Beware of selling for $1.00 to a relative, a gift might be better!

Are you thinking of selling your cottage for the symbolic amount of $1.00 to a family member? This symbolic gesture could have significant tax consequences for both you and your relative.

Indeed, it’s important to know that transactions between related parties are governed by strict tax rules, especially when transferring property to a relative for less than its fair market value, that is, for less than what it would sell for on the market. In such cases, the transaction may result in double taxation.

For example, if a father wants to sell the family cottage to his daughter for $1.00, and the current fair market value is $500,000.00, he will be deemed, for tax purposes, to have sold it for $500,000.00. If he originally purchased the cottage for $100,000.00, he will have to declare a capital gain of $400,000.00. Later, when his daughter sells the cottage, she will be deemed to have acquired it for the actual amount paid, which is $1.00. This results in double taxation, as the $400,000.00 gain already taxed in the father’s hands will be taxed again in the daughter’s hands.

Therefore, under tax rules, it may be more advantageous to proceed with a gift between related parties rather than transferring property for less than its fair market value. In fact, a gift between related parties is deemed to occur at fair market value for both the donor and the donee. In such a case, the transaction does not result in double taxation.

We therefore recommend consulting a tax specialist before proceeding with a transaction between related parties to fully understand the tax implications and make the most appropriate decision for your situation, with full knowledge of the facts.

This article was written in collaboration with Me Émie Talbot, notary at Blanchard Lupien notaries LLP.