My name is Mark Goodfield. Welcome to The Blunt Bean Counter ™, a blog that shares my thoughts on income taxes, finance and the psychology of money. I am a tax partner and the managing partner of Cunningham LLP in Toronto. This blog is meant for everyone, but in particular for high net worth individuals and owners of private corporations. The views and opinions expressed in this blog do not reflect the position of Cunningham LLP. My posts are blunt, opinionated and even have a twist of humor/sarcasm. You've been warned.

Monday, May 27, 2013

Transferring Property Among Family Members - A Potential Income Tax Nightmare

In today’s blog post, I will discuss the income tax implications relating to the transfer of property among family members. These transfers often create significant income tax issues and can be either errors of commission or errors of omission. Over my 25 years as an accountant, I have been referred some unbelievably messed up situations involving intra-family transfers of property. Most of these referrals come about because someone has read an article and decides they are now probate experts or real estate lawyers have decided they are also tax lawyers. 

Transfers of Property - Why They Are Undertaken


Many individuals transfer capital properties (real estate and common shares, being the most common) in and amongst their families like hot cakes. Some of the reasons for undertaking these transfers include: (1) the transferor has creditor issues and believes that if certain properties are transferred, the properties will become creditor protected (2) the transferor wishes to reduce probate fees on his or her death and (3) the transferor wishes to either gift the property, transfer beneficial title or income split with lower-income family members.

I will not discuss the first reason today because it is legal in nature. But be aware, Section 160(1) of the Income Tax Act can make you legally responsible for the transferor's income tax liability and there may be fraudulent conveyance issues amongst other matters.

Transfers of Property - Income Tax Implications


When a property is transferred without consideration (i.e. as gift or to just transfer property into another person's name), the transferor is generally deemed to have sold the property for proceeds equal to its fair market value (“FMV”). If the property has increased in value since the time the transferor first acquired the property, a capital gain will be realized and there will be taxes to be paid even though ownership of the property has stayed within the family. For example, if mom owns a rental property worth $500,000 which she purchased for $100,000 and she transfers it to her daughter, mom is deemed to have a $400,000 capital gain, even though she did not receive any money.

There is one common exception to the deemed disposition rule. The Income Tax Act permits transfers between spouses to take place at the transferor’s adjusted cost base instead of at the FMV of the capital property.

This difference is best illustrated by an example: Mary owns shares of Bell Canada which she purchased 5 years ago at $50. The FMV of the shares today is $75. If Mary transferred the shares of Bell Canada to her brother, Bob, she would realize a capital gain of $25. If instead Mary transferred the shares of Bell Canada to her husband, Doug, the shares would be transferred at Mary’s adjusted cost base of $50 and no capital gain would be realized. It must be noted that if Doug sells the shares in the future, Mary would be required to report the capital gain realized at that time (i.e. the proceeds Doug receives from selling the shares less Mary’s original cost of $50) and Mary would be required to report any dividends received by Doug on those shares from the date of transfer.

As noted in the example above, when transfers are made to spouses or children who are minors (under the age of 18), the income attribution rules can apply and any income generated by the transferred properties is attributed back to the transferor (the exception being there is no attribution on capital gains earned by a minor). The application of this rule is reflected in that Mary must report the capital gain and any dividends received by Doug. If the transferred property is sold, there is often attribution even on the substituted property.

We have discussed where property is transferred to a non-arm’s length person that the vendor is deemed to have sold the property at its FMV. However, what happens when the non-arm’s length person has paid no consideration or consideration less than the FMV? The answer is that in all cases other than gifts, bequests and inheritances, the transferees cost is the amount they actually paid for the property and there is no adjustment to FMV, a very punitive result.

In English, what these last two sentences are saying is that if you legally gift something, the cost base and proceeds of disposition are the FMV. But if say your brother pays you $5,000 for shares worth $50,000, you will be deemed to sell the shares for $50,000, but your brothers cost will now only be $5,000; whereas if you gifted the shares, his cost base would be $50,000. A strange result considering he actually paid you. This generally results in “double taxation” when the property is ultimately sold by the transferee (your brother in this case), as you were deemed to sell at $50,000 and your brothers gain is measured from only $5,000 and not the FMV of $50,000.

Transfers of a Principal Residence - The Ultimate Potential Tax Nightmare


I have seen several cases where a parent decides to change the ownership of his or her principal residence such that it is to be held jointly by the parent and one or more of their children. In the case of a parent changing ownership of say half of their principal residence to one of their children, the parent is deemed to have disposed of ½ of the property. This initial transfer is tax-free, since it is the parent’s principal residence. However, a transfer into joint ownership can often create an unforeseen tax problem when the property is eventually sold. Subsequent to the change in ownership, the child will own ½ the principal residence. When the property is eventually sold, the gain realized by the parent on his or her half of the property is exempt from tax since it qualifies for the principal residence exemption; however, since the child now owns half of the property, the child is subject to tax on any capital gain realized on their half of the property (i.e. 50% of the difference between the sale price and the FMV at the time the parent transferred the property to the child, assuming the child has a principal residence of their own).

An example of the above is discussed in this Toronto Star story that outlines a $700,000 tax mistake made by one parent in gifting their principal residence to their children.

 

 

 

Transfers for Probate Purposes


As noted in the first paragraph, many troublesome family transfers are done to avoid probate tax. Since I wrote on this topic previously and this post is somewhat overlapping, I will just provide you the link to that blog post titled Probate Fee Planning - Income Tax, Estate and Legal Issues to consider.

Many people are far too cavalier when transferring property among family members. It should be clear by now that extreme care should be taken before undertaking any transfer of real estate, shares or investments to a family member. I strongly urge you to consult with your accountant or to engage an accountant when contemplating a family transfer or you may be penny wise but $700,000 tax foolish.

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs.

110 comments:

  1. Mark, what if I put my investments into joint ownership with my daughter and son, but I report the income for tax. Does that get me out of the tax problems and work for probate?

