30 March 1995 External T.I. 9502065 - CAPITAL GAINS ELECTION

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

1. Whether the capital gains election can be used by a father where land is gifted to his son.

2.Whether a transfer of land by a husband, as sole owner, to himself and his spouse as joint tenants will be treated as a transfer of the husband's entire interest in the land.

Position TAKEN:

1.Capital gains election can be filed by father only if father owned the land on February 22, 1994.

2.Treated as a disposition of one-half of the property.

Reasons FOR POSITION TAKEN:

1. Only property owned on February 22, 1994 can be the object of the capital gains election.

2.Husband has not disposed of his entire interest in the property.

		5-950206
XXXXXXXXXX		C. Chouinard

March 30, 1995

Dear Sir:

Re: Capital Gains

We are writing in response to your letter of January 23, 1995, wherein you requested our comments on the capital gains election in two different situations involving a gift of property to a related person.

In the first situation you describe, a father gifts land to his son. You ask whether, upon gifting the land, the father can file the capital gains election in respect of the land and designate the fair market value of the land as proceeds of disposition. You also ask whether the adjusted cost base of the land for the son will be equal to the fair market value of the land.

In the second situation you describe, a husband transfers an undivided one-half interest in land to his wife, such that the land is jointly owned by the two spouses. You ask whether we would consider that the husband has disposed of his entire interest in the land, such that he could elect out of the subsection 73(1) of the Income Tax Act (the "Act") rollover and recognize the full capital gain accrued on the land.

Our Comments

Written confirmation of the tax implications inherent in particular transactions are given by this Directorate only where the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R2. The following comments are, therefore, of a general nature only, and are not binding on the Department.

In the February 22, 1994 budget, the federal government announced that the $100,000 capital gains exemption would no longer be available for capital property or eligible capital property sold after February 22, 1994. However, taxpayers who owned such property at the end of February 22, 1994 and who have not used all of their $100,000 capital gains exemption, may file a one-time election. The election allows taxpayers to report a capital gain to take advantage of the unused portion of their $100,000 capital gains exemption, even though they did not actually sell their property. In order to recognize the accrued gain in respect of a property owned by a taxpayer at the end of February 22, 1994, the taxpayer is required to elect to have the provisions of subsection 110.6(19) apply to the property. This election can be made in respect of any property that constitutes capital property.

In the first situation you describe, the father can file the capital gains election in respect of the land only if he owned the land on February 22, 1994. If the land was gifted to the son prior to February 23, 1994, the son, as opposed to the father, can file the capital gains election. The elector can designate any amount between the adjusted cost base and the fair market value of the land on February 22, 1994 as proceeds of disposition, thereby generating a capital gain. When the capital gains election is filed, the elector is deemed to have disposed of the property which is the object of the election for proceeds of disposition equal to the amount designated and to have reacquired the property immediately after February 22, 1994 at a cost equal to the designated amount, unless the designated amount exceeds the fair market value of the property. Therefore, if the father owned the property on February 22, 1994, he could file the capital gains election and designate the fair market value of the property as proceeds of disposition. As a result, he would be deemed to have reacquired the property at that same fair market value. If the property was subsequently transferred from the father to the son, since the father and son would not be dealing at arm's length, pursuant to paragraph 69(1)(c) of the Act, the son would be deemed to have acquired the land at its fair market value at the time of the transfer.

As regards the second situation described above, where property such as real estate that is wholly owned by an individual is transferred by that individual from himself, as sole owner, to himself and his spouse as joint tenants, it is our view, for purposes of subsection 73(1) of the Act, that the sole owner has only disposed of one-half of the property in question. Subsection 73(1) of the Act would be applicable on the transfer of land from a husband, as sole owner, to himself and his spouse as joint tenants, unless the husband elects that the rollover not apply. However, as indicated above, the husband will be deemed to have disposed of only one-half of the capital property in question. If he elects out of subsection 73(1) of the Act, the capital property is transferred at its fair market value, rather than its adjusted cost base, thereby generating a capital gain. If the husband transfers the undivided one-half interest to his wife after February 22, 1994, the $100,000 capital gains exemption will not be available to shelter the capital gain resulting from the transfer. Furthermore, after the transfer, the attribution rules of sections 74.1 and 74.2 of the Act may apply if the conditions of subsection 74.5 of the Act are not met at the time of the transfer. If the attribution rules apply, any income or losses from the property and any capital gains or losses resulting from the subsequent sale of the property may be attributed to the husband. However, if the husband owned the real estate on February 22, 1994, it should be noted that he may file the capital gains election on the whole property and use his capital gains exemption without an actual transfer of the property. We refer you to our comments above regarding the capital gains election.

We trust that these comments will be of assistance.

Yours truly,
R. Albert
for Director
Business and General Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch