30 November 2010 External T.I. 2010-0355101E5 - Disposition of property to a non-resident

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: What are the tax consequences when a resident of Canada gifts property situated in XXXXXXXXXX to his daughter resident of XXXXXXXXXX ?

Position: Capital gain or loss, assuming the property is capital property.

Reasons: The property is deemed to be disposed of, and acquired, at fair market value. However, we do question why the daughter sold the property very shortly after the taxpayer gifted it to her.

XXXXXXXXXX
									2010-035510

November 30, 2010

Dear XXXXXXXXXX :

Re: Disposition of property situated outside Canada

I am writing in reply to your letter that we received on January 22, 2010, in which you asked our opinion in relation with the disposition of property situated in XXXXXXXXXX .

All statutory references in this letter are references to the provisions of the Income Tax Act, R.S.C. 1985 (5th supp.) c. 1, as amended (the "Act").

More specifically, you indicate having inherited XXXXXXXXXX of a parcel of land situated in XXXXXXXXXX in late XXXXXXXXXX or at the start of XXXXXXXXXX . In the spring of XXXXXXXXXX , you gifted your interest in the parcel of land to your daughter, who at that time was a resident of XXXXXXXXXX . Soon after receiving this property, your daughter sold her interest in the lot to an unrelated third party.

You wish to understand the tax implications to you as a resident of Canada of the transactions described above.

Our Comments

The particular situation outlined in your fax appears to relate to a factual one, involving a specific taxpayer. Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant tax services office. In addition, we note that we do not have a complete picture of your situation. However, we are prepared to offer the following general comments, which may be of assistance.

A taxpayer resident in Canada is taxable on his income derived from sources inside or outside Canada. The tax payable on such income is computed on the basis of:

(a) computation of income;
(b) computation of taxable income; and
(c) computation of tax.

Hence, when a resident of Canada disposes of capital property, he or she must generally include, in the computation of his or her income, half of the capital gain realized on the disposition. Conversely, half of any capital loss realized can be used to offset capital gains.

When a taxpayer disposes of property to person with whom the taxpayer does not deal at arm's length for proceeds of disposition less than the fair market value of the property, the taxpayer is deemed to have received proceeds of disposition equal to the fair market value of the property. Conversely, when a taxpayer acquires property by way of a gift, the taxpayer is deemed to have acquired the property at its fair market value.

In your situation, assuming that you disposed of capital property when you gifted your interest in the parcel of land to your daughter, in order to calculate any capital gain or capital loss arising from the disposition, you would use the fair market value at the time the gift was made as your proceeds of disposition. Any capital gain or loss should be reported on your return of income for the year in which the property was disposed. As your daughter is not resident of Canada for the year in which she disposed of her interest in the parcel of land to an unrelated third party, there would not be any Canadian income tax issues affecting her in respect of this transaction.

Lastly, although we have no information on this, we question the reasons behind the short time between the gifting of the parcel of land to your daughter and the sale by her of the parcel to an unrelated third party.

We trust that these comments will be of assistance.

Yours truly,

François Bordeleau, LL.B.
Manager
Business and Partnerships Section
Income Tax Rulings Directorate