    ReplyDelete
  2. Anon,

    The CRA has stated that where there is only a change in legal title and not a change in beneficial ownership (the true owner) there would most likely not be a deemed capital gain, however, the CRA is of the view that a true joint tenancy does not exist and thus the objective of reducing probate fees has not been achieved.

    In plain language, reporting the income earned on assets transferred would be indicative (subject to actual legal agreements)that there has not been a true beneficial transfer and thus, the assets would still be subject to probate.

    ReplyDelete
  3. It's funny that the Star article refers to the couple "thinking with their heart instead of their head" but my immediate cynical impulse is to think that they were trying to avoid probate taxes and were bitten on the ass by not doing it properly, there was nothing well-intentioned about it.

    ReplyDelete
  4. Hey Lewin:

    I think you are partially right. Most intra family transfers have a twofold agenda. (1) Save probate and/or minimize taxes and (2)ensure property moves to your loved ones with the lowest tax cost. So I am not as cynical, but there definitely was a probate savings component, but what a costly mistake.

    ReplyDelete
  5. Hello Mark,

    First off, I really like your blog; it's informative and well written.

    I was a little confused in this post where you write:
    "We have discussed where property is transferred to a non-arm’s length person that the vendor is deemed to have sold the property at its FMV. However, what happens when the non-arm’s length person has paid no consideration or consideration less than the FMV? The answer is that in all cases other than gifts, bequests and inheritances, the transferees cost is the amount they actually paid for the property and there is no adjustment to FMV, a very punitive result."

    The example of buying something from a relative for less than FMV is clear, and demonstrates the strange tax implication. However, in the paragraph above, it seems you imply there is a difference between a gift/bequest/inheritance and a transfer where the recipient "has paid no consideration".

    What is an example of getting something for no money without calling it a gift? (maybe... theft?)

    Thanks

    - Brent

    ReplyDelete
    Replies
    1. Hi Brent:

      Good question. Bequests and inheritances tpically arise from legal docs. so fairly clear what they are.

      What I am getting at is that often someone requires some sort of payment, even as a token and that is where the double tax issue arises.

      In respect of your question, the difference between a gift vs getting something for no money would just be intention. However, they would often be one in the same, so I was a bit confusing. To show the intention, I would ensure a deed of gift drawn up by a lawyer.

      Delete
  6. Hi Mark,

    Here's another scenario on the Principal Residence exemption:
    My parents and I owned a farm jointly. I occupied the house (as my principal residence) and handled the expenses for it, while my parents continued to live in their own home (or principal residence). We shared income and expenses of the land. Upon sale of the house and land, should I have been able to claim 100% of the value of the house as my principle residence, or only the percentage ownership in which I held?

    ReplyDelete
  7. Suddenly, great handle.

    I would like to help, but working in TO I have no experience with farms and i know they have some funky rules.

    You need to engage and accountant on this, it is very complicated even without the farm issue.

    ReplyDelete
  8. Hi Mark,

    I have a cottage that I want to gift to my son but I have been told that it could hurt him down the road if he sells the property because his cost base would be zero even if I claim the capital gain when the transfer is completed.

    One, is this accurate? Secondly, I have enough cash that I could "gift" my son today and he could then purchase the property at fair market value. Would this be an acceptable transaction?

    Thanks,

    James

    ReplyDelete
    Replies
    1. Hi James:

      I do not provide specific income tax planning on the blog. However, I would suggest the advice you have been given in not correct if the transaction is properly executed and documented. Speak to your accountant or lawyer to ensure the facts provide for a tax free gift and ensure you have a deed of gift or whatever the lawyer suggests drawn up.

      Delete
    2. Hi Mark and James - this is another Jim,
      Cottages must be a clasic situation for transition (tax implications and FMV). My situation is Uncle gifting cottage to nephews. Not sure if this is different from a parent (anything to know there). It seems that if a legal document such as a "deed of gift" shows the gifting intent then there would be a FMV transition. I assume the FMV would impact both giver and receiver (s). If the giver had no other property, the cottage would be a PR to them = no cap gain. The receivers would be subject to future cap gains if they had their own PR - they would have to pick one for the overlapping ownership timeframe upon an eventual sale. HOw am I doing so far? However it would clearly be in the best interest of the receivers to establish a FMV as high as could be found in the market. How the heck does the FMV get established and documented? Cottages not in density cottage land are interesting. Hopefully you can validate some of the assumptions above and point me to something for a little focus on the FMV transition. We are not doing it just to avoid probate. We are doing it before people go crazy and this cottage transition gets difficult.
      Jim

      Delete
  9. Hello Mark,

    I have a client who currently lives in a home that his parents bought. They had bought the property 3 years ago for $250,000 on the intent that family (their son) would live in this home, pay the mortgage and not necessarily for revenue property.

    At this point, they are making arrangements to 'sell' this home at $250,000 to their son and daughter-in-law. Would there still be a FMV disposition, and impact on the parents to pay capital gains or not because the intent was for this property to help their children out? Not too clear on this... Your guidance is much appreciated...

    ReplyDelete
    Replies
    1. Hi Anon

      I do not provide specific income tax advice on this blog for obvious reasons. That being said, here are my general comments regarding situations of this type. The intent to "help" children is irrelevant. Transfers of property are deemed sold at the FMV, nothwithstanding a sale price at a lessor value.

      Delete
  10. Hi Mark I currently own my own principal residence and my parents are going to gift me a property (a part of their principal residence that they will subdivide) for me to build a new house on. Do i need to sell my principal residence first before accepting the gift property and building my new principal residence? or can i build on the gift property and then sell my own principal residence. wondering if there are any tax implication I need to consider timing-wise for the transaction
    Thanks!

    ReplyDelete
    Replies
    1. Hi Anon

      This is way to complicated a question to answer on a blog, you should speak to your accountant or your parents accountant. There is nothing stopping you from keeping your original PR however, you will need someone to explain the PR election and plus one rule and possibly the change in use rules to you and how they may apply to your situation.

      Delete
  11. Hi Mark,
    I've got a rental property 100% in my name and I would like to sell it to my spouse @ FMV. If I sell the property @ FMV and provide a spousal loan for any shortfalls is this considered an event significant enought to be treated as a deemed disposition where my spouse could recognize all cap gains and income solely in her name going forward?
    Really enjoy your blog.

    Thanks!

    ReplyDelete
    Replies
    1. Sorry, I should note on the above that this is being done primarily for income tax splitting purposes. My wife is a stay at home mom and would be managing the property for income.

      Delete
    2. Hi Anon

      I do not provide specific tax planning advice on this blog for obvious reasons. As your plan is somewhat complicated you should obtain income tax advice from an accountant. I will however suggest you consider the following issues. You will be deemed to have transferred the property to your wife at your ACB unless you elect out of the automatic spousal rollover. To elect out you must file an election with your tax return. Also you need to be cognizant of any recapture you may trigger upon transfer to your wife.

      Delete
  12. My wife and I are currently living in a condo in Toronto. We are thinking about buying a house for us to move into. My parents are thinking about selling their house and buying our condo to move into. I'm thinking of the best way to minimize the transactional costs. Could my parents give me money in the amount that is FMV of the condo and my wife and I would still keep the condo under our names while my parents live in the condo? This would avoid paying land transfer taxes and closing costs, and the condo would get transferred back to me when they pass away anyways. What are your thoughts on this plan?

    ReplyDelete
    Replies
    1. Hi Anon:

      I do not provide personal tax planning advice on this blog. However, what i dont like about your plan is your parents no longer have a tax free Principal residence and you only have one tax free property and one taxable.

      Delete
  13. Hi Mark, bit of a complicated situation;)
    Would you know how capital gains are treated if you receive a cash insurance settlement due to a fire on a rental property (total loss, home demo'd)...but you are keeping the land (vacant lot for now)? As you have not technically disposed of the property, would all or a portion of a gain be triggered now for Rev Can? or later (deferred) assuming land is sold or gifted 25 years down the road?...also, what implications if any would be had if a subdivided lot on the parcel was sold along the way? thanks:)

    ReplyDelete
    Replies
    1. Hey Anon

      Sorry, way to complicated to answer on a blog. However, check out this link for some info on replacement property rules.

      http://www.mnp.ca/en/media-centre/blog/2012/7/17/replacement-property-rules

      Delete
  14. Good day, Mark.

    Back in 06', I transferred my half of our principle residence to my wife. I had NO tax problems at the time, but I ended up with tax problems afterwards and had to declare bankruptcy in August 2012.

    She sold that house in 2011.

    Can you tell me if she is on the hook for anything?

    Thanks so much.

    ReplyDelete
    Replies
    1. Hi Anon:

      I do not provide personal tax advice on this blog, especially in fact specific cases such as this.

      Section 160 of the Act may cause your spouse to be responsible for your liability in certain situations, however, you need to review the criteria. The key for you is whether you were liable to pay tax under the Act at the time of the property transfer even if assessed after the transfer.

      I attach an article about the topic here

      http://www.dorislaw.com/?PGID=13&ARID=431

      Delete
    2. I think that was meant for me, thank you very much, Mark.

      Joe

      Delete
  15. Hi, my spouse & I and son bought a live/work property together. He lives there and runs her biz from there. We live in our principal residence. We put the full down payment in & he signed a promissory note agreeing to make payments for 1 year to pay off his portion of the down payment, and if not, he would forfeit his right to be on the title. He has not been able to make payments. We plan to transfer the home & mortgage over to our names and he will continue to live in the dwelling. What tax consequences are we looking at? Much thanks!

    ReplyDelete
  16. Hi Anon

    I don't provide specific personal advice on this blog just some direction

    In this case since there is family I would engage an accountant to sort out the issues for tax and provide some practical alternatives that may keep everyone happy

    ReplyDelete
  17. I have a home that has been mortgaged since 2003 and my sister has lived in it and paid the mortgage payment throughout the loan. She had bad credit so I helped in this way. I intend to transfer the title/home to her name when the loan is paid off. According to what I understand, I am liable to pay the taxes even though I receive nothing in profit?

    ReplyDelete
    Replies
    1. Hi Anon

      I am missing facts and I do not provide personal tax planning advice. However, in general if a home is in your name, even if done for credit or other purposes, a transfer would typically result in a gain equal to the Fair market value upon transfer less your original cost. It may be unfair, but you can only own one principal residence.

      Delete
    2. Merely being on the title of real property does not make you the 'actual' or beneficial owner under the law. The principal residence exemption belongs to the beneficial owner of the real property not the named entity on title. Usually it's both but not always.

      Generally speaking, if your sister is the common law beneficial owner of the home in question and it is her principal residence and you were brought on title, merely to satisfy a mortgage lender, she is entitled to the principal residence exemption and you are not liable for any capital gain.

      This article provides some insight:

      https://mail.google.com/mail/?tab=wm#search/beneficial+owner/143e692783486ae3?projector=1


      Delete
  18. From January 26, 2014 at 12:55 PM....the home is worth approximately $70K.

    ReplyDelete
  19. Hi mark

    Just came across your blog and hoping you are able to point me in the right direction. We are selling our primary residence to buy a house with an inlaw suite with our parents. We are going in 50/50 as far as down payments and mortgage payments go. Can we apply for a joint mortgage or can only one party hold the mortgage. If only one can hold it then it will most likely be our parents as they currently do not own a home or mortgage. It is our intention to pay them back for their purchase of the property or take over the mortgage for them. Can we do this without incurring tax implications. We are planning to visit an accountant but would appreciate any input you may have

    ReplyDelete
    Replies
    1. Hi Danny:

      I dont provide personal tax planning or mortgage advice on this blog. All I can say is the key for tax purposes will be the legal ownership of the property and to ensure that either you and/or your parents can claim the principal residence exemption. Your accountant should be ale to assist you. The mortgage is probably a red herring for tax, but I dont know all the facts, so discuss with your accountant.

