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: Whether the transfer of title of wholly owned property to joint ownership constitutes a disposition when there is no change in beneficial ownership.
Position: No disposition.
Reasons: Paragraph (e) of the definition of the term disposition in section 54 of the Act makes it clear that a disposition will not occur as a result of any transfer of
property by virtue of which there is a change in legal ownership without any change in beneficial ownership. It is not clear if in such a situation, probate fees upon the death of one of the joint owners would be eliminated.
XXXXXXXXXX 980880
T. Murphy
Attention: XXXXXXXXXX
October 13, 1998
Dear Sirs:
Re: Transfers of Property to Joint Ownership
We are writing in response to your letter of April 6, 1998 in which you posed various questions on the transfer of property to joint ownership for the purposes of avoiding probate fees.
You have described a situation where the financial institution will be notified that registration of property will be changed from the name of the original owner ("parent") to that of both the parent and the adult child of the parent. There will be a declaration of trust stating that the parent retains the property during his or her lifetime and is responsible for paying any income taxes arising on income generated by the property.
The interpretations you seek should be the subject of an advance income tax ruling request as set out in Information Circular 70-6R3. However, we offer the following general comments that may be of assistance to you.
Paragraph (e) of the definition of the term disposition in section 54 of the Income Tax Act (the "Act") makes it clear that, for purposes of subdivision c of Division B of Part I of the Act, a disposition will not occur as a result of any transfer of property by virtue of which there is a change in legal ownership of the property without any change in the beneficial ownership thereof. It is a question of fact whether there has been a change in the beneficial ownership. The declaration of trust referred to above would not, in and by itself, be conclusive evidence that beneficial ownership has not changed. In this regard reference should be made to Interpretation Bulletins IT-437R and IT-170R for the Department's position on what constitutes beneficial ownership.
In our view, if in fact beneficial ownership has not changed, no disposition for tax purposes will have occurred on the transfer of the property to joint ownership. However, we would caution you, that in such a situation, a true joint ownership arrangement does not exist and, in our view, the objective of reducing probate fees is not achieved. See, for example, Anthony P. McGlynn and K. Thomas Grozinger, "Joint Ownership of Property in the Context of Inter-generational Transfers of Estates: Convenience and Conflict," Estates and Trusts Journal, Vol. 16, No. 2, pp. 105-114, December, 1996. If beneficial ownership has not changed, then the property (50% interest in property plus capital interest in a trust) could form part of a testamentary trust created on the parent's death. For purposes of subsection 70(5), it appears that the deceased parent would dispose of 50% of his or her interest in the property and a capital interest in a trust representing the other 50% interest in the property.
If, however, beneficial ownership does change, it is our view that the transfer of property to a joint ownership arrangement (ignoring the trust) would result in a disposition pursuant to section 54 of the Act of 50% of the parent's interest in the property. Pursuant to paragraph 69(1)(b) of the Act, the deemed proceeds of disposition would be equal to 50% of the fair market value of the property. The adjusted cost base of the interest disposed of would be equal to 50% of the adjusted cost base of the entire property pursuant to section 43 of the Act.
Paragraph 69(1)(c) of the Act provides that property acquired by way of gift is deemed to have been acquired at its fair market value. Thus, the child would acquire his or her 50% interest in the property at the amount equal to the deemed proceeds of disposition to the parent. The 50% interest in the property retained by the parent would be subject to the provisions of subsection 70(5) of the Act upon the death of the parent (assuming the property has not otherwise been disposed of before that time); specifically, paragraph 70(5)(a) of the Act would operate to deem the parent to have disposed of his or her joint interest in the property immediately before death for proceeds equal to its fair market value. In accordance with paragraph 70(5)(b) of the Act, the child would acquire that joint interest in the property at the proceeds deemed to have been received by parent pursuant to paragraph 70(5)(a) of the Act.
In our view, if the property is sold prior to the death of the parent, 50% of the proceeds of disposition would be allocated to the child's interest, and any increase in value from the date of the transfer of the property into joint ownership (assuming a change in beneficial ownership) would create a capital gain.
Additionally, if there is a change in beneficial ownership, the property by law would automatically pass to the child on the parent's death. Consequently, a transfer of that property to a testamentary trust created by the parent would taint the trust as property would have been contributed to the trust by someone other than the deceased parent.
With respect to your question concerning whether a declaration of trust needs to be in writing, our understanding of the law pertaining to trusts is that only trusts dealing with real property are required to be in writing. Of course, the best evidence of intention to create a trust is a written declaration.
We trust our comments will be of assistance to you.
R.S. Biscaro, CA
Director
Resources, Partnerships and Trusts Division
Income Tax Rulings and Interpretations Directorate
Policy and Legislation Branch
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