Q: My husband and I own a condo as an investment property. We want to transfer the title to my father who doesn’t own any property to avoid paying tax on the capital gain. Now, I have two questions regarding the tax on capital gain that we should pay, as well as land transfer fee that my dad has to pay: (a) If we give the condo to my dad as a gift or sell it to him for let’s say $1, do we need to pay tax on the capital gain based on the current market value of the house? In this case, does he need to pay land transfer fee on the house based on market value? Or based on selling price? What happens if we sell it to my dad with a price lower than the actual market value with no capital gain for us.
A: When you transfer property to a related adult other than your spouse, it is considered to be a deemed disposition at fair market value (FMV) at the date of transfer. Any increase in value of the property over its adjusted cost base (ACB), less outlays and expenses, is your taxable gain. Outlays and expenses are deducted from the proceeds of disposition and can include commissions, legal fees, and transfer taxes.
Unfortunately, transferring at an amount less than FMV does not circumvent any tax rules. You would have to check with the municipal property tax office to see what the rules are for the purposes of determining the amount of any transfer taxes.
For your information, in the case of transfers to a spouse, the Income Tax Act assumes the transfer to be at the ACB under Subsection 73(1). Upon subsequent sale during your lifetime, special “Attribution Rules” require the capital gain would be reported by the transferor.
However, spouses may elect not to have Subsection 73(1) apply, and use FMV if that is more advantageous; for example to utilize the losses of one spouse against the gains of the other. In that case, a subsequent sale in the future is taxed in the hands of the transferee. It’s prudent in this case to seek professional advice to structure this properly to ensure the property is properly acquired and sold.
Evelyn Jacks is president of Knowledge Bureau, which offers e-learning at knowledgebureau.com. Evelyn tweets @evelynjacks and blogs at evelynjacks.com
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