One of the growing more common estate planning points is to “gift” property to adult children/grandchildren/etc. before death so that the property is no longer part of the estate and therefore is not part of the Will. “Gifts” of property (investments, real property, etc.) create a deemed disposition whereby the transferor recognizes a deemed disposition at fair value (which may create a taxable gain) and the transferee receives the property at a cost equal to that fair value (“proceeds” = fair value). However, if a property is transferred at less than fair value (say a “sale” at 50% of the fair value) the transferor is still deemed to have disposed of it a fair value, but the transferee will now receive the property at the cost equal to only the 50% of fair value in my example. In essence, this would create a double taxation situation in that the transferor pays tax at the fair value but the transferee has a cost basis for a future sale at 50% of the fair value. This problem becomes acute when the property in question is real property – say a lake house. Often these types of transfers are intended as “gifts” but for legal purposes the transaction is recorded at proceeds of $1 (because legal contracts require some “consideration” to be paid to be enforceable). The intention is that the transfer is a “gift” but since there are “proceeds”, the transaction may be interpreted as a “sale” at less than fair value. This would normally result in the transferor paying tax at the fair value but the transferee receiving a cost of the $1 consideration – which is the worst type of result. CRA would likely administratively accept this type of transaction as a “gifting” transaction which avoids the double tax problem. But just to be safe, it would be preferable that any legal documents reflect the intention of the “gift” and any nominal consideration is just for legal enforcement. As all property transfers are complex, It is critical to speak with us before any such large transfer of property to ensure that all the tax issues are properly dealt with.
ROMANOVSKY & ASSOCIATES LLP
CHARTERED PROFESSIONAL ACCOUNTANTS
Keith M.J. Anderson* BCom, CPA, CA-IT, CITP
Chartered Professional Accountant and Chartered Accountant (Canada)
CA-Designated Information Technology Specialist (Canada)
Certified Information Technology Professional (US)
* Professional Corporation