      Delete
  20. Hello
    If you're the only one on the Title/Deed of the home you share with a second husband, does he still own half of it?

    ReplyDelete
    Replies
    1. Hi Anon

      Legally and for tax purposes your own the house, however, for family law purposes he may have a claim as family property. You would have to ask a family law lawyer, that is not my area

      Delete
  21. I have a rental property, when I bought it only my name on the deed but my husband do all the maintenance work and I almost do nothing. For the rent income can I put onto his income?

    ReplyDelete
    Replies
    1. Hi Anon

      In general only the legal owner can report the income. However, if it was your husbands money, you may be able to do something. Speak to an accountant.

      Delete
    2. We kind of get all the money from bank and line of credit of our house. But the mortgage is on my name. Just wondering how I should do it. Or need rollover the property?

      Delete
    3. I don't provide personal tax advice on this blog. Engage an accountant to advise. Based on the facts presented you may be able to at least split the rental, but u need advice.

      Delete
  22. Hi Mark,

    I just sold my principal residence (my only property) and lives with my son in his principal property (his only property). I plan to use the proceed from the sale of my house to pay off his mortgage. He then will transfer (100%) of his house to me as a gift and buy another property for himself as his principal residence. What will be the tax implication in this transaction, if any ?

    David

    ReplyDelete
    Replies
    1. Hi David

      Sorry, but I do not provide specific personal tax planning advice on this blog. FYI, you will want to check the land transfer tax in your province on the gift to understand if it is applicable or not.

      Delete
  23. My sister-in-law and her husband would like to purchase a second home to allow her daughter's family to live there. Rent would possibly be a little less than FMV, being enough to cover the mortgage payment. The home being purchased is a foreclosure, hence being purchased at less than FMV. Due to recent legislation, the daughter & her husband cannot apply for a home loan for 3 years, due to the fact that they just foreclosed on their principal residence. The idea would be for the daughter and her family to live there for 3 years and then purchase the house at the amount left on the mortgage at that point in time. Because the FMV is expected to be more than the cost basis and you have the related party rules to consider, could each parent gift both the daughter and her husband 14K at the time of sale (up to a total of $56K as needed), to absorb the difference between the mortgage balance and the selling price? Of course, it would be a on-paper gifting to satisfy the difference between the mortgage balance and selling price. Would this make it an arms length transaction and satisfy the related party rules? I realize the parents would have to realize a capital gain for the difference between original cost basis and FMV at time of sale, and additionally have 3 years of depreciation recapture at ordinary gain. Do you have any thoughts or a better suggestion?

    Mary

    ReplyDelete
    Replies
    1. Hi Mary,

      Unfortunately I do not provide personal tax planning advice on this blog. If your sister in law engages an accountant, they could probably sort this out in one consultation. You sort of have it, but I see other ways to go about this that an accountant could help u with.

      Delete
  24. Hi Mark,
    Came across your very informative blog by pure accident and it has left me perplexed.
    In the late 70s my father bought a house and offered it as lodgings for 3 siblings and myself. It made sense to him that his 4 children contributed equally to mortgage while he worked towards retirement overseas. Instead of paying rent to a landlord and having nothing to show for it, I must say it made sense to us too at the time. So legally we 4, were the owners of the house. My father retired and came to Canada and passed away a few years later. Before he did, he said that he wanted my youngest brother to inherit the house because he lived with and took of my parents. We agreed. After several years of procrastinating my brother (the inheritor) finally went to see a notary and we 4 siblings sold the house to him for a $1.
    What are the tax implications for the 4 of us? and for how long? My brother has agreed to pay (our capital gain) taxes the 4 of us are charged. I have the oddest feeling we are in deep ?&*t????

    ReplyDelete
    Replies
    1. Hi Anon

      I cant answer the questions because I would need to know if the siblings also had their own princiapl residences amongst other factors and I do not provide specific tax planning advice on this blog in any event. I would suggest however, you may have an issue and you should engage an accountant and provide them all the facts and they can confirm whether you do indeed have an issue and provide you some alternatives if their is an issue.

      Delete
  25. We recently bought a new home and intended to rent our first home (a townhouse). After the re-financing of the townhouse was completed (along with appraisals, etc) our son asked if he could 'buy' it instead. This 'buy' arrangement is such that I still have the mortgage on the property but he pays it, the property tax and all upkeep. On one hand, this is his principle residence and I am his 'mortgage company' while on the other it's a kind of rent-to-own arrangement except there's no benefit to me at all. How can I handle this from a tax perspective? Do I have to claim this as a rental? (in which case, almost half of what my son is building in equity is being paid by me in taxes!!).

    ReplyDelete
    Replies
    1. Hi Anon

      I do not provide personal tax planning and advice on this blog. The situation is a little complex. The first issue is did you transfer the property to your son or is it still in your name? Don't answer, just saying issue. You need to engage and accountant to help you through this so you create the most tax effective ownership and report what is required.

      Delete
  26. Hi There. Great content thank you. I'm trrying to make an important decision and would appreciate help. My daughter would like to get a condo. Should I buy this in her name and let her own this as her primary residence. or should I buy it and rent it to her as an income property. Which option would yield the most value. For example if she does buy she gets a rebate on welcome taxes as a firt time home buyer, can use her rrsp etc.. If I buy it, she pays fair market vaue rent which is income, but I claim the interest, maintenance, taxes, heating, etc. which seems in the early years will greatly offset the income. I realize I then would need to claim capital gains at disposition. Would appreciate your thought as to which you think would yield the best value. Thanks

    ReplyDelete
    Replies
    1. Hi Anon

      I don't provide specific income tax planning advice and to answer would require far too much work and way more info.

      All I will say is that if you are okay with the condo in her name (she has legal ownership), if the price goes up, it is tax-free as her PR as opposed to taxable as your rental property.

