17 July 1998 External T.I. 9813445 - TRANSFER OF PROP TO JOINT OWNERSHIP -ESTATE

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 an adult child is required to report income from property when title to parents property is transferred to joint tenancy with child in order to reduce probate costs on parents death and a trust deed exists to confirm that beneficial ownership has not been transferred

Position: question of fact as to whether beneficial ownership has changed or not and a trust deed may not be sufficient to support such a finding
-if beneficial ownership is not transferred, child does not need to report the income but on the death of parent, the property will transfer to child and presumably, probate fees will be required
-if beneficial ownership does change, a disposition has occurred of the child's 1/3 interest and the child must report his\her share of the income

Reasons: previous position E9803405

XXXXXXXXXX 981344
A. Humenuk

Attention: XXXXXXXXXX

July 17, 1998

Dear Sir:

Re: Transfer of the Ownership of Property

This is in reply to your letter of May 19, 1998, in which you asked for a technical interpretation as to whether or not a disposition of property occurs when the legal ownership of the property is changed without a simultaneous change in beneficial ownership.

You described a situation in which the parents of an adult child wish to change the legal title to their investment account and to their real property from a joint tenancy of the two parents to a joint tenancy of the two parents and the adult child. The purpose of this is to simplify the administration of the estate and avoid the need to probate the parents’ estates in the future. The adult child will sign a declaration of trust acknowledging that he or she does not have any beneficial ownership in either the investment account or the real property. Specifically, you have asked for confirmation that the sample trust deed and acknowledgment submitted with your request would be sufficient to show that no disposition of the property occurs upon the registration of the adult child on the title to the properties.

Confirmation of the tax consequences of a proposed transaction is only given by way of an advance income tax ruling as described in Information Circular 70-6R3, Advance Income Tax Rulings. However, as noted in paragraph 15 of that circular, an advance ruling will not be granted when the matter upon which a determination is requested is primarily one of fact, and the circumstances are such that all the pertinent facts cannot be established at the time of the request. Nevertheless, we offer the following general comments which may be of assistance to you.

Our Comments

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 in 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. A written agreement would not, in and by itself, be conclusive evidence that beneficial ownership has not changed. In this regard, reference should be made to paragraphs 2 to 5 of Interpretation Bulletin IT-437R, Ownership of Property (Principal Residence), for the Department's position on what constitutes beneficial ownership.

If, in fact, a change of beneficial ownership has not occurred, it is our view that no disposition for tax purposes occurs upon the inclusion of the child on the title to the properties. The child will not be required therefore, to include any income or capital gains in income in respect of the property prior to the death of his or her parents. However, in such a situation, a true joint tenancy arrangement with the child does not exist and, in our view, the stated objective of reducing probate fees is not achieved. On the death of the parents, a disposition by the parents of said properties would occur.

If, on the other hand, a change in beneficial ownership does occur, the transfer of property owned by the parents into a joint tenancy arrangement between the parents and their child will result in a disposition by the parents pursuant to section 54 of the Act, of a third of their collective interest in the properties. Pursuant to paragraph 69(1)(b) of the Act, the deemed proceeds of disposition of each property would be equal to a third of its fair market value. The adjusted cost base of the interest disposed of would be equal to a third of the adjusted cost base of the entire property pursuant to section 43 of the Act. By operation of law, upon the death of the parents, the property will pass directly to the child and will not form part of the deceased's estate, hence easing estate administration for probate purposes.

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 third interest in the property at the amount equal to the total deemed proceeds of disposition to the parents. If the property is sold prior to the death of the parents, one third 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 such a change in beneficial ownership has occurred) would result in a capital gain. Likewise, since the attribution rules do not apply to a gift of capital property to a child over the age of 17, one third of any income earned on the property would be required to be included in the child’s income.

We trust that these comments have clarified our position in this matter.

Yours truly,

J.F. Oulton, CA
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch