16 November 2006 External T.I. 2006-0198071E5 - transfer of property to spouse, MURB

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: Whether taxpayer can transfer MURBs to his spouse without triggering capital gains

Position: Question of fact. Depends on whether there is a disposition and a change in beneficial ownership for purposes of the Income Tax Act. Also, attribution rules will likely apply.

Reasons: The law

2006-019807
XXXXXXXXXX G. Moore
(613) 957-9232
November 16, 2006

Dear XXXXXXXXXX:

Re: Transfer of Property to Spouse

This is in response to your letter of June 24, 2006, inquiring about transferring property to your spouse.

You have owned XXXXXXXXXX condominium properties for about XXXXXXXXXX years and would like to transfer them to your spouse without triggering any tax consequences. The condominiums are multi-unit residential buildings ("MURBs") and you indicate that during the XXXXXXXXXX-year period of ownership, you were allocated capital cost allowance ("CCA") on those units.

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.

Our Comments

MURBs were buildings that met certain conditions and that were included in class 31 or 32 for CCA purposes. A distinguishing feature of MURBs from other rental properties was that MURBs were not subject to the rental property CCA restrictions in subsection 1100(11) of the Income Tax Regulations, which prohibit the deduction of CCA where such deduction would create or increase a loss from rental properties. In effect, a taxpayer could claim CCA on MURBs and create or increase a loss from the properties that could be used to offset his or her other income. CCA is discussed in more detail in Interpretation Bulletin IT-478R2, Capital Cost Allowance - Recapture and Terminal Loss.

Based on the information you provided, it is unclear whether the properties you acquired are MURBs. You have indicated that you have owned your MURB condominium units for about XXXXXXXXXX years. However, as explained in paragraph 15 of Interpretation Bulletin IT-195R4, Rental Property - Capital Cost Allowance Restrictions, if a MURB is acquired after June 17, 1987, (i.e., 19 years ago) it will be considered a rental property and will be subject to CCA restrictions. For additional comments on MURBs which qualify as property of class 31 or 32, see (archived) Interpretation Bulletin IT-367, Capital Cost Allowance - Multiple-Unit Residential Buildings.

You indicate that you want to transfer your MURB condominiums to your wife without triggering any capital gains or other tax consequences such as recapture of CCA previously claimed. Whether or not the transfer of your condominiums to your wife will result in a capital gain or recapture of CCA is dependent upon whether such a transfer results in a disposition for purposes of the Income Tax Act (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 pursuant to subsection 248(1) of the Act on the transfer of the property to your spouse and consequently no capital gain or loss will result. If beneficial ownership does change, it is our view that the transfer of the property to your spouse would result in a disposition of your condominiums.

In a situation where a taxpayer transfers a capital property to his or her spouse and there is a change in beneficial ownership, subsection 73(1) of the Act would generally deem the proceeds of disposition to be equal to, in the case of non-depreciable capital property, the adjusted cost base or, in the case of depreciable property, the undepreciated capital cost of the property, as the case may be (assuming the taxpayer does not opt out of subsection 73(1) of the Act as explained below). The spouse will be deemed to have acquired the property at that time for an amount equal to those proceeds. This will generally ensure that no tax consequences, such as capital gain or loss or recapture of CCA previously claimed, will result on the transfer. While no capital gain would be realized by the transferor, the attribution rules of section 74.2 of the Act may apply to attribute to the transferor any capital gains or capital losses resulting from a subsequent disposition by the transferee. In addition, the net income realized by a transferee from the properties transferred under subsection 73(1) is also attributed back to the transferor. You may wish to refer to Interpretation Bulletin IT-511R, Interspousal and Certain Other Transfers and Loans of Property, for additional information on the application of the attribution rules and to Interpretation Bulletin IT-325R2, Property Transfers after Separation, Divorce and Annulment, for comments on subsection 73(1) of the Act.

The transferor may elect in his or her tax return for the taxation year in which the property is transferred to his or her spouse (resulting in a disposition) not to have the provisions of subsection 73(1) apply. In such a situation, the taxpayer's proceeds of disposition will be deemed to be equal to the fair market value of the property and this will result in tax consequences. In this regard, you may wish to obtain professional advice in order to best plan your tax affairs.

We trust that our comments are of assistance to you.

Yours truly,

S. Parnanzone
For Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch