Transfers of property between related parties for less than fair market value is always problematic.
Consider two scenarios, one a typical Estate Plan involving a “gift” of property to a related party and second a transfer of property to a related corporation at a value of something less than fair market value.
In the first scenario, the gift technique would result in a deemed disposition at fair market value to the Transferor which could result in a taxable capital gain to the Transferor. A worse result would be a transfer value at something more than as free “gift” but still less than fair market value. The Transferor would still have a deemed disposition and possible capital gains at the full fair market value, but the Transferee would receive the property at the transfer value (unlike in the pure “gift” scenario where the Transferee would receive the property at a cost equal to fair market value – although this may too be problematic). This would result in double taxation when the Transferee eventually sells the property and cannot claim the original fair market value as the cost base of the property sold.
In the second scenario, again the transfer is deemed to occur at fair market value to the Transferor. The Transferor may therefore incur a taxable capital gain. However, as in the scenario above, the Transferee receives the property at a cost equal to the transfer value. Therefore, the Transferee would incur a larger gain (again double taxation) on the eventual sale of that property. In addition, CRA may apply a taxable benefit to the shareholder of any of the Transferor or Transferee corporations equal to the difference between fair market value and the transfer price. This may result in triple or quadruple taxation!
Given the complexity and the punitive nature of being offside on taxation law, taxpayers should consult with their tax accountant, preferably one that has a CPA (Chartered Professional Accountant) or CA (Chartered Accountant) designation to ensure the corporate structures, transactions, and business practices are in-line of tax law. Our CPA – CA accounting firm based in Edmonton are highly experienced in income tax matters and would be pleased to assist in your personal tax or business tax matters.
ROMANOVSKY & ASSOCIATES LLP
CHARTERED PROFESSIONAL ACCOUNTANTS
Keith M.J. Anderson* BCom, CPA, CA-IT, CITP
Chartered Professional Accountant and Chartered Accountant (Canada)
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