tax advisor. Nevertheless, we are prepared to offer the following general comments, which may be of assistance.
It appears that you have previously been allowed capital cost allowance ("CCA") on the building and that, accordingly, it is depreciable property under the Act. Generally, the undepreciated capital cost ("UCC") is equal to the cost related to the building (the capital cost) net of any CCA claimed in computing income. The land is not depreciable property.
Spouses are deemed not to deal at arm's length. As a general rule, a person who disposes of a capital property to another non-arm's length person for no proceeds or for proceeds less than the property's fair market value is deemed to have received proceeds of disposition equal to the fair market value. There are exceptions to this rule; one of them involves transfers between Canadian resident spouses under the rollover provisions of subsection 73(1) of the Act. In general terms, except where an election is made, by virtue of the provisions of subsection 73(1), the transferor's proceeds of disposition for a particular capital property, such as a rental townhouse, transferred to his or her spouse and the transferee's acquisition cost are deemed to be equal to:
- In the case of depreciable property (e.g., building), the transferor's UCC (or, if there is more than one property in the class, a portion of the UCC based on the properties' fair market value), and
- In any other case (e.g., land), the transferor's adjusted cost base ("ACB").
Generally, the ACB of depreciable capital property is equal to its capital cost and the ACB of other capital property is equal to its cost, plus or minus certain adjustments.
Subsection 73(2) of the Act applies to transfers of depreciable property where subsection 73(1) applies and the transferor's capital cost is more than the transferee's cost determined under subsection 73(1). In such cases, for the purposes of sections 13 and 20 and any regulations made under paragraph 20(1)(a) [i.e., generally, for the purposes of claiming CCA and the recapture of CCA on disposition], subsection 73(2) deems the capital cost to the transferee of the depreciable property to be the same amount that was the capital cost of the property to the transferor. The excess is deemed to have been allowed as CCA to the transferee for years prior to the transfer.
The provisions of subsection 73(1) apply automatically to a property transfer between Canadian resident spouses, unless the transferor elects not to have the provisions apply. If such election is made, the disposition will generally have to occur at fair market value. As a result, the transferor will realize any capital gain or recapture of CCA at the time of the transfer. The transferee of the property will generally be considered to have acquired the property for an amount equal to the transferor's proceeds of disposition.
Capital property transferred between spouses, even if a subsection 73(1) rollover applies to the transaction, may still be subject to the rules in sections 74.1 and 74.2 of the Act concerning the attribution of income and capital gains, respectively, to the transferor. The attribution rules are discussed in greater detail in the current version of IT-511, Interspousal and Certain Other Transfers and Loans of Property Made After May 22, 1985. Generally, these rules require that the income earned from the transferred property by the transferee (e.g., rent and interest) and the transferee's taxable capital gains or allowable capital losses from the disposition of the transferred property are attributed to the transferor, who will have to take such amounts into account in computing his or her income, instead of the transferee.
The attribution rules do not apply if fair market consideration is paid by the transferee for the property transferred and an election is made by the transferor to not have the subsection 73(1) rollover apply. Paragraph 74.5(1)(b) of the Act sets out additional requirements necessary to avoid attribution if the consideration includes debt.
In the above situation, where you are transferring the rental property to your spouse for no consideration, the attribution rules would therefore apply to attribute both the rental income and any capital gain or loss on the property to you.
The transferor would report the disposition of the rental property to the transferee on Schedule 3 to his or her tax return. However, the land and building should be reported separately. The Capital Gains guide contains a detailed discussion of capital property transactions and the reporting of such transactions on Schedule 3.
The publications mentioned above are available on the Internet at www.ccra-adrc.gc.ca.
We trust that the foregoing comments are of assistance.
Yours truly,
Milled Azzi, CA
For Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Planning Branch
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