Related party transaction

Question 1

Related party transaction

Answer 1

• When property is transferred between related parties at below FMV, the proceeds received on the transfer are deemed to be the FMV of the property.
  o A capital gain must be reported for the difference between the deemed proceeds and the adjusted cost base of the property.
  o The party receiving the property is only permitted to record a cost base equal to what was paid. If this is less than FMV, double taxation results.
• Can avoid this double taxation a number of ways, such as by selling the property for the FMV or by electing to use a Section 85(1) rollover.
  o For a Section 85(1) rollover, a transfer price is elected between cost and FMV (electing at cost would minimize taxes).
  o At least one share must be taken back as consideration.
  o The non-share consideration should not exceed the elected transfer price, so the balance of the amount to reach FMV of the property should be shares.

Reference: ITA 69(1)