2018-0773301E5 Paragraph 69(1)(c) and Nominal Consideration

Principal Issues: Whether the disposition of a property to a child for the nominal amount of $1 constitutes a gift for the purposes of paragraph 69(1)(c).

Position: Depending on the facts, possibly.

Reasons: Question of fact.

Author: Ross, Matthew
Section: 69(1)(c)

XXXXXXXXXX                                                                                                       2018-077330
                                                                                                                               Matthew Ross, CPA, CA
January 24, 2019

Dear XXXXXXXXXX:

Re: Gifts and non-arms-length transfer

This is in reply to your email of August 8, 2018, and our subsequent telephone conversation.  You requested our views on whether the disposition of property by a parent to a child for the nominal amount of $1 would constitute a gift.  You indicated that the $1 consideration is specified in the legal documentation solely to ensure the agreement is legally binding and asked whether paragraph 69(1)(c) of the Income Tax Act (the Act) would apply, notwithstanding that nominal consideration of $1 would be paid.

Our comments

This technical interpretation provides general comments about the provisions of the Act and related legislation (where referenced).  It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination.  The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R8, Advance Income Tax Rulings and Technical Interpretations.

Except as expressly permitted otherwise in the Act, paragraph 69(1)(b) of the Act applies where a taxpayer (the transferor) disposes of anything to a person with whom the transferor was not dealing at arm’s length for no proceeds or for proceeds less than fair market value (FMV).  It also applies where the transferor disposes of anything to any person by way of gift.  Paragraph 69(1)(b) deems the transferor to have received proceeds of disposition equal to FMV.  Accordingly, a gift could result in a capital gain or loss for the transferor.

Paragraph 69(1)(c) of the Act will apply where a taxpayer (the recipient) has acquired property by way of “gift, bequest or inheritance.”  If paragraph 69(1)(c) applies, the recipient is deemed to acquire the property at FMV.  The term “gift” is not defined in the Act and therefore assumes its common law meaning.  In our view, a gift at common law is a voluntary transfer of property from a donor, where the donor freely disposes of the property to a donee, and the donee confers no right, privilege, material benefit, or advantage on the donor or on a person designated by the donor.

The determination of the nature of a particular transaction, namely whether it is a sale or a gift, must be made on the basis of the legal relationships created by the agreement governing the transfer of the property.  In the absence of an express provision to the contrary in the Act or a finding that the transaction is a sham, the legal relationships created by the agreement of transfer must be respected.

In certain circumstances, the Canada Revenue Agency may be willing to accept that the transfer of property between non-arm’s length parties for the nominal amount of $1 could be considered a gift.  For example, if the agreement governing the transfer provides for consideration of $1 merely to ensure that the agreement is legally binding, the CRA may consider the transfer to be a gift.

The determination of whether a transfer of property constitutes a gift is a question of fact that can only be made upon a complete examination of the circumstances, including the legal relationship between the parties and the agreements governing the transfer of the property.  If it is determined that the transfer of property was a sale for inadequate consideration rather than a gift, paragraph 69(1)(c) would not apply.

We trust our comments will be of assistance.

Yours truly,

Pamela Burnley
Manager Business Income and Capital Transactions
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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