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I own a small rental property. I would like to transfer ownership of the property to my parents (i.e. gift the property), who will be retiring soon. The purpose of this is to supplement their retirement income with the rental income (it's not much, but a little bit extra each month will help), while reducing my taxable income.

I understand that ownership transfer is considered disposition by CRA, and I will be subject to capital gains. Purchase price was $50,000, fair market value today is $100,000, so the gain is approximately $50,000 / 2 = $25,000 x 40% marginal tax rate = $10,000 payable in tax. This is $10,000 I don't really want to spend!

Is there some way around this?

I checked on the CRA site, which states:
If you sell property to someone with whom you do not deal at arm's length and the selling price is less than its FMV, your selling price is considered to be the FMV. Similarly, if you buy property from someone with whom you do not deal at arm's length, and the purchase price is more than the FMV, your purchase price is considered to be the FMV.

Does this mean I can sell the property to my parents for $50,000, which which means a zero capital gain for myself? If that's the case, that would take care of my immediate concern of having to pay tax. But in terms of future implications, would this mean:
- If my parents decide to sell the property, they will be stuck with the capital gain, based on future selling price less $50,000 purchase price (I could, of course, help pay for this since it was originally my responsibility. The potential advantage is that their tax bracket would be lower than mine as they will be retired)
- If they hold the property until they die and then leave it for me, it will be considered that I acquired the property at the time of their death at FMV, and I will be responsible for any future capital gain.

Any thoughts or advice on this???
 

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If you sell property to someone with whom you do not deal at arm's length and the selling price is less than its FMV, your selling price is considered to be the FMV. Similarly, if you buy property from someone with whom you do not deal at arm's length, and the purchase price is more than the FMV, your purchase price is considered to be the FMV.

Does this mean I can sell the property to my parents for $50,000, which which means a zero capital gain for myself?
I'm not sure how you got the questions you have from what you've posted. The CRA bulletin is very clear.

If you sell to them for anything less than FMV, you are considered to have disposed of the property at FMV and are taxed accordingly.
 

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Discussion Starter #3
Wow, I had a completely different interpretation of what Moneygal highlighted in bold. Thanks for the clarification on this point.

Are there really no tricks around this? No way to defer the capital gain???
 

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No.
Look at it this way. You made a $50,000 profit on the sale of an investment property, and are objecting to paying 20% of that profit in taxes.
 

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Are there really no tricks around this? No way to defer the capital gain???

Well, you can choose to defer the capital gain, or to get the rental income taxed in your parents hands, but not both.

If instead of gifting them the rental property you simply gift them the rental income every year, then you get to defer the capital gain... but then the rental income continues to be taxed in your hands.

So to put some numbers to it, let's say your $100k property is giving you $3k/year in net income. You're at 40% and your parents at 20% tax rates.

If you give the property to them now, you pay $10k in taxes right now, and they pay $600/year in taxes on the rental income. If you're concerned about the estate after they die, then there may be further capital gains taxes when the property goes back into your hands if there is further appreciation.

If you hold on to the property, then you don't pay anything now for capital gains tax, but you have to pay taxes of $1200/year on the rental income.

So if you play around with the numbers to more accurately fit your situation, you'll find that there may be some cases (largely depending on how long the arrangment is to continue for) where it makes more sense to just pay the capital gains taxes now to get the rental income into your parents hands, and some cases where you should continue to defer the gain and just give them cash.
 

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Discussion Starter #6
Thanks for the suggestion Potato. Gifting the rental income to my parents could indeed be an option. How does this work from a tax reporting perspective? Right now, I report rental income as personal income and list the various deductible expenses (taxes, maintenance, etc.). How do I report the "gift" as an expense? Would my parents report the gift as "other income"?
 

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Alternatively you can hire your parents to manage the property, take care of the grounds and so on.

I assume they are closer to the property than you are.

FMV Property management fees are about 10% of the income plus any work done on the property. That would probably take care of your income for a large part.

Just saying...

But...capital gains is still your problem but considering the transaction fees of turning over the property to your parents then getting it back unless something goes wrong with the estate and you lose it to a sibling or something. You also save on those. I'd say it's a draw.
 

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Maybe look into renting it to your parents below market, and let them sublease it at market rent - they get the same income, since the costs would be the same as your costs. Your income is neutral as you transfer all costs to them so its not a cost share arrangement. Or put a mortgage on the property, do the same thing, but gift them the mortgage proceeds (to invest or whatever). Alternatively, let them move in rent free or otherwise, and rent their own place (assuming they own a property). If not, let them move in at the reduced rent and they lower their expenses, just don't claim a rental loss.
 
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