A donation should be a donation
Many parents in the present times go to their notary to request information on transferring their property to their children in the first degree. Notaries often acquiesce to these requests without informing the transferor of important consequences that will result from such an act.
If the property is not a family residence, then the realization of capital gains will be provoked for the part of the immovable not being used as a principal family residence. If a parent bought the property in the 1970’s the capital gain could be significant and could result in a devastating surprise for the transferor. This may occur even if the transferor crystallized his capital gain exemption in 1994. Thereby, it becomes important for the notary to tell the transferor to consult his accountant and get an evaluation of the fair market value of the property and to estimate the amount of capital gain the transferor must pay. It is clearly part of the notary’s obligation to inform the transferor of this consequence.
The other important consequence, that must be avoided, is that of double taxation. In many cases, on request of the transferor, the notary will do a sale rather than a donation and this for $1.00 and/or other valuable consideration. This type of transaction is really, in effect, a simulated donation. However, the notary must be very aware of the fiscal consequences generated by such transaction in virtue of the Taxation Act. Pursuant to this law, a transfer in this context will mean that the transferee will have acquired the property for $1.00 and whatever the value of the other considerations that the parties can justify and the transferor will have sold for market value and pay the capital gains triggered by the sale.
Afterwards, when the transferee sells the property, the adjusted cost base will not be the fair market value that the transferor will be deemed to have transferred at but rather $1.00 and whatever the value of the other considerations. So, in effect, capital gain taxes will be paid again on the amounts that the initial transferor paid on. Example, if a revenue property was purchased at $100,000.00 in 1978 and today the fair market value is $400,000.00 and the transferor never crystallized his capital gain exemption in 1994, when the transferor donates the property by a deed of donation to his children the generated capital will be $300,000.00 taxable at 50% due to the fact that in virtue of the tax laws he will have been deemed to have disposed of the property at $400,000.00.
At the same time the adjusted cost base of the transferee will be $400,000.00. As such, when the transferee transfers the property he will pay any gains made over $400,000.00. In the same example, if the notary does a sale for $1.00 and other valuable considerations which cannot be quantified, the transferor for tax purposes will be deemed to have disposed of his property at $400,000.00 and pay the taxes in consequence and the transferee will be deemed to have purchased the property at $1.00. In this scenario, when the transferee re-sells the property, his adjusted cost base will be deemed $1.00 and he will pay capital gains on all amounts over the $1.00 and thus pay again on the same $400,000.00, at least.
The obvious message in this scenario is that if you are transferring a property to your children or grand-children, and there is no money being exchanged, then just simply do a deed of donation, not a sale, and only once the transferor has determined how much taxes he must pay and is satisfied therewith. A sale in place of a donation, when in reality a donation is what was intended or should have been intended, can lead to undesired consequences and liability. Notary, transferor and transferee, beware
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Many parents in the present times go to their notary to request information on transferring their property to their children in the first degree. Notaries often acquiesce to these requests without informing the transferor of important consequences that will result from such an act.
If the property is not a family residence, then the realization of capital gains will be provoked for the part of the immovable not being used as a principal family residence. If a parent bought the property in the 1970’s the capital gain could be significant and could result in a devastating surprise for the transferor. This may occur even if the transferor crystallized his capital gain exemption in 1994. Thereby, it becomes important for the notary to tell the transferor to consult his accountant and get an evaluation of the fair market value of the property and to estimate the amount of capital gain the transferor must pay. It is clearly part of the notary’s obligation to inform the transferor of this consequence.
The other important consequence, that must be avoided, is that of double taxation. In many cases, on request of the transferor, the notary will do a sale rather than a donation and this for $1.00 and/or other valuable consideration. This type of transaction is really, in effect, a simulated donation. However, the notary must be very aware of the fiscal consequences generated by such transaction in virtue of the Taxation Act. Pursuant to this law, a transfer in this context will mean that the transferee will have acquired the property for $1.00 and whatever the value of the other considerations that the parties can justify and the transferor will have sold for market value and pay the capital gains triggered by the sale.
Afterwards, when the transferee sells the property, the adjusted cost base will not be the fair market value that the transferor will be deemed to have transferred at but rather $1.00 and whatever the value of the other considerations. So, in effect, capital gain taxes will be paid again on the amounts that the initial transferor paid on. Example, if a revenue property was purchased at $100,000.00 in 1978 and today the fair market value is $400,000.00 and the transferor never crystallized his capital gain exemption in 1994, when the transferor donates the property by a deed of donation to his children the generated capital will be $300,000.00 taxable at 50% due to the fact that in virtue of the tax laws he will have been deemed to have disposed of the property at $400,000.00.
At the same time the adjusted cost base of the transferee will be $400,000.00. As such, when the transferee transfers the property he will pay any gains made over $400,000.00. In the same example, if the notary does a sale for $1.00 and other valuable considerations which cannot be quantified, the transferor for tax purposes will be deemed to have disposed of his property at $400,000.00 and pay the taxes in consequence and the transferee will be deemed to have purchased the property at $1.00. In this scenario, when the transferee re-sells the property, his adjusted cost base will be deemed $1.00 and he will pay capital gains on all amounts over the $1.00 and thus pay again on the same $400,000.00, at least.
The obvious message in this scenario is that if you are transferring a property to your children or grand-children, and there is no money being exchanged, then just simply do a deed of donation, not a sale, and only once the transferor has determined how much taxes he must pay and is satisfied therewith. A sale in place of a donation, when in reality a donation is what was intended or should have been intended, can lead to undesired consequences and liability. Notary, transferor and transferee, beware