24 January 2012 External T.I. 2011-0405071E5 - Sale of residential investment 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.

Principal Issues: Allocation of a capital gain resulting from the sale of a residential investment property owned jointly by spouses, following a marriage breakdown, in a case where one spouse releases his or her interest in the proceeds of disposition directly to the other spouse in partial payment of an equalization payment, as required under a court order.

Position: The capital gain is allocated between the spouses based on their respective ownership interests in the property at the time of disposition. Proceeds of disposition are not reduced by the release of one spouse's interest in the proceeds of disposition to the other spouse by reason of a court order or otherwise.

Reasons: Wording of section 54, paragraph 40(1)(a), subsection 248(1) definition of "disposition", court jurisprudence

XXXXXXXXXX
									2011-040507
									M. Allan
January 24, 2012

Dear XXXXXXXXXX :

Re: Capital gain on sale of residential investment property

We are writing in response to your letter of April 25, 2011, regarding the taxation of a capital gain resulting from the sale of a residential investment property which was jointly owned by yourself and your spouse ("the Property"). You have stated that the Property was sold directly to a third party following a marriage breakdown. The Property was not the principal residence of either of you.

Under a court order (a divorce order) issued by the Ontario Superior Court of Justice, you were ordered to pay an equalization payment to your spouse as full and final settlement of all rights and obligations arising under the Ontario Family Law Act. The equalization payment was to be paid in part by the release of your share of the proceeds of disposition of the Property.

A taxpayer's capital gain from the disposition of a capital property is the amount of the proceeds of disposition from the property, less the adjusted cost base of the property and any disposal costs, as described under paragraphs 39(1)(a) and 40(1)(a) of the Income Tax Act ("ITA"). A "disposition" of a property is defined under subsection 248(1) of the ITA to include any transaction entitling a taxpayer to proceeds of disposition of the property. Under section 54 of the ITA, the "proceeds of disposition" from a disposition of property includes the sales price of a property that has been sold.

Therefore, the sale of a capital property by its owners to a third party is a disposition that entitles the owners to proceeds of disposition equal to the sales price of the property. A capital gain is realized, calculated as the sales price less the adjusted cost base of the property and any disposal costs.

Where subsequent to a sale of a capital property which was jointly owned by spouses immediately before the disposition, one spouse transfers or releases their share of the proceeds of disposition to the other spouse, in satisfaction of an equalization payment under a court order or otherwise, it is our view, as supported by court cases, that there is no change or reduction to the amount of the proceeds of disposition recognized under section 54 of the ITA, nor to the capital gain otherwise calculated and allocable between the spouses.

Generally the capital gain resulting from a disposition of a capital property, which was owned jointly by spouses immediately before the disposition, is allocated between the spouses based on their respective ownership interests at the time of the disposition. The ownership interest of each spouse is normally based on their respective contribution to the purchase of the property. In a case where the ownership of the capital property was previously transferred from one spouse to joint ownership with their spouse prior to a marriage breakdown, some or all of the capital gain from the subsequent sale of the property may be considered to be that of the spouse who originally purchased the property, subject to certain exceptions, as described in IT-325R2, Interspousal and certain other transfers and loans of property, available at http://www.cra-arc.gc.ca/formspubs/menu-eng.html . These exceptions include cases where the spouse receiving joint ownership paid fair market value for their ownership interest or where at the time of the subsequent sale, the spouses are living separate and apart as the result of a marriage breakdown and make a joint election.

If the jointly owned capital property disposed of is also a depreciable property (e.g. a rental property for which capital cost allowance may have been claimed), then in addition to any capital gain, any income realized in the form of recaptured capital cost allowance is also allocable between the spouses in the same manner as described above. For further information on recaptured capital cost allowance see IT-478R2, Capital cost allowance - recapture and terminal loss.

The determination of your share of the capital gain and/or income that resulted from the disposition of the Property would require a review of all the facts and circumstances. This review would be carried out by audit officials in the local tax services office and would include a review of the all relevant documents. You may wish to contact your local tax services office for a determination of your specific situation.

We trust these comments will be of assistance.

Nerill Thomas-Wilkinson
Manager
for Director
Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch