5 January 2011 Internal T.I. 2009-0350871I7 - Disposition of farm 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: Income tax consequences of transferring ownership of farm property from sole ownership by the taxpayer to joint tenancy with his spouse.

Position: General comments provided.

Reasons: Question of fact whether there is a disposition of property [par. 248(1)] which depends on whether there is a change in beneficial ownership of the property. However, there is generally a presumption that the holder of legal title of a property is also the beneficial owner of the property, unless the facts support otherwise.

							January 5, 2011

	Tax Services Office, Regina		Income Tax Rulings Directorate
							Division 52
							Saskia deLang-Lenters
	Attention:  Mr. Walker
							2009-035087	

Disposition of farm property

This is in response to your memorandum of January 4, 2010. You asked for our comments regarding the income tax consequences of transferring ownership of farm property (property) from sole ownership by a taxpayer to joint tenancy with his spouse.

Our Comments:

The first issue is whether or not a transfer of a taxpayer's property from sole ownership to joint tenancy with his spouse is a disposition for purposes of subsection 248(1) of the Income Tax Act ("Act"). Subsection 248(1) of the Act defines "disposition" of any property to include any transaction or event entitling a taxpayer to proceeds of disposition (POD) of the property. However, paragraph 248(1)(e) of the Act excludes from the definition of disposition any transfer of the property as a consequence of which there is no change in the beneficial ownership of the property. Whether there is a change in beneficial ownership on the transfer of any property is a question of fact. However, there is generally a presumption that the holder of legal title of a property is also the beneficial owner of the property, unless the facts support otherwise.

The concepts of "beneficial ownership" and "legal ownership" as recognized under the common law jurisdictions are discussed in Interpretation Bulletin IT-437R "Ownership of Property (Principal Residence)". Some of the criteria to consider in determining whether or not a person has beneficial ownership of a property are discussed at paragraphs 2 to 5 of this bulletin.

If, based on the facts, there is a change in beneficial ownership of a property upon its transfer from sole ownership by a taxpayer to joint tenancy with his spouse, it is our view that this would result in a disposition of 50% of the taxpayer's interest in the property at that time for the purposes of subsection 248(1) of the Act. If beneficial interest does not in fact change on the transfer of the property, our view is there would be no disposition of the taxpayer's interest in the property, and consequently no capital gain or loss would result.

We will first consider the situation in which there is a change in beneficial ownership of a property upon its transfer from sole ownership by a taxpayer to joint tenancy with his spouse, resulting in a disposition of 50% of the taxpayer's interest in the property.

In this situation, subsection 73(1) of the Act, inter vivos transfers by individuals, provides that where capital property is transferred by an individual to the individual's spouse, and both are resident in Canada at the time of the transfer, the transfer occurs on a tax-deferred basis. If the conditions in subsection 73(1) of the Act are met, the rollover applies automatically. In this case, the transferor is deemed to have disposed of capital property for proceeds equal to 50% of the undepreciated capital cost (UCC) of depreciable property and, in any other case, 50% of the adjusted cost base (ACB) of the property to the taxpayer, immediately before the transfer. The transferee is deemed to have acquired the property at that time for an amount equal to those proceeds. This means that no capital gain or loss results on the transfer.

Alternatively, the taxpayer may elect in his return for the tax year in which the property is transferred to joint tenancy with his spouse to have the provisions of subsection 73(1) of the Act not apply. In such a situation, the taxpayer's POD and the spouse's ACB would be deemed to be 50% of the FMV of the entire property at the time of the transfer pursuant to subsection 69(1) of the Act. The taxpayer would be required to report any resulting capital gain on the disposition, subject to any capital gains deduction for qualified farm property, if applicable, explained below.

Paragraph 6 of IT-325R2 "Property transfers after separation, divorce and annulment" states that "there is no official form for the election not to have the subsection 73(1) rollover apply." The election is normally made by the transferor simply reporting the full tax consequences of the disposition in his Income Tax Return for the year of the transfer. According to your memorandum, the taxpayer did not elect in the year of the transfer of the property to joint tenancy to have the rules under subsection 73(1) of the Act not apply.

Upon the taxpayer's death, subsection 70(5) of the Act would trigger a deemed disposition at FMV of the taxpayer's remaining 50% interest in the property, thus creating a potential capital gain in the deceased's final tax return. The principal exception to subsection 70(5) of the Act is contained in subsection 70(6) of the Act, which provides a tax-deferred rollover of property transferred to the taxpayer's spouse at the time of the taxpayer's death. The rollover automatically applies unless an election is made under subsection 70(6.2) of the Act to have the provisions of subsection 70(5) of the Act apply. Under the rollover provisions in subsection 70(6) of the Act, the taxpayer is deemed to have disposed of his remaining 50% interest in the property for POD equal to the lesser of the capital cost and cost amount of depreciable property, and in any other case the ACB of the property to the taxpayer, immediately before his death. The spouse is deemed to have acquired the property at the time of the taxpayer's death at a cost equal to those proceeds.

Despite the exception in subsection 70(6) of the Act, the taxpayer's legal representative may elect under subsection 70(6.2) of the Act, to have the provisions of subsection 70(5) apply, in which case the taxpayer is deemed to have disposed of his remaining 50% interest in the property at its FMV immediately before his death, and the spouse is deemed to have acquired the taxpayer's remaining 50% interest in the property at the time of the taxpayer's death at a cost equal to those proceeds. Paragraph 2 of IT-305R4 "Testamentary Spouse Trusts" states that an election made under subsection 70(6.2) of the Act must be made in the deceased's regular income tax return for the year of death. If the taxpayer's legal representative elects under subsection 70(6.2) of the Act to report the deemed disposition of the property at FMV in the taxpayer's final return, then the taxpayer may have a capital gain or loss at that time on the deemed disposition of his remaining 50% interest in the property. Your memorandum states that the taxpayer's representative reported a deemed disposition of the property at FMV in the taxpayer's final return.

Subsections 74.1(1) and 74.2(1) of the Act contain the attribution rules for transfers of property to a spouse. These rules generally attribute the income and capital gains and losses on the transferred property of the transferee back to the transferor, while the transferor is alive, so as to prevent income splitting. However, IT-511R "Interspousal and certain other transfers and loans of property" states under the exclusions at paragraph 18, that subsections 74.1(1) and 74.2(1) of the Act do not apply to attribute any income or loss or any taxable capital gains or allowable capital losses to the transferee that relate to a period following the death of the transferor or transferee. Therefore, the attribution rules do not apply upon the deemed disposition of the property at the time of the taxpayer's death. For greater certainty, any capital gain realized from a disposition of the property after the death of the transferor would be reported by the spouse.

A subsequent sale of the property by the spouse to an arm's length party would result in a disposition of the property. Any capital gain or loss to the spouse would be calculated using an ACB of the property comprised of the sum of two amounts. The first amount is determined under subsection 73(1) of the Act. This is the amount determined at the time of the change in beneficial ownership of the property (50% of the UCC of depreciable property and, in any other case, 50% of the ACB of the property to the taxpayer, immediately before the transfer).

The second amount is determined under subsection 70(6) of the Act, unless an election was made under subsection 70(6.2) of the Act to have the rollover provisions not apply.

Your memorandum asks us to assume that the taxpayer elected under subsection 70(6.2) of the Act. Therefore, the second amount is determined under 70(5) of the Act and is the FMV of the taxpayer's remaining 50% interest in the property immediately before his death.

If the property meets the definition of "qualified farm property" in subsection 110.6(1) of the Act, any capital gain resulting from the disposition thereof by the taxpayer or the spouse, as the case may be, may qualify for a capital gains deduction pursuant to subsection 110.6(2) of the Act provided all the requirements of that section have been met. A review of all the facts surrounding a situation would be required to determine whether a particular property meets the requirements of a qualified farm property.

We will next consider the situation where the taxpayer is able to refute the general presumption that the holder of the legal title of a property is also the beneficial owner of the property. Where there is no change in beneficial ownership of a property upon its transfer from sole ownership by the taxpayer to joint tenancy with his spouse there is no disposition for the purposes of subsection 248(1) of the Act. In this situation, a true joint tenancy arrangement would not exist, and the spouse would not have acquired an interest in the property at that time for tax purposes. Accordingly, there would be no tax consequences to the taxpayer or his spouse at the time of the transfer.

Upon the taxpayer's death, subsection 70(5) of the Act would trigger a deemed disposition of the taxpayer's 100% interest in the property at proceeds equal to the FMV of the property at that time, unless the automatic rollover provision in subsection 70(6) of the Act applies where property is transferred to a spouse. Under the rollover provisions in subsection 70(6) of the Act, the spouse is deemed to acquire the taxpayer's 100% interest in the property at a cost equal to the lesser of the capital cost and cost amount of depreciable property, and in any other case the ACB of the property to the taxpayer, immediately before the taxpayer's death.

As noted above, you ask us to assume that the taxpayer elected under subsection 70(6.2) of the Act. Therefore the rollover provision in paragraph 70(6) of the Act will not apply, and pursuant to subsection 70(5) of the Act the taxpayer will have a deemed disposition of the entire property at the FMV of the property immediately before the taxpayer's death. In this situation, the spouse
will be deemed to acquire the taxpayer's 100% interest in the property at a cost equal to its FMV immediately before the taxpayer's death.

Upon the sale of the property by the spouse to a third party, any capital gain or loss from its disposition would include only the gain or loss that accrued since the time the spouse acquired her 100% interest in the property. Any capital gain to the taxpayer or the spouse resulting from a deemed or actual disposition of the property may qualify for the capital gains deduction calculated pursuant to subsection 110.6(2) of the Act if the property meets the provisions of qualified farm property in subsection 110.6(1) of the Act, as previously discussed.

For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Revenue Agency's electronic library. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the electronic library version, or they may request a severed copy using the Privacy Act criteria, which does not remove client identity. Requests for this latter version should be made by you to Mrs. Celine Charbonneau at (613) 957-2137. A copy will be sent to you for delivery to the client.

Yours truly,

Roger Filion
for Acting Director
Ontario Corporate Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch