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: What is the relevant date for the determination of the fair market value of a property, which is to be sold to a non-arm's length person in a subsequent year.
Position: The FMV is to be determined on the date of disposition, which is generally the date beneficial ownership of the property is transferred.
Reasons: Paragraph 69(1)(b) deems the POD to be the FMV of the property on the date of disposition. 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.
2005-014748
XXXXXXXXXX Rob Ferrari
(613) 957-2138
April 4, 2006
Dear XXXXXXXXXX.
Re: Date to Determine Fair Market Value
We are writing in response to your facsimile of August 17, 2005 and our telephone conversion of February 15, 2006, wherein you requested our opinion as to the date the fair market value ("FMV") of a property is to be determined on the sale of a property from parents to an adult son.
In the situation you describe, the parents purchased a residential property in 2000 and since that time, have rented it to their son and they have reported that rental income for income tax purposes. The parents intend to sell the property to their son at the property's FMV as established in 2005, however, the property will not be sold to the son until 2007 in order to allow the son to arrange adequate financing and to save sufficient funds for a down payment. You ask whether the FMV of the property as established in 2005 will represent the parents' proceeds of disposition on the sale of the property in 2007.
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 income tax ruling request submitted in the manner set out in Information Circular IC 70-6R5 - "Advance Income Tax Rulings". Where the particular transactions are completed, the inquiry should be addressed to the relevant tax services office. However, we are prepared to provide the following comments.
The parents and the son are related persons as defined by subsection 251(2) of the Income Tax Act ("Act"), and are therefore deemed, by paragraph 251(1)(a) of the Act, to not deal with each other at arm's length. Except as expressly otherwise provided, paragraph 69(1)(b) of the Act stipulates that where a taxpayer has disposed of anything to a person with whom the taxpayer was not dealing at arm's length for no proceeds or for proceeds less than the FMV at the time the taxpayer so disposed of it, the taxpayer shall be deemed to have received proceeds of disposition therefor equal to that FMV. Accordingly, proceeds of disposition for income tax purposes are deemed to be the property's FMV on the date of its disposition.
In order to determine the date of disposition, we refer to paragraph (e) of the definition of "disposition" in subsection 248(1) of the Act, which provides a disposition generally does not include a transfer of property where there is no change in the beneficial ownership of the property. Based upon the information you have provided to us, it does not appear that the beneficial ownership of the property will be transferred to the son until 2007. Accordingly, in our view, at that time at which beneficial ownership of the property is transferred to the son, the parents will be deemed to have received proceeds from the disposition equal to the property's FMV, which is determined at the date of the transfer. We would refer you to paragraphs 2 to 5 of IT-437R - "Ownership of Property (Principal Residence)" and IT-170R - "Sale of Property - When Included in Income Computation", for further information on the Agency's general views on what constitutes a disposition of property.
Although you did not request our opinion as to the son's cost of the property, we nevertheless offer the following general comments. Unless otherwise provided in the Act, paragraph 69(1)(c) of the Act stipulates a taxpayer who has acquired property from a non-arm's length person by way of gift, bequest or inheritance is deemed by paragraph 69(1)(c) of the Act to have acquired the property at its FMV. However, paragraph 69(1)(c) of the Act does not apply to property that was acquired by a taxpayer by way of "purchase" at less than its FMV. Accordingly, if the son subsequently purchases the property for less than its FMV, his cost of the property will be limited to the amount actually paid.
On the other hand, paragraph 69(1)(a) of the Act stipulates (unless otherwise provided) that where a taxpayer has acquired anything from a non-arm's length person at an amount in excess of its fair market value, the taxpayer is deemed to have acquired the property at that fair market value. Therefore, if at the time of purchase the son acquires the property from his parents for an amount in excess of the property's FMV, his cost of the property will be deemed to be its FMV at that time.
As a final point, we would note that as a general rule, subsection 69(1) applies to all acquisitions and dispositions of property between persons who do not deal at arm's length. However, the CRA will not necessarily challenge the price set for a residence at the sale agreement date in a transaction between related persons if the price is equal to the FMV at that time, the period intervening before the closing date is relatively short, and the terms of the transaction, including financing conditions, are not unlike the terms of a "normal" transaction entered between arm's length persons (e.g., the financing conditions to be removed and the closing date to occur within two weeks and three months, respectively, of the sale agreement date). However, in the circumstances you have described, in which the price was established in 2005 on a sale not to take place until 2007, we would not consider this approach to be appropriate.
We trust the above comments will be of assistance to you.
Yours truly,
Bob Skulski
Manager
Business and Individual Section
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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