Tax Tip[] Transfers

Transfers of Investments to Corporations

“If Mr. X had retained and sold the investment, there would be no tax liability.”

Potential unintended tax problems can arise when investments are transferred to a corporation. In particular, the transfer of an investment with an unrealized loss can result in unanticipated consequences as a result of the superficial loss rules. These rules prevent an individual from claiming a capital loss when the individual transfers an investment with an unrealized loss to a corporation that is controlled by the individual. The unrealized loss is added to the cost of the investment now owned by the corporation, which preserves the ability of the corporation to claim the loss when the investment is eventually sold to an arm’s length person. This result seems equitable until you analyze what happens when the proceeds are distributed by the corporation.

Consider the following example. Mr. X transfers an investment with a cost of $1,000 to Xco for its fair market value of $500. He takes back a note (or an adjustment to the shareholder loan account) for $500 — in other words, Xco now owes him $500.

Mr. X’s loss of $500 is denied but is added to Xco’s cost of the investment. As a result Xco’s cost of the investment, for tax purposes, is $1,000. If the investment increases in value from $500 to $1,000 and Xco sells it, there is no tax liability for Xco as the cost is $1,000.

The problem arises when Xco distributes the proceeds from the sale of the investment. In this example, only $500 can be distributed to Mr. X without tax (paying off the debt that Xco owes Mr. X). The remaining $500 would be a taxable dividend resulting in a tax liability to Mr. X. If Mr. X had retained and sold the investment, there would be no tax liability.

While it may be possible to plan around this problem, taxpayers and their advisers should be aware of this risk when considering transfers to corporations.


TAX TIP OF THE WEEK is provided as a free service to clients and friends of the Tax Specialist Group member firms. The Tax Specialist Group is a national affiliation of firms who specialize in providing tax consulting services to other professionals, businesses and high net worth individuals on Canadian and international tax matters and tax disputes.

The material provided in Tax Tip of the Week is believed to be accurate and reliable as of the date it is written. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Neither the Tax Specialist Group nor any member firm can accept any liability for the tax consequences that may result from acting based on the contents hereof.

Transfer of Properties on Separation & Divorce

“Proper planning can result in benefits to both sides.”

When properties are transferred between related persons, the Tax Act states that the transaction should occur at fair market value. However, the rules in section 73 state that transfers between spouses occur at cost unless there is an election for the transactions not to occur at cost. What happens to transactions between spouses who are separated or in a process of being divorced?

If the individuals are still legally married, then transactions between them will generally occur at cost. Having said that, there may be situations where it is beneficial for the transactions to occur at fair market value. For example, if the assets being transferred are shares in a company that qualifies as a qualified small business corporation, then consideration should be given to electing to have the transaction occur at fair market value so that the $750,000 capital gains exemption can be used. Another situation where it might be beneficial to transfer at fair market value is where the transferor has unused capital losses or non-capital losses. If the election is made to have the transaction occur at fair market value, then the transferor is able to use his/her capital losses so that the transaction is still tax-free. This also gives a benefit to the transferee in that he/she will now have an asset with a higher cost base on any future dispositions.

Where a transfer is being done as part of a settlement of marital property, the transfer again is generally deemed to be at cost base unless the individuals elect otherwise.

If no planning is done, there generally will not be tax on the transfer. However, there may be opportunities for both sides to benefit with proper planning.


TAX TIP OF THE WEEK is provided as a free service to clients and friends of the Tax Specialist Group member firms. The Tax Specialist Group is a national affiliation of firms who specialize in providing tax consulting services to other professionals, businesses and high net worth individuals on Canadian and international tax matters and tax disputes.

The material provided in Tax Tip of the Week is believed to be accurate and reliable as of the date it is written. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Neither the Tax Specialist Group nor any member firm can accept any liability for the tax consequences that may result from acting based on the contents hereof.