2 December 2004 External T.I. 2004-0101971E5 - Disp. of Interest in Property - joint ownership

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

Position: 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 an interest in the property to the recipient at fair market value.

Reasons: Paragraph (e) of the definition of "disposition" in subsection 248(1) of the Act.

2004-010197
XXXXXXXXXX Karen Power, CA
(613) 957-8953
December 2, 2004

Dear XXXXXXXXXX:

Re: Joint Tenancy

We are writing in reply to your letter of November 3, 2004 wherein you have asked for our comments on the tax consequences of transferring the ownership of a taxpayer's principal residence from sole ownership to a joint tenancy with the taxpayer's child, for estate planning purposes.

Our Comments

For purposes of the following comments, we have assumed that the taxpayer (the "Mother"), who has an adult child (the "Child"), was the sole owner of a residence and that, before and after the change to joint ownership (the Child was added as a joint owner of the residence), the Mother ordinarily inhabited the residence and a gain of the Mother on the disposition of the residence would qualify for the principal residence exemption in paragraph 40(2)(b) of the Income Tax Act (the "Act"). The Canada Revenue Agency's position on the "principal residence exemption" is set out in Interpretation Bulletin IT-120R6.

By virtue of paragraph (e) of the definition of "disposition" in subsection 248(1) of the Act, a disposition generally does not include a transfer of property where there is no change in the beneficial ownership of the property. It is always a question of fact whether there has been a change in the beneficial ownership. In this regard, reference may be made to paragraphs 2 to 5 of Interpretation Bulletin IT-437R "Ownership of Property (Principal Residence)" 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, the Child would not be faced with a capital gain if the property were sold prior to the Mother's death, or on the Mother's death if she still owned the property at that time. However, in such a situation, a true joint tenancy arrangement would not exist.

If beneficial ownership does change, 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 the Child, would result in a disposition, as defined in subsection 248(1) of the Act, of 50% of 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 50% of the fair market value of the property at the time of disposition. Her adjusted cost base of the interest disposed of would be equal to 50% of the adjusted cost base of the entire property pursuant to subsection 43(1) 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 in 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 Child 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 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 Mother to have disposed of her joint interest in the property immediately before her death for proceeds equal to its fair market value at that time. Generally, this gain would not be subject to tax by virtue of the principal residence exemption. No capital gain would be recognized by the Child on the Mother's death. In accordance with paragraph 70(5)(b) of the Act, the Child 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 were 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 Child'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 Child (see paragraph 5 of IT-120R6), the Child may not qualify for the principal residence exemption with respect to his or her share of the gain.

Copies of Interpretation Bulletins are available from your local tax services office or on the Internet at the following site - http://www.cra-arc.gc.ca/formspubs/type/menu-e.html.

We trust that our comments are of assistance to you.

Yours truly,

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