It was a fun and interesting week last week.
We originally planned to go up north, and spend some time at our friend’s cottage. Things changed last minute and we cancelled our trip.
Since I had the entire week blocked off for vacation, I figured it would be nice to keep it off and enjoy my staycation.
Erwin recently picked up golf and has been playing every week. I golfed, but hadn’t played for a long time.
Erwin and I are value hunters. He had been buying coupons off some golf websites to get better golf rates at different clubs. We finally ended up ordering a thick coupon book to take advantage of all these great golf courses nearby.
Golf is a humbling game. The more you play, the more you realize that you need to practice.
So we started doing a few practice swings in our backyard.
One of my favourite parenting quotes – “Children close their ears to advice but open their eyes to example.”
Seeing us practicing inspired my son to ask me later, ‘Mommy, can I practice golf in the backyard today?’
It’s cute and sweet. Also goes to reinforce my life mantra – “lead by example”.
Lead by example is my life mantra and my parenting mantra. 😊
Many of us invest because we want to have financial freedom. We want to be able to provide for our kids’ future education. We want to have enough for our own retirement and still have some left for our children.
Recently, I met with a prospect who’s a widowed mom and decided earlier on that real estate investing would fund her retirement.
She went on to purchase a couple of investment properties and she would like to sell one of these properties to her son at below market value.
What would the tax implication be when you sell a property at a price significantly lower than fair market value?
Well… just like everything else in the Income Tax Act, it can get complicated.
Mom’s tax implication
When mom sells a property to her son at below fair market value, the property would still be deemed to dispose at fair market value.
Let’s use an example to explain.
Mom purchased the property for $200K and has been using the property exclusively as a rental property.
Current fair market value of the property is $500K.
Mom would like to sell to her son for $300K.
In this example, the Income Tax Act would deem to have the property disposed of at fair market value.
In other words, mom’s deemed sale price = $500K.
Mom’s purchase cost is $200K.
Mom would need to pay tax on the $300K capital gain.
Son’s tax implication
Son purchases the property for $300K.
He would need to pay land transfer tax on $300K. Ontario land transfer tax on this $300K purchase would have been $2,975.
If property is located in Toronto, son would need to pay double.
Son’s adjusted cost base acquiring this property is $300K + $2975 + legal fees, say $2,000 = $304,975.
If he keeps it as a rental property and eventually sell the property for $600K, the capital gain is calculated as the following:
$600,000 – $304,975 = $295,025.
If you’re following along, you may wonder…hey, mom just paid taxes based on the sale price of $500K.
So the tax between $500K and $300K (the transfer price) would have been taxed one in mom’s return.
Why is the son taxed again?
Unfortunately, transferring the property at below fair market value would result in double taxation.
Son would have to pay taxes again on capital gain that mom has already paid tax on.
If mom is able to gift the property outright, the adjusted cost base (tax cost) to son would have been the fair market value. No land transfer tax is triggered as the gift is given out of love and affection. 😊
If that isn’t an option, and the son’s intended use is to live in the property until it is sold, mom can still sell the property at $300K as intended and not get double taxed.
If that isn’t the case, make sure you consult with a professional to calculate the cost and benefit analysis for each option.
Until next time, happy Canadian Real Estate Investing.
Cherry Chan, CPA, CA
Your Real Estate Accountant