13 April 2011 External T.I. 2011-0395501E5 - Transfer of rental property to a corporation

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.

Principal Issues: 1) Can section 85 of the Act be used in transferring depreciable property of two individuals to a corporation and: 2) what amount can be established as the transfer price?

Position: 1) Yes section 85 can be used. 2) No comment on which amount should be established as the transfer amount.

Reasons: 1) A rental property meets the definition of eligible property. 2) It is not the ITR directorate's practice to offer tax planning advice.

XXXXXXXXXX
			2011-039550
			S. D'Angelo

April 13, 2011

Dear XXXXXXXXXX :

Re: Capital Gains upon Rollover to a Corporation

This is in response to your correspondence of February 10, 2011, regarding the transfer of depreciable property to a taxable Canadian corporation under section 85 of the Income Tax Act (the "Act").

You have provided the following hypothetical situation:

1. Taxpayers A (husband) and B (wife) are married and each owns a single-family rental property. A and B would like to transfer these properties to a newly formed taxable Canadian corporation under subsection 85(1) of the Act in order to facilitate an equitable division of assets to their three children without selling the properties.

2. On the subsection 85(1) transfer of the properties to the corporation, each of A and B will receive as consideration shares of the corporation with a fair market value (FMV) equal to the FMV of their respective property.

3. The corporation would continue operating the two rental properties,

You are asking if the rental properties can be transferred to a taxable Canadian corporation under subsection 85(1) of the Act in the above situation. You also would like to know what amount can be elected as the agreed amount for the properties on a subsection 85(1) rollover.

Our Comments

The situation outlined in your letter appears to relate to a factual one, involving a specific taxpayer. It is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advanced income tax ruling. For more information about how to obtain a ruling, please refer to Information Circular 70-6R5, "Advanced Income Tax Rulings, dated May 17, 2002. This Information Circular and other Canada Revenue Agency (CRA) publications can be accessed on the internet at http://www.cra-arc.gc.ca. Notwithstanding the above, we are prepared to provide the following general comments which may be of assistance.

The CRA's position with respect to transfers of property to a corporation under subsection 85(1) is outlined in Interpretation Bulletin IT-291R3, Transfer of Property to a Corporation Under Subsection 85(1) and Information Circular IC 76-19R3, Transfers of Property to a Corporation under Section 85, which are available on the Internet on the CRA webpage at www.cra-arc.gc.ca.

Only "eligible property" as defined in subsection 85(1.1) of the Act can be transferred under section 85. With certain exceptions, a capital property of a taxpayer that is real property such as a rental property would generally meet this definition and as such would be considered "eligible property" for the purpose of a section 85 rollover.

In order for the provisions of section 85 of the Act to apply a joint election must be made in prescribed form by both the transferor and transferee. The administrative procedures are discussed in IC 76-19R3.

The rules in section 85 of the Act generally enable a taxpayer (transferor) to dispose of eligible property to a taxable Canadian corporation so that most, if not all, of the tax consequences which usually arise on such a disposition are shifted to the corporation from the taxpayer. The transferor is permitted to dispose of the property to the transferee for an agreed amount, which may be other than the fair market value of either such property or the consideration received for it. This agreed amount, which is subject to statutory limitations, generally becomes the proceeds of disposition of the property to the transferor and the cost to the transferee.

The limitations concerning the agreed amount for capital property generally ensure that such amount cannot exceed the fair market value of the property and cannot be less than its adjusted cost base (non-depreciable property) or its undepreciated capital cost (depreciable property). Special rules apply to depreciable property.

A property's agreed amount on a subsection 85(1) rollover has tax consequences for the transferor that disposes of the property and for the transferee corporation that acquires the property. Thus the choice of such agreed amount is a matter of proper tax planning. In this regard, we would mention that the CRA does not provide tax planning advice.

For tax planning advice, taxpayers generally consult independent professionals. Since your situation involves the application of various provisions in section 85 of the Act, including the election of the agreed amount, you may wish to consider obtaining professional advice in order to best plan your tax affairs.

We trust our comments will be of assistance.

Yours truly

S. Parnanzone
Manager
For Director
Business and Partnership Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch