8 February 1989 Income Tax Severed Letter 5-7265 -  

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.

Small Business and General Division R. Kangvin (613) 967-2138

Feb 8 1989

Dear Sirs:

This is in reply to your letter dated December 16, 1988, requesting our confirmation of your understanding of the appropriate tax treatment in respect of the following scenario:

1) Mr. X owns a rental property consisting of land and building. The property is capital property to Mr. X. Details as to the land and building are:

           Fair Market      Adjusted Cost     Undepreciated
           Value            Base              Capital Cost

Building   600,000          200,000           200,000
Land       400,000          100,000
           -------          -------

         1,000,000          300,000
         ---------          -------

We are to assume that there is an interest-bearing mortgage attached to the property in the amount of $150,000 which is payable to the vendor from whom Mr. X acquired the property.

2) Mr. X will gift to his adult son the real property with the son assuming the mortgage of $150,000.

To the extent that a gift has been made in law, we confirm that Mr. X. would be deemed to have received proceeds of disposition equal to the fair market value of the property pursuant to paragraph 69(1)(b) of the Income Tax Act (the "Act"). In such circumstances, paragraph 69(1)(c) of the Act would apply to the son to deem his acquisition at the fair market value of the property at the time the property is acquired.

Inasmuch as the mortgage would be legally assumed by the son and the property would be used solely to produce income from property, the interest paid in the year pursuant to such legal obligation to do so would be deductible pursuant to paragraph 20(1)(c) of the Act.

We would note that in keeping with paragraphs 21 through 24 of Information Circular 70-6R, the Department does not express opinions on proposed transactions other than through the mechanism of an advance income tax ruling and, accordingly, this opinion may not apply to that facts of a particular case and is not binding on the Department.

Yours truly,

ORIGINAL SIGNED BY

Wm. R. McColm

for Director Small Business and General Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch