Most transactions between parties not at arm’s length with each other (often described as related parties, such as family members), the parties to the transaction are subject to a one-sided adjustment where the transaction proceeds does not equal fair market value (“FMV”). If the price exceeds FMV, then the cost to the purchaser is limited to the FMV while the vendor is taxed based on price. If FMV exceeds price, the vendor is deemed to receive proceeds equal to the FMV, but the purchaser’s cost is limited to price. Often related party transactions will include a price adjustment clause to avoid such one-sided adjustments in the event the FMV is successfully challenged.

Generally, when property is transferred as a gift, the proceeds to the donor and the cost of the gift to the recipient of the gift are deemed equal to the fair market value, pursuant to the Income tax Act (“ITA”). In the event the fair market value is challenged, any adjustment would be the same for both parties.

In a recent Technical Interpretation, The Canada Revenue Agency (“CRA”) was asked whether a disposition to a child would constitute a gift or a sale for consideration of $1. The consideration of $1 is being specified in the legal agreement for the sole purpose of making the agreement legally binding.

The CRA noted that the term “gift” is not defined in the ITA. The CRA views a gift as a voluntary transfer of property by a donor, which the recipient confers no right, privilege, material benefit or advantage on the donor, the determination of whether a transaction is a sale for a gift is a question of fact which must be based on legal relationships between the parties. However, the CRA acknowledged that a transfer for nominal consideration of $1 could be a gift. In particular, where the agreement provides for nominal consideration merely to endure the transaction is legally binding, this may be considered a gift.

While a sale for $1 and a gift would both result in deemed proceeds equal to FMV for the transferor, a gifts would result in a cost equal to FMV for the recipient, while a sale for $1 would mean the recipient’s cost would be $1.

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