5 August 1993 External T.I. 9306665 F - Transfer of 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.

XXXXXXXXXX

Dear XXXXXXXXXX

RE:  Sale of Rental Property to Your Spouse

This is in reply to your letter of February 24, 1993 concerning the possible sale of a residential rental property to your wife and/or your infant Daughter. Since the sale at current values would generate a terminal loss of approximately $30,000, you asked if this could be applied against your employment income, thus reducing taxable income in the year of sale. You also asked what documentation the department would require to substantiate the selling price as being the fair market value (the "FMV") of the property at the time of sale.

It is apparent that the information you provided us relates to a specific proposed transaction. Confirmation of the tax consequences of such a transaction will only be provided in response to a request for an advance tax ruling. The procedures for requesting an advance tax income ruling are set out in Information Circular 70-6R2. We are, however, providing you with the following general comments.

Our Comments:

In order to have a terminal loss on the transfer of a depreciable property to one's spouse a taxpayer must elect not to have the provisions of subsection 73(1) of the Act apply. If the election is made, and the transfer is made for proceeds of disposition equal to or less than the FMV of the property, the transferor is deemed to receive proceeds equal to the FMV of the property transferred. The excess of the UCC over the FMV would be a terminal loss allowable as a deduction in the year of transfer. If this election is not made, the transfer is considered to be a disposition by the taxpayer for deemed proceeds equal to the UCC of the taxpayer and an acquisition at that time by the spouse for an amount equal to those proceeds. Hence, there would not be a terminal loss and the attribution rules would apply. Note that any income or capital gains earned by the spouse will be included in the income of the transferor, unless an election is made not to have subsection 73(1) of the Act apply and the consideration paid by the spouse is not less than the FMV of the property transferred. Paragraph 74.5(1)(b) of the Act sets additional requirements necessary to avoid attribution if the consideration includes debt.

If a taxpayer gifts property or transfers property to his child for consideration that is less than FMV, the transferor (parent) is deemed to have received proceeds of disposition equal to the FMV of the property transferred. In such situations any income or loss from the property or property substituted therefor is attributed to the transferor each year until the year in which the child becomes 18 years of age. If the transfer is for consideration that is not less than the FMV of the property transferred and that consideration meets the requirements of subsection 74.5(1) of the Act, the attribution rule would not be applicable. Should the beneficial ownership be transferred to the child, the difference between the FMV and the UCC would be a terminal loss allowable as a deduction in the year of transfer.

The attribution rules are discussed further in Interpretation Bulletins IT-510 and IT-511, copies of which are enclosed for your information.

The onus would be on the taxpayer to determine the amount that would represent the FMV of the property to be transferred and, if applicable, to show that the consideration received for the property was not less than the FMV of the property transferred. This may or may not require an appraisal depending on other market data and explanations the taxpayer can offer to support the values.

The foregoing comments are given in accordance with the practice of providing opinions referred to in paragraph 21 of Information Circular 70-6R2 dated September 28, 1990 and are not binding on Revenue Canada, Taxation.

We trust that you will find our comments helpful.

Yours truly,

E. Wheeler for DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch

Encls.