      Thus, you need to make a best estimate of how much the condo will increase in value, the potential tax savings on that capital gain at your personal rate and compare it to the rebate savings.

      The rental is much easier to deal with if it is owned by her and no income has to be reported.

      Delete
  27. Hi Mark,

    My spouse and I sold our principal residence and currently rent our accomodations.

    We invested the proceeds from the sale of our residence. How are we taxed on the investment income? For example, do we each pay tax on half of the income, or do attribution rules apply that require us to split the income based on our percentage ownership of the residence?

    Regards.

    ReplyDelete
    Replies
    1. Hi Anon

      Technically you report income based on the ownership of the residence, assuming the ownership reflected the funds contributed in the first place. Practically, I would suggest there are many Cdn's who report 50/50.

      Delete
  28. Hi Mark,

    So glad I found this discussion! My brothers and I inherited property upon the death of my mother in 2009. I believe a conservative estimate of the property value was $150,000 (still looking for some records). Anyway, we are now thinking of selling the property and looking at two scenarios: 1) Sell outright to one of the brothers for $150,000; or 2) Deed the property to him to help him qualify for loan (re-fi?), he gives up his 20% interest, borrows $120,000, then gives each of us $30,000.

    Based on what you said above, there are some serious tax implications. Can you dumb down both scenarios tax-wise for me please? :)

    Thank you!

    ReplyDelete
    Replies
    1. Hi Writer, sorry but I don't provide personal tax planning on this blog. If one of you has an accountant I would see them for a quick consultation or if you don't, I would engage an accountant for a quick consult. You just need to understand what T's to cross and what I's to dot and who has to report what on their returns.

      Delete
  29. Hi Mark,
    I recently resigned from a privately held family concrete construction company. I was there approximately 21 years and had 5% of the companies stock "Gifted to me" Do these stocks have any value? I am under the impression that my father is not happy about this and has informed me that the stocks being gifted was simply a way to slowly transfer ownership to my brother and I over time and only have value if the company was to be sold. The reason I ask this is because After 21 years of family service to the business, he agreed to pay me one months salary and offered Cobra to me after 30 days. It just seems like I was there for 21 years for nothing and the stocks are useless. Am I correct in assuming that since I resigned, I am entitled to nothing, and just walk away?

    ReplyDelete
    Replies
    1. Hi Anon

      This is way too fact specific and complicated a question for a blog. I suggest you speak to your accountant if you have one or engage one to explain the ramifications of your situation

      Delete
  30. Hi Mark,
    Great blog!!
    My parents and I live together in the same house here in Ottawa. I own the house and I still have a mortgage on it (~$100k). House is worth (~300k)
    I would like to transfer this property to their names but they will have to pay out my mortgage (~$100k)...I will still live with them (the house will remain my principal residence) till the end of the year.
    Basically I am giving them the whole house as a gift minus $100k.
    I am planning to move out next year 2015.
    Question 1: what kind and what amount of tax should be paid? and who should pay it?
    Question 2: Is transferring the property to their names in my case considered (buying/selling)? meaning, to do this transaction, will I need a lawyer and I will have to pay him/her fees for both selling/buying?
    Thanks for answering in advance :-)

    ReplyDelete
    Replies
    1. Hi Anon:

      I do not provide specific personal tax advice on this blog. However, in general, if someone sells or transfers a house that was their principal residence throughout their period of ownership, the transfer is generally tax free.

      In respect of question 2, this will be a legal transfer and you will need legal documentation and there may or may not be land transfer fees depending upon your province.

      I would speak to a lawyer before undertaking this transfer to ensure you understand the related costs & legalities and confirm with the lawyer or your accountant that this will be a tax free transfer.

      Delete
  31. Hi Mark,

    I recently bought my first home and was thinking of renting it out for a year before moving in and living in it. I plan to live with my parents in this year that the house is being rented out. Since it is my first and only home, I am hoping that it will qualify as my principal residence and be exempted from capital gains. Are there any tax implications that I should be worried about? If so, how should I go about to reduce these implications.

    In addition, if I were to rent out the basement after I move into the house in a year's time, will the house still qualify as my principal residence so that I will be exempted from capital gains?

    Thanks in advance! :)

    ReplyDelete
    Replies
    1. Hi Anon

      See the blog I wrote for Jim Yih http://retirehappy.ca/your-principle-residence-is-tax-exempt/ The plus 1 should help you out the first year. See my blog next week for the answer to your 2nd question

      Delete
    2. Thank you Mark!!

      Delete
  32. Hi Mark,

    This post has been incredibly helpful, thanks for keeping up with it. I have a question for you.

    My parents just bought a new house and would like to sell/give me their existing one. The value of the house is somewhere between 610-630K. They were thinking of gifting me the 150(but really I would pay them a down payment of 100K + loan) and me taking a mortage of 480. The sale price would be 480 so its easier from a LTT perspective. When I tried to do that, the mortgage commitment that came back essentially wanted me to change all sale prices to 630 instead of the 480 we originally wanted. We are a bit stunned and clearly not happy.

    Are there any other ways I can get the house? If my parents change the title to me, it would be my principal residence and from what I have read there would be no LTT and capital gains. How would I get a mortgage for 480? Any advice would be greatly appreciated.

    Thanks!

    ReplyDelete
    Replies
    1. Hi anon. I do not provide personal tax planning on this blog just general guidance. That being said first of all have u checked with ur lawyer there is no LTT I think u have to meet love and affection criteria to be exempt. If for arguments sake the house is gifted to u (again I am not saying that should or should not be done under the circumstances) why could u then not get a mortgage when u have clear title with no debts attached? Anyways u need to speak to a lawyer and/or an accountant to make sure u do this properly

      Delete
  33. Hello Mark,

    My wife and I own a condo in Hawaii. We would like to transfer ownership to our daughters family via allowable gifts each year until they own the property. Can we do this?
    Clark

    ReplyDelete
    Replies
    1. Hi Clark

      I do not provide personal tax planning on this blog. However, that being said, I think your plan is impractical if you do it on a yearly basis. I suggest you seek legal or tax advice before undertaking any gifting and would consider making it a single gift or maybe two or three assuming the facts provide for the gifting in the first place.

      Delete
  34. Hi Mark,

    My friend is an only child and lives with her elderly and ill father (her mother has passed) in a very small home 12kms from Sydney CBD. She is his part time carer though he will require more care in due course. Her occupation is as an elderly carer. Is the following scenario feasible?
    - transfer the house to her and pay stamp duty if applicable. This is in the view that he can maintain his pension
    - sell the house (Market estimate is $1.3m)
    - buy a home in an alternative area for $600k which would also have a self contained granny flat for her dad so she could care for him better and also provide him with privacy
    - invest the ~700k in a managed fund that returns 10% per annum which would become her taxable income
    - in due course become her father's full time carer

    On his inevitable passing, she would have a fully owned home as her principle residence along with an income generating residence.

    Is this feasible or am I overlooking something - else is there a nasty tax implication. Both her and her dad a very cash poor.

    Paul

    ReplyDelete
    Replies
    1. Hi Paul

      Sorry, I am Canadian, I have no idea about stamp duty tax

      Delete
  35. Hi BBC,

    My parents moved out of their condo into a retirement home several years ago when their memories started to go. My dad died 3 years ago and my mother is now living with Alzeheimer's in a full care nursing home.

    When they moved out of the condo myself and siblings sold the condo and divested all of their assets and added the proceeds to their existing investment portfolio. When my dad died my mother was the sole beneficiary of his estate plus she still receives the full pension that my dad had as a survivor benefit. This is more than adequate for her maintenance in the home.

    My question is, can my sisters, who have Power of Attorney for my mother, with the agreement of my brother and I make a gift to the four siblings of $10,000 each? This is accumulated income from the capital invested and not used.

    ReplyDelete
    Replies
    1. Hi Anon

      Power of attorneys are legal instruments and not tax instruments. I am pretty sure of the answer, however I dont like to play lawyer, so u should ask a lawyer. Sorry.

      Delete
    2. I understand and I'll do as suggested. Thanks for getting back to me.

      Delete
  36. Dustin in AlbertaJune 5, 2014 at 7:13 PM

    BBC,

    Eye-opening post, thanks but reading some of this has the hairs raising on the back of my neck. These implications have the potential to ruin the finances of ignorant people.. Definitely worth reading up on before selling properties to anyone. I think by now after reading all these comments that I get the picture: "Speak to an Accountant, a Real Estate Lawyer, and a Tax Lawyer"...

    But I just have to ask:

    In the case of a husband/wife owning a single principal residence, and interested in purchasing a second home for rental income purposes, are there any articles you'd recommend or key points to share about the pros/cons of whether to purchase the rental as 50/50, 99/1, 100/0, etc ownership?

    For arguments sake and to make it more realistic, I would want to read advice specific to where the husband is the only Employed spouse, and the wife is self-employed from home.

    Appreciate any breadcrumbs!

    Dustin

    ReplyDelete
    Replies
    1. Hi Dustin:

      I am not aware of any specific articles. Here is the issue in a nutshell.

      1. You want the lower income spouse (assuming ur wife's self employment income is less than your full time employment) to in general have at least partial ownership, if not full ownership.

      2. The issue with #1 above, is technically you cannot use the higher income spouses money to purchase and put the lower income spouse as the owner of the property. I say technically, because I see the income tax attribution often ignored in real life.

      3. As consequence of #1 and #2, and the fact a LOC is usually used to purchase the property and it is usually the LOC is in both names, the path of least resistance is usually a 50/50 split where financing is required.

      However, as you note, it would be best to speak to an accountant before purchasing who could review ur specific situation in detail.

      Delete
  37. My parents have just moved to a long term care facility, and they want to gift their house (principal residence) to my sister (who rents), and change their will to then split any cash assets between my brother and I upon their death. Question is, are there tax implications (eg capital gains) that would affect my father for gifting the house to my sister? And would land transfer taxes also apply? I'm my parents power of attorney and will consult a lawyer of course, but really wanted a general guideline on gifts of living parents to a child. I know they can give us cash gifts now freely and they have from time to time, but gifting property I imagine is quite a different thing.

    ReplyDelete
    Replies
    1. Hi Joanne:

      I have written about this issue multiple times on my blog. In general, other than potential land transfer tax (check with your lawyer if it applies) the transfer of a principal residence to a child who does not have their own PR, should not create an income tax issue. However (1) I am not aware of all the details and thus, you need to discuss this with your lawyer and/or accountant to ensure their are no issues (2)- what happens if your parents run down their bank account while living and you and your bro. get far less in value than the house, are you good with that. Anyways, you need to sit down with an accountant and lawyer to ensure your parents plan is tax and estate effective based on all the assets they hold.

      Delete
    2. Thank you very much. I did indeed contact our family lawyer today. There are some issues still to deal with... certainly it changes the intention my parents always had to split their estate equally. And with both in long term care and bills already starting to pile up, plus they're supporting my sister who just quit her job...yeah, it's a saga!! Wish us luck.

      Delete
  38. Hi Mark,

    Thank you for your advises on this website.

    I live in Ontario and I have inherited a house from my father. The house is overseas and I inherited it with my siblings.
    We have recently sold the house and I am about to transfer the money to my account here.
    The money is the sale of the inherited house.
    Will I be taxed? if yes, what kind of taxes?
    What do I need to proof the inheritance other than the sale contract and the death certificate?

    ReplyDelete
    Replies
    1. Hi Anon

      I do not provide personal tax advice on this blog. That being said, in general, when u inherit a house that is not a principal residence, the deceased should report a gain equal to their cost less the fair market value on their final tax return.The children inherit the house at the fair market value on the parents death. Thus, in your situation, most likely you have a gain equal to the selling price less the value of the house on the passing of your father, that must be reported in Cda and maybe the overseas country. You need to get some income tax advice to sort this out.

      Delete
  39. I have a question about selling shares from a mutual fund. My father-in-law is selling the shares to pay for a legal issue of mine. Is there a way to transfer the tax bill related to that to myself and my husband. We don't think it's fair that he is helping us, but going to have to pay income tax for it. How could we effectively make us responsible for the approx. $8,000 tax bill??

    ReplyDelete
    Replies
    1. Hi Anon

      You cannot transfer the tax bill. Not sure why you dont think it is fair, it is your father in laws mutual fund and tax, what he does with the money, is not the CRA's concern. He could have just lent you the money using a line of credit or similar vehicle to have avoided the tax issue.

      Delete
  40. We do not have a principal residence, currently we live in an in-law suite with our daughter. We intend to purchase my parent's home at a FMV (we have had it assessed for $150,000.) and allow them to continue to live in it until their health changes (they are in their very late 80's but still enjoy fairly good health). When the time comes, we will probably move into the home. My parents want us to pay $100k and they will in turn gift my brother and sister with $50,000 each cash. Should I be speaking with a layer, accountant or an estate planner to ensure that we are not in a jackpot in the future? or is the a bad idea altogether?

    ReplyDelete
    Replies
    1. Hi Anon

      I do not give specific personal advice on this blog, that said, this may be a flawed plan. Your parents will no longer own a principal residence and you will not live in the PR you own and thus, u may be converting your parents tax free PR into a taxable property. Definitely speak to an accountant before u do anything.

      Delete
    2. Thank you for the direction. Will do

      Delete
  41. Mark,
    Great blog. A few years back, my parents "sold" my wife and I some land for the " sum of one dollar and other goods and considerations". When I sell the property, am I liable for the entire proceeds of the sale minus $1, the FMV of the land at the time of the "sale" or the cost-basis of the purchase price of the non PR land when they purchased it?

    I think the answer is the first option, but just wanting confirmation. Also, if it isn't clear, I am referencing "liable" from a capital gains perspective.

    ReplyDelete
    Replies
    1. Hi Anon:

      Read this link, it discusses your issue.

      http://www.theglobeandmail.com/globe-investor/personal-finance/taxes/avoid-pitfalls-when-transferring-assets-to-kids/article12965114/

      Did you parents report a capital gain on the sale of the property to you? If not, you may want to to revisit this transfer with an accountant and the lawyer who made the transfer to see if anything can be done to avoid the potential negative income tax consequences at the time of the transfer and in the future.

      Delete
  42. Hello Mark,
    I think I'm in a nightmare.
    In 2008 my brother was diagnosed with colon cancer. In March 2009 he prepared a will that would leave me his home Also in March 2009 he decided to go ahead and prepare a warranty deed to have my name as the legal owner before he died. However in that deed we entered considerations of $10.00. In July of 2009 he died. The market value in 2009 for the house was at $168,616.00 . I sold the property in May 2014 for $258.000.00. I'm sure I will have to pay some capitol gains on this 2014 transaction, but will I have to pay capitol gains on the 168.616.00 of 2009. I was under the impression that I was going to inherit the property and didn't think it was not in my interest to be given the property before he died and of course there's the consideration of $10.00 in the deed which I think makes it a legal transaction. I did not probate the will in 2009 because there was no contestants among the family. Am I screwed.

    ReplyDelete
    Replies
    1. Hi Anon

      Speak to a tax lawyer. The $10 consideration may be problematic, but not sure if legally there is an argument it was not tax consideration paid for property, but just legal consideration. I cant say if there is an argument for a distinction.

      Delete
  43. Hello, I have transferred a sum of money to my brother. My brother trades on the basis of orders received from a financial investor that I subscribe to. The money was transferred because my own employer has a trading policy in place which prevents short term trades. As a result, the intention is for my brother to execute the trades from the service. I have checked with my employer that a trustee (in this case my brother) acting on my behalf executing trades that I have no control over (my brother only executes the trades directly provided by the subscription service) is not a violation of their trading policy. At the time when I eventually do leave my employer I intend to have the funds transferred back to me. Given my intent, how do we go about ensuring that there is no US tax burden for my brother when he eventually does transfer the cash back at my request.

    ReplyDelete
    Replies
    1. Hi Anon

      I am not a US tax expert. The US has some stringent gifting laws. Your brother should check with a US accountant whether he will have any issues.

      Delete
  44. Hi,

    My father's house is completely paid off. He is getting re-married and wants the house to stay in the family (stay with his 3 kids- All above 18 years old). We have 2 options one is a prenuptial agreement and the other is to transfer the property to the 3 children at 25% ownership each, leaving the remaining 25% with my Father. My question is about the latter

    1. I am assuming the transfer will be considered a gift, which means deemed disposition at FMV. The home has definitely increased in value, it was originally purchased for 300,000 and is worth about 600,000. Meaning my father would have to pay (300,000 * 50% * 75% transfer * Tax rate)
    to CRA, is this a correct statement? Would the principal residence exemption prevent him from having to pay on the capital gains?

    2. What are the tax implications for the children or do we only have tax implications when the property is sold. Please provide some detail. Note one sibling has a separate home and the other 2 still live at home and do not have any other property.

    3. What are the tax implications for my dad once the property is sold.

    4. Please provide any other details you think would be helpful

    Your article was helpful

    Thanks

    ReplyDelete
    Replies
    1. Hi Anon

      Sorry, I do not provide personal tax planning advice on this blog. The only comment I will make is that if you dad gifts his house and it is his Principal residence, it will be exempt from tax, however, if the 3 children have their own PR, you have converted a tax free property into a 3/4 taxable property. You should get proper tax advice before undertaking this transaction.

      Delete
  45. Hi Mark,

    My mom has a vacant lot, FMV is $100,000. My husband and I would like to buy it from her. She says she would rather gift it to us to avoid paying taxes. First of all, I do not understand the "gifting" process, does she just change the name on title from hers to ours? and second, what tax implications would there be for us if we were to sell it down the line for $120,000?

