Canadian Taxes A to Z (2018): "D" is for Deemed Disposition

Today, D is for Deemed Disposition. Four letters down, 22 to go!

THE MAGIC OF SELLING WITHOUT SELLING

When can you be considered to have sold property, when you didn't actually sell it? Under the Income Tax Act, of course!

You might know that you're subject to capital gains tax (or can claim a capital loss) when you sell a piece of property, and that property has either gone up in value from its original purchase price, or dropped in value below its depreciated (capital cost allowance) value.

What not everyone realizes is that such gain or loss tax rules kick in for many circumstances when you don't actually sell the property. These are called deemed dispositions.

THE FIVE DEEMED DISPOSITION SITUATIONS

Such sales that aren't really sales apply in principally five situations.

1. You transfer securities from a non-registered investment account to a registered account like an RRSP, RDSP, TFSA or RRIF. Deemed proceeds will be market value of securities at time of transfer. Thus trying to save tax can cost you tax.

2. You make a gift of the property to someone else. Deemed proceeds are fair market value of property at time of transfer. Thus a "free" gift could become very costly for the giver.

3. You change the property's use from personal to business, or from business to personal. For example, you change a personal residence into a rental property. Thus trying to generate more income leads to paying your existing income in taxes.

4. You die. All of your capital property is deemed to have been disposed of at the time of your death.

5. You cease to be a resident of Canada. While some people go to a lot of effort to sufficiently cut their ties to Canada so as to be free of its tax regime, that cutting could cost them dearly in deemed disposition taxes.

TOP REASON TO AVOID DEEMED DISPOSITIONS

The reason you need to be very wary about triggering deemed dispositions is that you could get hit with a huge tax bill that might have been deferred until the much later date of the time you actually sell the property (and thus have cash available to pay all those taxes). 

Gordon S. Campbell is a tax lawyer practicing throughout Canada who has argued tax cases as high as the Supreme Court of Canada. Learn more at acmlawfirm.ca/taxlaw.