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: (1) Is there a disposition by the mother of her principal residence on the date of the transfer of 3/4 of the interest in the property to the daughters? (2) At the date of the mother's death, what will the cost be for each of the three daughters?
Position: (1) Question of fact. (2) Question of Fact.
Reasons: (1) Question of fact. (2) It depends on whether beneficial ownership was transferred prior to the mother's death.
2006-016655
XXXXXXXXXX S.Lewis
(613) 941-7239
June 21, 2006
Dear XXXXXXXXXX:
Re: Disposition of Principal Residence
This is in response to your letter of January 11, 2006 and subsequent telephone conversation regarding the partial transfer of a principal residence.
We have the following understanding of the hypothetical facts:
1. A mother owns and lives alone in a home that is her principal residence.
2. The home currently has a fair market value of $100,000.
3. The mother will transfer 1/4 of the interest in her home to each of her three daughters in joint tenancy.
4. The mother will continue to live in the home until she dies.
5. At the time of mother's death the fair market value of the home will be $200,000.
You have two concerns:
1) For tax purposes, is there a disposition by the mother on the date of the transfer of the ownership of the residence in joint tenancy with her three daughters?
2) At the date of the mother's death, what will the cost be of the interest in the residence for each of the three daughters?
The situation outlined in your letter appears to relate to a factual one, involving a specific taxpayer. It is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advanced income tax ruling. For more information about how to obtain a ruling, please refer to Information Circular 70-6R5, "Advanced Income Tax Rulings, dated May 17, 2002. This Information Circular and other CRA publications can be accessed on the internet at http://www.cra-arc.gc.ca. Should your situation involve a specific taxpayer and a completed transaction, you should submit all relevant facts and documentation to the appropriate Tax Services Office ("TSO") for their views. A list of TSOs is available on the "Contact Us" page of the CRA website. Although we cannot comment on your specific situation, we are prepared to provide the following general comments, which may be of assistance.
In determining whether or not there will be a disposition when the mother transfers a 3/4 interest of her principal residence to her three daughters by changing the ownership to joint tenancy, it will be necessary to determine whether or not the transfer results in a change in beneficial ownership. The concepts of "beneficial ownership" and "legal ownership" as recognized under the common law jurisdictions are discussed in Interpretation Bulletin IT-437R Ownership of Property (Principal Residence).
It is a question of fact as to whether there has been a change in beneficial ownership of a property in a particular situation. However, it is generally presumed that a transfer of property from a parent to a child, including a transfer of property into joint ownership, is a gift to the child unless a contrary intent is evident. Where a contrary intent is evident, the presumption of the gift is rebutted and the child then holds the legal title in trust for the parent and the parent's estate. Where the transfer of ownership into joint tenancy results in a change in beneficial ownership we will assume that the three daughters acquired their interests in the residence by way of a gift.
If the mother's change of ownership of the residence to joint tenancy results in a change of the beneficial ownership of the home, so that each daughter beneficially owns 1/4 of the home, there will be a disposition for tax purposes. Pursuant to paragraph 69(1)(c) of the Income Tax Act ("the Act"), each daughter would be deemed to acquire her respective interest at fair market value, at a cost of $25,000 (i.e., 1/4 of $100,000). Upon the death of the mother, each daughter would receive 1/3 of her mother's interest in the principal residence at the fair market value, pursuant to paragraph 70(5)(b) of the Act. If the fair market value of the principal residence is $200,000 at the mother's death, each daughter's cost for her proportionate share of the mother's 1/4 interest in the home would be 1/3 of 1/4 of $200,000 or $16,666.67. As such each daughter's total cost for 1/3 of the home will be $41,666.67. From the date of the transfer only the portion that is beneficially owned by the mother would qualify for the principal residence exemption pursuant to 40(2)(b). Only the mother could claim to principal residence exemption for only she ordinarily inhabited the home as required by the definition of principal residence in paragraph 54(a) and discussed in Interpretation Bulletin IT- 120R6 Principal Residence.
If the mother's transfer of ownership into joint tenancy is not a gift to the daughters and there is no change in beneficial ownership, there will be no disposition for tax purposes, pursuant to the definition of disposition in subsection 248(1). As such, if the mother continues to live in her home until her death, upon her death the subsection 70(5) will apply to deem a disposition of the property at fair market value. At that time the property could be designated as the mother's principal residence. The principal residence exemption under paragraph 40(2)(b) of the Act would be computed with reference to the capital gain on the entire property.
We trust that these comments will be of assistance.
Yours truly,
S. Parnanzone
Manager
Business Incentives and Capital Transactions Section
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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