23 January 2009 External T.I. 2009-0305951E5 - Disposition of Rental Property

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: Tax consequences relevant to rental property, which includes a personal element, inherited by children and subsequently sold at a loss.

Position: Unable to opine. Completed transaction.

Reasons: Completed transaction. Too many factual contingencies.

XXXXXXXXXX 							2009-030595
								James Atkinson CGA
January 23, 2009						(519) 457-4832

Dear XXXXXXXXXX :

Re: Capital / Terminal Loss on Disposition of Property

This is in response to your letter of December 23, 2008 inquiring about the tax consequences of an actual transaction involving the disposition of real property (land and building) by three of your clients.

As we understand the circumstances, the property which had in part produced rental income, was bequeathed to three children in 2007. The children subsequently sold the property in 2008 at a loss. You have provided certain calculations involving the transfer of the property to the children, and the children's subsequent disposition at a loss. You ask whether your calculations would "be refused by the government".

As discussed during our telephone conversation of January 20, 2009 (Atkinson/XXXXXXXXXX ), 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 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.

The tax consequences of the transactions you described require determinations of fact, involving matters such as valuations and allocations of business/personal usage. In order to answer your question, the CRA would essentially have to carry out an audit of the activities reported in the returns. However, the subject returns have not yet been filed.

You indicate a capital gain in the father's return followed shortly thereafter by a large terminal loss in the childrens'. To support such a claim, you should obtain documentation of the values. In this respect, we also note that the selling price is a round number and no selling costs are indicated. This may suggest a transaction not at arm's length, which increases the burden on your clients to ascertain fair market value.

Some other questions arise from a review of your letter, as well. For instance:

• Prior to March 31, 2007, most of the property was used for personal purposes. However, based on your letter you have suggested that the personal portion of the property changed to an income producing use on April 1, 2007. Considering that the circumstances involved the settlement of an estate, you would have to establish when the personal use portion, in fact, changed to an income use.
• If one apartment was left vacant deliberately to accommodate a future purchaser, that apartment was never used for rental purposes, and a portion of the rental and terminal loss associated with it should be removed.
• Given the short holding period, the apparent intention to sell quickly, the tiny amount of rental income, and the decision to not use part of the space in order to accommodate such a sale, it is quite likely that the entire property never became an income-earning property for the children. Incidental revenue realized while holding property does not indicate that it is held for the purpose of earning income. In this case, the losses would not be deductible at all.

The Canadian system of taxation is based on self-assessment. Individuals are expected to compute and report their income accurately. We appreciate your efforts to assist your clients to do so.

We trust that these comments will be of assistance.

Yours truly,

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