9 October 1990 Ministerial Letter 901638 F - Estate Planning

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.

October 9, 1990

19(1)

Re:  Estate Planning

We are replying to your letter of June 27, 1990 concerning the income tax implications related to estate planning.

You asked us to confirm the accuracy of certain statements you made concerning the transfer of property to a spouse during the lifetime of the transferor or upon the death of the transferor. As you are undoubtedly aware, the income tax implications relating to transfers of property to a spouse are quite complex and it is not possible to make all-encompassing statements on these topics. We have attempted to draw your attention to some of the more salient points of the legislation on the subjects in which you have expressed interest and have enclosed material published by the Department which deals more extensively with those topics.

We would like to preface our remarks with some general comments concerning the transfer of property between spouses. The transfer of any property, including cash, securities and real property, to a person with whom the transferor does not deal at arm's length is usually treated for income tax purposes as a disposition of property at fair market value. A disposition of capital property may result in a taxable capital gain, based on its appreciation in value, to be to be included in the transferor's income.

Subsection 73(1) of the Income Tax Act provides an exception to this rule for an inter vivos transfer of property to a spouse and subsection 70(6) provides an exception in respect of a transfer to a spouse upon death. The attached Interpretation Bulletin IT-209R discusses the income tax effects of these subsections on the donor and donee. Provided that either subsection 73(1) or 70(6) applies and the taxpayer does not opt out of the provision these subsections allow for the capital property in question to be transferred to the spouse at the transferor's adjusted cost base with the result that the transferor will not be required to include in income in the year any capital gain that would ordinarily have accrued up to the time of the transfer.

With respect to the specific statements contained in your letter, we offer the following comments:

1.     You make the statement that transfers of cash or securities between husband and wife, whether as gifts during the lifetime of both spouses or by last will and testament from a deceased to a surviving spouse, are not subject to any tax, including capital gains. As stated above, no tax would result from the actual inter vivos transfer of any capital property, including cash and securities, to a spouse provided subsection 73(1) applies. However, any income or capital gains earned on that property by the receiving spouse would be attributed to the transferor, as explained in the attached Interpretation Bulletin IT-511 "Interspousal Transfers and Loans of Property made after May 22, 1985". Where capital property is transferred upon death and subsection 70(6) applies, a capital gain in respect of that transferred property is not required to be included in the deceased's final return. As well, income earned on that property in any period following the death of the transferor will not attribute to the deceased.

2.     You make the statement that transfers of real property between spouses during their lifetime, and the passing of a deceased spouse's share of real property, held by the couple either as joint tenants or as tenants in common, to a surviving spouse, are all free of tax, including capital gains. Please refer to our comments in paragraph 1 above.

3.     You make the statement that all assets willed or given by the last surviving spouse to children, grandchildren or other heirs are subject to capital gain treatment, if the asset was capable of appreciating in value, on the increase in value during the period such assets were held by the testator/testatrix unless the increase in value can be offset by the testator's/testatrix's lifetime capital gains exemption. In this regard, we direct you to the information contained in the attached two pamphlets, "Capital Gains Tax Guide" an "Deceased Persons Tax Guide". It should be clarified, however, that while subsections 73(1) and 70(6) provide for a deferral of tax consequences on the original transfer of capital property to the surviving spouse, as explained in paragraphs 1 and 2 above, the subsequent disposition of the property by the spouse effectively brings the deferred gain into the calculation of the spouse's taxable gain at the time of the transfer of the property to the children, grandchildren, etc.

4.     You make the statement that the passing of title to what has been a principal residence, whether by sale or by last will and testament, and whether title passes to a near relation or to someone outside the immediate family, does not give rise to a capital gain inclusion. Although the disposition of a residence may give rise to a capital gain, the law provides for a reduction in the amount of the capital gain to be included in income on the disposition of a property which qualifies as a principal residence within the meaning assigned by the Act as long as the property is so designated. Where the property has been designated as the taxpayer's principal residence for the entire period that it was held by the taxpayer, the reduction would be the whole amount of the gain. Interpretation Bulletin IT-120R3 "Principal Residence" provides further detail on the legislation relating to a principal residence.

5.     It is your understanding that current tax law states that an individual and his or her spouse may have no more than one principal residence at any one time. Based on this understanding, you further state that if an individual or couple own two properties at the same time and sell or transfer them both at the same time, one property would be exempt from tax and the other would be subject to tax. You ask us to confirm that an individual can move the designation to another property from time to time. Paragraphs 3 and 4 of IT-120R3 explain the circumstances under which a property can be designated as a principle residence. However it should be noted that the designation need not be made until the first of the properties qualifying as a principal residence is sold or otherwise disposed of and that the limitation of one designation per family unit as described in paragraph 3(d) of the bulletin is in respect of a whole year. The decision must then be made as to the number of years for which the qualifying property will be so designated as a principal residence.

6.     You state that there is no theoretical limit to the number of principal residences that an individual or couple may own and occupy in succession and therefore conclude that a taxpayer may avoid the tax liability on the disposition of his homes by shifting the principal residence designation. Your general understanding is correct. However, as stated in paragraph 5 above, the designation is limited to one property in a given year. At this Point, we should also note that where an individual buys and sells property in the manner of a trader, the gain on the property may be treated as income from business and thus not be subject to the capital gains rules, as explained in IT-218R "Profit, Capital Gains and Losses from the Sale of Real Estate, Including Farmland and Inherited Land and Conversion of Real Estate from Capital Property to Inventory and Vice Versa" and IT-459 "Adventure or Concern in the Nature of Trade". The principal residence designation does not modify the calculation of profit on property held as inventory.

If you have any further questions concerning the attached material, you may contact the Toronto District Office at (416) 869-1500 or Annemarie Humenuk at the above noted number.

We trust our comments will be of assistance to you.

Yours truly,

for DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch