19 May 1999 External T.I. 9907965 - CAPITAL GAINS/ JOINT TENANTS

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

An individual is considering a joint tenancy arrangement to avoid probate fees by adding the son to an account currently in the names of the father and mother. He plans to recognize capital gains on the original allocation to the son (1/3), on the death of the 1st parent (1/6) and the remainder (1/2) on the death of the remaining parent. These calculations are based on the capital gains remaining static throughout the period under consideration. He would like an accounting and legal opinion of the transaction.

Position TAKEN:

Provided that beneficial ownership has changed, the transaction complies with the legislation as it currently reads.

Reasons FOR POSITION TAKEN:

Agrees with prior opinions.

XXXXXXXXXX 5-990796
D. Miller
May 19, 1999

Dear XXXXXXXXXX:

Re: Capital Gains

This is in reply to your letter of March 22, 1999, regarding capital gains as they apply to the creation of a Joint Tenancy with Right of Survivorship (“JTWROS”).

We understand you are considering the creation of a JTWROS arrangement to avoid probate fees. You plan no written agreement but there will be a legal and beneficial ownership change by forming a new account adding the son to an existing joint account currently under the father and mother. Since this transaction will be considered a disposition, a capital gain will result on the transfer to the son. In your example there are accrued gains of $120,000 and a current fair market value (“FMV”) of $400,000. Each of the parents would be transferring 1/3 of their account to the son resulting in a capital gain of $20,000 each. On the death of one of the parents, 50% of that parent’s interest in the property would flow to the remaining spouse tax free at the adjusted cost base (“ACB”), while the other 50% would flow to the son at FMV resulting in a capital gain of $20,000. When the remaining parent dies the balance of the property flows to the son and a capital gain of $60,000 on the remainder of the property is realized and taxed on that parent’s tax return prior to death.

Our Comments

Written confirmation of the tax implications inherent in particular transactions are given by this Directorate only where the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R3, dated December 30, 1996. Where the particular transactions are completed, the enquiry should be addressed to the relevant tax services office. However, we are prepared to offer the following general comments.

Paragraph (e) of the definition of the term “disposition” in Section 54 of the Income Tax Act (the “Act”) makes it clear that, for purposes of subdivision c of Division B of Part 1 of the Act, a disposition will not occur as a result of any transfer of property in which there is a change in legal ownership of the property without any change in the beneficial ownership thereof. It is a question of fact whether there has been a change in the beneficial ownership. In this regard, reference should be made to paragraphs 2 to 5 of Interpretation Bulletin IT-437R (attached) for the Department’s position on what constitutes beneficial ownership.

Where a change in beneficial ownership does occur, as is the situation you have asked us to consider, the transfer of assets owned by the parents into a joint tenancy arrangement between the parents and their son will result in a disposition by the parents pursuant to section 54 of the Act, of a third of their collective interest in the property. Pursuant to paragraph 69(1)(b) of the Act, the deemed proceeds of disposition of each asset will be equal to one third of its FMV. The ACB of the interest disposed of will be equal to one third of the ACB of all the assets pursuant to section 43 of the Act. Paragraph 69(1)(c) of the Act provides that assets acquired by way of a gift are deemed to have been acquired at FMV. Thus, the son would acquire his one third interest in the property at the amount equal to the total deemed proceeds of disposition to the parents.

By operation of law, upon the death of the parents, the assets will pass directly to the son and will not form part of the deceased’s estate, hence easing estate administration for probate purposes. If the assets are sold prior to the deaths of the parents, one third of the proceeds of disposition would be allocated to the son’s interest, and any increase in value from the date of the transfer of the assets into joint ownership would result in a capital gain. Likewise, since the attribution rules do not apply to a gift of capital property to a child over the age of 17, one third of any income on the assets would be required to be included in the son’s income.

The provisions of subsection 70(5) of the Act, will operate to deem a deceased to have disposed of their interest in the property immediately before their death for proceeds equal to its FMV. For the same reasons, and in accordance with paragraph 70(5)(b) of the Act, the individual acquiring the property, deemed to have been disposed of, acquires that property at its FMV. If the person acquiring the property is the spouse of the deceased person, subsection 70(6) applies, deeming the spouse to have acquired the property at the ACB of the taxpayer immediately before their death.

Please note that in the last paragraph on page 1 of your letter, you state “1/6 of the father’s assets and 1/6 of the mother’s assets are transferred to son...”. This reference should be 1/3. Also in page 2 you describe the tax treatment on the death of the parents. The $15,000 taxable capital gain in the first instance and the $45,000 taxable capital gain in the second, would be reported on the deceased person’s tax returns, not the son’s, as the property is deemed to have been disposed of immediately before death. We agree with the remainder of your analysis.

We trust you will find the above comments to your satisfaction.

Yours truly,

Jim Wilson
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch