Selling Property to a Family Member Below Market Value in Canada

Many families want to sell a home, cottage or investments to a child or sibling at a friendly price. It feels generous, but the Income Tax Act does not simply accept the price on the paper. For tax purposes the seller may be treated as if they had sold at full value.

This article explains the deemed proceeds rule, how double taxation can happen, and the main exceptions. It is general information; the numbers in a real transaction need professional review.

This article covers Canadian federal tax law, which applies in every province.

The deemed proceeds rule

If you sell to a non-arm's length person, such as a relative, for less than fair market value (FMV), your proceeds are deemed to be the FMV. The CRA describes it the same way: your selling price is considered to be the FMV.

Fair market value is, in plain words, what the property would reasonably sell for between unrelated parties. Because the deemed price can differ from what you were actually paid, you can owe tax on money you never received.

How double taxation happens

The seller is taxed as if the price were FMV. The buyer, however, has a cost equal to the lower price actually paid. Since the buyer's cost remains that lower price, the same gain can be taxed twice, once in the seller's hands and again when the buyer later sells.

The mirror rule applies to buyers. If you buy from a non-arm's length person for more than FMV, your cost is considered to be the FMV.

How the gain is taxed

The gain is the proceeds minus the ACB and selling expenses. Here the proceeds are the deemed FMV. One-half of the capital gain is the taxable capital gain, and it is added to your other income on line 12700 of your T1 return.

If the property was your principal residence, you must report the sale on Schedule 3 and include Form T2091(IND). Since 2016 the exemption is allowed only if the disposition and designation are reported on the return, and a late designation may attract a penalty.

If you are paid over several years, a capital gains reserve may spread the gain. Most reserves can be claimed for a maximum of four years after the year of sale. You generally cannot claim a reserve if you sold the property to a corporation you control in the relevant tax year or the following year. For transfers to a child of family farm or fishing property or qualified small business corporation shares, the reserve can run nine years.

Gifts and transfers to a spouse

A gift of capital property, other than to a spouse or common-law partner, is treated as a sale at FMV on the date of the gift, and the giver reports a gain or loss. The recipient is generally considered to acquire the property at FMV.

A transfer to a spouse or common-law partner generally happens at ACB with no gain or loss, and the transferor can elect out. If the spouse later sells, the gain is generally attributed back to the transferor. After a relationship breakdown, the transferor may avoid reporting the attributed gain by filing an election with their return.

Income from property transferred or lent to a minor who is not at arm's length with you, or who is your niece or nephew, is treated as your income, until the end of the year the minor turns 18. Capital gains on gifted property are not attributed back to a minor child under the spouse rule.

What to do next

• Get a reliable estimate of the property's FMV before you agree on a price, such as an appraisal for real estate.
• Calculate the ACB and the deemed gain to see the tax you may owe.
• Check whether a principal residence designation, reserve or spousal rule applies.
• Keep the sale agreement, appraisal and records of expenses.
• Speak with a lawyer or accountant before signing, since fixing a double-tax problem afterward is difficult.

Frequently asked questions