In my last blog on this topic I shared with you the comments of the Canada Revenue Agency (CRA) on an implied agreement between a couple regarding their ownership of a property. The CRA went on to comment on the tax implications of both an actual and a deemed sale.
Two common-law partners, A and B, purchased a condo as a principal residence. When A renewed the mortgage debt on the condo, B’s name was struck off from the title without anything being paid to B as a consideration. A and B had a tacit agreement under which they owned a share of the condo and would share in the same proportion any related gain from its sale. During the ownership both A and B contributed to the running costs and remained common-law partners and lived in the condo until the time of its sale.
Regarding the sale of the condo, the person (say A) or the persons (say A and B) owning the condo would calculate the capital gain on the share of the condo that they owned at the time of sale. If the condo was a “principal residence” and A was sole owner after the debt renewal, he would not have to include any portion of the gain in his income if the whole gain qualified for a principal residence exemption. The tax implications would be different if only a portion of the gain qualified for that treatment. Even if A gave a portion of the sales price to B, the tax implications would be the same.
If, instead, A and B were co-owners of the condo qualifing as a principal residence, each of them could calculate the capital gain on their share of the condo and claim a principal residence exemption in respect of the gain.
If A died before B and the condo was left to B by will, the portion of the condo owned by A immediately before his death would be deemed to be disposed. A would be deemed to have received proceeds of disposition immediately before his death, a capital gain could be realized on the disposition, and the principal residence exemption could be claimed in respect of the gain. In the case of the transfer between A and B, the deemed disposition proceeds are the adjusted cost base (ACB) of the condo if two conditions are met: (i) B is a Canadian resident immediately before A’s death; and (ii) B acquires the condo no later than 36 months after the date of death. In this situation, the deemed disposition does not trigger any gain for A, and the gain is deferred to the date of disposition of the condo by B.
A’s representatives could elect on his final tax return to use the fair market value (FMV) of the condo immediately before A’s instead of its ACB as deemed disposition proceeds. If this was the case, a capital gain could be included in A’s final tax return and a principal residence exemption could be used to eliminate that gain.
Following A’s death, B would get the condo at a cost equal to A’s deemed proceeds of disposition and could subsequently use the principal residence exemption to eliminate the capital gain realized on the sale of the condo. In this case, B would be deemed to have been the owner of the condo for the period during which A was the owner and the condo would be deemed to have been B’s principal residence for every taxation year for which it was A’s principal residence.
Clearly there are options to consider and action to be taken to save tax when a property is a principal residence. Remember to consult a pro.