13 October 1998 External T.I. 9802885 - JOINT TENANCY

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: Whether the transfer of title of wholly owned property to joint ownership constitutes a disposition when there is no change in beneficial ownership.

Position: No disposition.

Reasons: Paragraph (e) of the definition of the term disposition in subsection 54(1) of the Act makes it clear that a disposition will not occur as a result of any transfer of property by virtue of which there is a change in legal ownership without any change in beneficial ownership. It is not clear if in such a situation, probate fees upon the death of one of the joint owners would be eliminated.

XXXXXXXXXX 						5-980288
T. Murphy
October 13, 1998

Dear Sir:

Re: Transfer of Title to Real Property

We are writing in response to your letter dated February 2, 1998, wherein you requested an advance income tax ruling on whether children who are registered on title of their mother's property can avoid future capital gains on either the sale of the property or on the mother's death.

Specifically, the mother would agree to have her two children registered on title (a joint ownership arrangement) of a property which qualifies as her principal residence. The children would, by letter, acknowledge that they decline beneficial interest in the property during their mother's lifetime and that should their mother become disabled or incapacitated the monies from the disposition of the property would be used at her discretion, or on her behalf, for her care and maintenance during her lifetime. You state that the purpose of registering the children on title is to reduce legal and probate fees payable on the mother's death.

An advance ruling is a written statement given by the Department to a taxpayer stating how it will interpret specific provisions of existing Canadian income tax law in its application to a definite, proposed transaction or transactions which the taxpayer is contemplating. Full disclosure is required and where the transaction is to be completed at some indefinite future time or where satisfactory evidence is lacking that a proposed transaction is being seriously contemplated, the request for an advance ruling may be refused. Additionally, where a matter on which a determination is requested is primarily one of fact, and the circumstances are such that all the pertinent facts cannot be established at the time of the request for the advance ruling, an advance ruling will not be granted. The attached Information Circular 70-6R3 contains more information on the advance income tax rulings process. While we are not in a position to provide an advance income tax ruling at this time, we offer the following general comments that may be of assistance to you.

Our 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 I of the Act, a disposition will not occur as a result of any transfer of property by virtue of 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. The children's acknowledgement letter referred to above would not, in and by itself, be conclusive evidence that beneficial ownership has not changed. 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.

In our view, if in fact beneficial ownership has not changed, no disposition for tax purposes will have occurred on the transfer of the property to a joint ownership arrangement. Neither child therefore, would be faced with a capital gain if the property is sold prior to the mother's death or on the mother's death. However, we would caution you, that in such a situation, a true joint tenancy arrangement does not exist and, in our view, the objective of reducing probate fees is not achieved.

If, however, beneficial ownership does change, it is our view that the transfer of the property to a joint ownership arrangement would result in a disposition pursuant to section 54 of the Act of 66% of her interest in the property. Pursuant to paragraph 69(1)(b) of the Act, the deemed proceeds of disposition would be equal to 66% of the fair market value of the property. The adjusted cost base of the interest disposed of would be equal to 66% of the adjusted cost base of the entire property pursuant to section 43 of the Act. Generally, a gain on the disposition of a principal residence would not be subject to tax by virtue of paragraph 40(2)(b) of the Act (the "principal residence exemption").

Paragraph 69(1)(c) of the Act provides that property acquired by way of gift is deemed to have been acquired at its fair market value. Thus, each child would acquire his or her 33% interest in the property at the amount equal to one-half of the deemed proceeds of disposition to the mother. The 33% interest in the property retained by the mother would be subject to the provisions of subsection 70(5) of the Act upon her death (assuming the property has not otherwise been disposed of before that time); specifically, paragraph 70(5)(a) of the Act would operate to deem her to have disposed of her joint interest in the property immediately before her death for proceeds equal to its fair market value. Generally, this gain would not be subject to tax by virtue of the principal residence exemption. No capital gain would accrue to the children on the mother's death. In accordance with paragraph 70(5)(b) of the Act, each child would acquire his or her additional interest in the property at one-half of deemed proceeds under paragraph 70(5)(a) of the Act.

In our view, if the property is sold prior to the death of the mother, 66% of the proceeds of disposition would be allocated to the children's interest, and any increase in value from the date of the transfer of the property into joint ownership (assuming a change in beneficial ownership) would create a capital gain. As the definition of principal residence in section 54 of the Act would require, among other things, that the home ordinarily be inhabited by the children it is unlikely that either of them would qualify for the principal residence exemption with respect to their share of the gain.

We trust our comments will be of assistance to you.

R.S. Biscaro, CA
Director
Resources, Partnerships and Trusts Division
Income Tax Rulings and Interpretations Directorate
Policy and Legislation Branch
Attachments