6 July 2006 External T.I. 2005-0152011E5 - Transfer of title to joint ownership with child

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: The income tax consequences of transferring title to property (principal residence) to joint ownership with child.

Position: General comments provided.

Reasons: Definition of the term "disposition" [par. 248(1)(e)]. Whether there has been a disposition when the sole owner of the real property transfers title to joint ownership with his or her child will depend on whether there has been an actual change in beneficial ownership of the property, which is a question of fact.

XXXXXXXXXX Tim Fitzgerald, CGA
2005-015201
July 6, 2006

Dear XXXXXXXXXX:

Re: Joint Ownership

This is in reply to your undated letter, which was received by Winnipeg Revenue Processing Centre on June 28, 2005. Your letter was forwarded to this Directorate for response. We apologize for the delay in responding to you.

In your letter you refer to a situation where for estate planning purposes, the sole owner of a real property (Mr. A), your father-in-law, transferred title of his principal residence into joint tenancy with his adult son (Mr. B), your husband. Your father in-law continued to inhabit the home up until the time that he died. Throughout the period of joint ownership, you and your husband maintained a personal residence elsewhere and have no intention of ever making the other house your principal residence.

You have asked what the capital gains tax implications will be when Mr. B sells the property, assuming that the property increases in value.

Our Comments:

The particular situation outlined in your letter appears to be a factual one involving specific taxpayers. As explained in Information Circular 70-6R5, it is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an Advance Tax Ruling. Should your situation involve a specific taxpayer and a completed transaction, you should submit all relevant facts and documentation to the appropriate Tax Services Office for their views. However, we offer the following general comments.

By virtue of paragraph (e) of the definition of "disposition" in subsection 248(1) of the Income Tax Act ("the Act"), a disposition generally does not include a transfer of property where there is no change in the beneficial ownership of the property. The concepts of "beneficial ownership" and "legal ownership" are discussed in Interpretation Bulletin IT-437R, which can be found at our website at the following web page address: http://www.cra-arc.gc.ca/cgi-bin/jsearch3.cgi.

It is always a question of fact whether there has been an actual change in beneficial ownership when one changes sole ownership of a property to joint tenancy ownership. A written agreement would not, in and by itself, be conclusive evidence that beneficial ownership has in fact changed. A joint tenancy is a form of ownership of property. By operation of the law dealing with property held in joint tenancy, in the event of the death of one of the joint tenants, the property will usually belong solely to the surviving joint tenant.

In addressing your question, we first consider the situation where the sole owner of a real property transfers title to the property into joint ownership with another person where beneficial ownership has changed and there is a disposition for income tax purposes.

In the situation where beneficial ownership changes, a transfer of property from sole ownership into true joint tenancy between Mr. A and Mr. B would result in a disposition of 50% of the Mr. A's interest in the property at that time. Pursuant to paragraph 69(1)(b) of the Act, Mr. A's deemed proceeds of disposition would be equal to 50% of the fair market value (FMV) of the entire property at that time. Pursuant to subsection 43(1) of the Act, Mr. A's adjusted cost base of the interest disposed of would be equal to 50% of the adjusted cost base of the entire property. The adjusted cost base is subtracted from the proceeds of disposition to compute the capital gain. Generally, a capital gain on disposition of a "principal residence", as defined under section 54 of the Act, would not be subject to tax by virtue of the principal residence exemption provided in paragraph 40(2)(b). Since the property is where Mr. A ordinarily resides, he could designate it as his principal residence. This would allow him to claim the principal residence exemption under paragraph 40(2)(b) of the Act in respect of any capital gain realized on the disposition of his 50% interest in the property.

Paragraph 69(1)(c) of the Act provides that property acquired by way of gift would be deemed to have been acquired at its FMV. Thus where beneficial ownership has in fact changed, Mr. B would acquire a 50% interest in the property at the amount equal to Mr. A's deemed proceeds of disposition.

Upon his death, Mr. A is deemed pursuant to paragraph 70(5)(a) of the Act, to have immediately before his death, disposed of his remaining 50% interest in the property for proceeds of disposition equal to its FMV at that time. Generally, Mr. A's gain from the deemed disposition of the remaining 50% interest in the property would not be subject to tax by virtue of the principal residence exemption under paragraph 40(2)(b), if he continued to reside in the property until death. Pursuant to paragraph 70(5)(b) the surviving joint owner, Mr. B would be deemed to have acquired his additional 50% interest in the property at a cost equal to Mr. A's deemed proceeds of disposition. Therefore, Mr. B's total cost of the property would be equal to the sum of the FMV of the 50% interest acquired when the ownership of the property was transferred into joint tenancy and the FMV of the 50% interest acquired upon the death of Mr. A.

Secondly, we consider in contrast, the situation where the sole owner of a real property transfers title to the property into joint ownership with another person but beneficial ownership has not changed.

If beneficial ownership has not changed, no disposition for tax purposes will have occurred on the transfer of property by Mr. A from sole ownership to joint ownership with Mr. B. In that situation, a true joint tenancy arrangement would not exist and for tax purposes, Mr. B acquires no interest in the property at that time.

Upon his death, Mr. A would be deemed pursuant to paragraph 70(5)(a) of the Act, to have immediately before his death, disposed of the property (his 100% interest) for proceeds of disposition equal to its FMV at that time. Generally, Mr. A's capital gain from the deemed disposition would be reduced or eliminated by virtue of the principal residence exemption provided under paragraph 40(2)(b), if he ordinarily inhabited the property.

Upon the death of Mr. A, sole title to the property passes directly to Mr. B. Pursuant to paragraph 70(5)(b), Mr. B is deemed to have acquired his 100% interest in the property at a cost equal to Mr. A's deemed proceeds of disposition immediately before death.

Finally, we consider the tax implications to Mr. B when he disposes of the property.

When Mr. B disposes of the property, any resulting capital gain must be reported on his income tax return for the year. In the case where there was a change in beneficial ownership when Mr. A transferred the sole ownership of the property to joint tenancy with Mr. B, any gain reported by Mr. B from disposition of the property would include (in addition to the gain accrued on the 50% interest acquired upon death of Mr. A) the gain that accrued on Mr. B's s initial 50% interest in the property since the time he acquired it when sole ownership of the property was changed to joint tenancy. In contrast, where there was no change in beneficial ownership, any gain reported by Mr. B from disposition of the property would include only the gain that accrued since the time Mr. B acquired his 100% interest in the property (upon Mr. A's death). Very generally, a taxpayer's gain from the disposition of a property is the amount, if any, by which the taxpayer's proceeds of disposition exceed the adjusted cost base to the taxpayer of the property immediately before the disposition and any outlays and expenses to the extent that they were made or incurred by the taxpayer for the purpose of making the disposition. The taxable capital gain will equal 50% of the capital gain. Based on the brief information provided in your letter, Mr. B would not qualify for the principal residence exemption under paragraph 40(2)(b) to reduce or eliminate the capital gain. This exemption applies only in respect of a property that is ordinarily inhabited as a principal residence. Further discussion regarding the principal residence exemption can be found in information bulletin IT-120R6.

We trust our general comments are of assistance.

Yours truly,

Sandy Parnanzone
Manager
Business Incentives and Capital Transactions Section
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch