The Blunt Bean Counter: Transferring Property Among Family Members. 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 2. 5 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.

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 1. 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.

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 $5. 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 $5. The FMV of the shares today is $7. If Mary transferred the shares of Bell Canada to her brother, Bob, she would realize a capital gain of $2.

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 $5. 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. 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 $5,0. 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 $5. FMV of $5. 0,0. 00.

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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 . 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 . 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. FMV at the time the parent transferred the property to the child, assuming the child has a principal residence of their own). 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. Armed Response (2017) Watch Online there. 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 $7.

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