The transfer of assets to family members is an important part of retirement and post-retirement planning, as the tax consequences can be enormous. This is especially true now for average families as well as high-net-worth clients, because all final tax returns will carry with them the requirement to report any deemed disposition of a common family asset: the principal residence.
By way of tax background, it’s important to communicate to clients that for income tax purposes, a transfer of assets is recognized, and income tax consequences result, when the beneficial ownership of an asset is transferred.
Where a transfer of legal title occurs but beneficial ownership does not change, the transfer will not be considered a disposition for income tax purposes. So what is beneficial ownership? In Tax Brief TI 2008-0281841E5, CRA notes:
“The primary attributes of beneficial ownership include possession, use and risk. Therefore, in determining whether a person has beneficial ownership in a property, one should consider such factors as the right to possession, the right to collect rents, the right to call for the mortgaging of the property, the right to transfer title by sale or by will, the obligation to repair, the obligation to pay property taxes and other relevant rights and obligations.”
If a transfer of legal and beneficial ownership takes place, the property is deemed to have been disposed of at its fair market value (unless that transfer is to a spouse, in which case the transfer may be made at the adjusted cost base rather than the fair market value).
If the property so transferred was the transferor’s principal residence for all years that it was owned, then there are no income tax consequences to the transferor because the accrued gain on the taxpayer’s principal residence is exempt. However, if there was another principal residence owned and disposed of during the same period, or if there were multiple purchases of residences which CRA could characterize as speculative or a sale of business inventory, there will be tax consequences.
If the transferor no longer has beneficial ownership, then the ability to claim the property as the principal residence ends. In addition, since the transferor no longer owns the property, they have no rights to determine what happens to the property when they die. And, since the property is no longer part of their estate, no probate or estate administration tax will apply to the property.
For the transferee, other than a spouse, the property is deemed to have been acquired at the fair market value at the time of the transfer. Therefore, taking the time to get a proper valuation is important. In some jurisdictions, this may trigger a land transfer tax.
After the transfer, the transferor will be liable for capital gains tax on any subsequent increase in value of the property but the gain could be exempt if the property becomes the transferee’s principal residence. To initiate that tax treatment, the transferee must “ordinarily inhabit” the property at some time during the year.
Is the transfer in the best interest of the surviving owner (the transferor)? That depends on where this person will be living next, the level of income earned, the cost of rent or per diems, the value of the property at the time of transfer, whether the property was one of several personal residences owned, and what the projected tax consequences are.
While there may be a saving on future probate costs to the estate, if the surviving owner counts on home ownership as a hedge against future costs prone to attract inflation or against other rising costs (rent, prescription drugs, attendant care, etc.), maintaining control of the equity in the home is important, to preserve options to borrow against the equity, or sell to a third party to obtain the cash needed for living costs.
Helping the client with these calculations is a tremendous way to add value to the relationship.
Evelyn Jacks is President of Knowledge Bureau, which provides continuing professional development in multiple areas of specialization to advisors who wish to provide Real Wealth Management services to their clients.
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