    ReplyDelete
    Replies
    1. Hi Gail

      I do not provide personal tax advice on this blog, also, I am not a lawyer. That said, in general you need to have a lawyer draft a deed of gift and transfer the title of the property, but confirm with a lawyer. Also, you need to check with your lawyer if there will be land transfer tax.

      If your mother gifts the property, she will be deemed to have sold it at $100k and typically you will acquire it at $100k so if you sell for $120k, you would have a $20k gain.

      Delete
  46. Hi Mark, Great Blog.
    My question is, when my father was dying he traded her a residential rental property for consideration in her part of the family cottage that she would have received through survivorship and Willed the cottage to his adult children.
    He passed away a month later and now she is questioning if the Estate (she is not executor) has to pay the Capital Gains, which would be significant, or if she will have to pay on the whole value when she goes to sell it? The Lawyer has not yet registered the property in her name or provided her with a new deed for the property even though the transfer took place nearly 2 years ago. Thank you for your help.

    ReplyDelete
    Replies
    1. Hi Anon

      This is a very complicated question and way too complex to answer on a blog. You need to meet with your accountant or engage one to sort this out properly to minimize any income tax consequences.

      Delete
  47. Hello Mark,

    What are the tax implications if I buy a cottage off my parents for less than fair market value? The cottage is worth around $200,000 and they want to sell it to me for $75,000.

    Thanks for your help!

    ReplyDelete
    Replies
    1. Hi Anon:

      Your parents will be deemed to sell the cottage for $200k and your cost will only be $75k. I would consult with an accountant, as there may be a practical way around this.

      Delete
  48. Mark,

    Grandmother gifts home to grandson roughly 3/4 years ago. Her husband passed away a few years previous to this transaction.

    She passes away and now grandson is selling home.

    I have been told there is a different calculation for the grandson (i.e. capital gains) because the grandmother lived in the home the entire time before her passing.

    Any help would be appreciated.

    Chad

    ReplyDelete
    Replies
    1. Hi Chad

      Upon the gift to her grandson, grandma would be deemed to sell her PR. Assuming she lived there her entire life and had no other properties, that gain should be (subject to actual facts) tax free as her Principal residence. Grandsons cost is the market value of the house at the time of the gift. If Grandson did not use the house as his PR, then the gain will be the difference between the value at the time of the gift and when he sells.

      Delete
  49. Hi, my mother transfered her house to me in 2008 but she was re assessed by CRA for 2004,2005 and 2006. we received a letter from cra in 2008 after we trabsfered the house to my name. she really did not know about owing money to cra. but she transfered the house in order to re mortgage and settle all the credit she had...(i was only one working at that time) .. now cra is sending me letter under section 160 (1)..to pay the entire tax amounts which my mon owes to cra... now i'm planning to buy a house for myself..mortgage under my name... could anyone advice me whether i can change the mortgage under my wife's name once she get a full time job? will cra follow my wife? or the property we planning to buy?

    ReplyDelete
    Replies
    1. Hi Anon

      This is a very complex matter. You need to engage a tax lawyer to held you untangle and/or advise you, it is way to complex to provide an answer on a blog.

      Delete
  50. I am in Ontario. My mother has passed and I want to transfer the house into my name. Does this mean I have to probate and pay5%?

    ReplyDelete
    Replies
    1. Hi Mike

      I am a tax accountant, this is an estate lawyer and real estate lawyer question. If you have an estate lawyer, you need to ask them, if not you will require a lawyer for the transfer anyways and you should ask them, Sorry, not my area.

      Delete
  51. Hello, Mark,

    I'd like to ask you a few questions:

    1. Are joint tenant and joint ownership the same?

    2. I'm a single. I'm going to add my best friend's name onto my principal residence as a joint tenant (this good friend is not my family member, nor is my common-law partner), after I die, will my best friend 100% own my principal residence automatically? Will there be any tax liability for me (after I pass away) and my best friend?

    3. My best friend's name is not on my present Will ( I appoint somebody else to inherit my principal residence), should I revise my Will to have my best friend inherit my principal residence or I don't have to do so as long as I add his name onto my principal residence as a joint tenant?

    4. If I sell my principal residence, I won't have capital gain tax. If I move to my rental property and convert it to be my principal residence, when I sell this property in the future, say, after a few months, will I need to pay any capital gain tax for the sale?

    5. If I give my principal residence to my best friend as a gift, will there be any capital gain tax? Who should pay it, my best friend or I?

    Many thanks for your help!

    Bai Yu



    ReplyDelete
    Replies
    1. Hi Bai,

      Sorry but I do not provide specific personal tax planning answers on this blog which you are requesting.

      Here is link to diff between joint tenancy and tenancy in common http://www.plea.org/legal_resources/?a=311

      Delete
  52. Hi,

    My ex wife has a secondary rental income. She is required to reveal her rental income in addition to her T4 income in order to calculate child support. Last year she claimed to have very little rental income and also again this year -approximately $3K gross for the whole year. How is it possible for the second year that she could only be grossing $3K when I know she has it rented for at least 10 months at $1500/month?

    ReplyDelete
    Replies
    1. Hi Anon:

      I would assume your separation agreement requires her to provide you details of this income (ask your lawyer if u r not sure). Assuming so, request a copy of her T776 rental income form 2013. She may have $15,000 of rental income, but other expenses. I can not comment in a vacum not knowing what other expenses such as prop taxes, repairs, int x, depreciation she is claiming.

      Delete
  53. when my mother and father passed away our properties went into the trust and each of the siblings had 25% ownership. Its been three years and everyone wants to split up the properties equally. Can this be done without tax problems? winslow10@aol.com

    ReplyDelete
    Replies
    1. Hi Anon

      I cant answer without knowing the terms of the trust. It may be possible depending upon the terms. You need to speak to the estate lawyers or accountant who is aware of the details.

      Delete