Wednesday, 8 June 2016

Non-arm’s Length Transfers -- Gifts (Canada)

Related persons are not considered to deal with each other at arm's length. Related persons include individuals connected by a blood relationship, marriage or common-law partnership, or adoption (legal or in fact).S1-F5-C1- Related Persons and Dealing at arm's Length 

Also, a corporation and a shareholder who controls the corporation are related. Control  here mean more than 50% of the voting shares. Two corporations can also be "related persons".IT64R4- Corporations: Associations and Control 
If property is transferred for a consideration greater than the FMV to a person who does not deal at arm’s length with the transferor, the acquirer is deemed to have acquired it at FMV.  Its cost for tax purposes is therefore less than the price paid. For the vendor, there is no price adjustment and the actual selling price constitutes the proceeds of disposition.

If property is transferred for a consideration less than the FMV to a person who does not deal at arm’s length with the transferor, the transferor is deemed to have transferred the property at FMV and the cost to the acquirer for tax purposes is equal to the consideration paid. There is therefore a risk of double taxation.

If depreciable property is transferred in a non-arm’s length deal, the acquirer’s capital cost, for CCA purposes only, is equal to the transferor’s capital cost plus 50% of the capital gain realized by the transferor. Also, where the transferor is an individual and the property was eligible for the CGD, the capital cost for the acquirer must be reduced by the amount of CGD claimed by the transferor.

In the case of a gift, the transferor is deemed to dispose of the property and the beneficiary of the gift is deemed to acquire it at FMV. If you donate capital property, you must report any capital gain on your return and in some cases, you may be able to claim a capital loss in the year you donated the property. Under certain situations, the donor can designate the transfer price between FMV and adjusted cost base of the property donated and thus can reduce or avoid the capital gain on donation.

For tax purposes, the eligible amount of the gift is the amount by which the fair market value (FMV) of the gifted property exceeds the amount of an advantage, if any, received or receivable for the gift.

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