Non-arm's length transactions
On this page, you will find information on the following:
- Capital cost calculation (Non-arm's length – Resident of Canada transaction)
- Capital cost calculation (Non-arm's length – Non-resident transaction)
When you acquire rental property (depreciable property) in a non-arm's length transaction, there are special rules for determining the property's capital cost. These special rules do not apply if you acquire the property because of someone's death.
You can acquire depreciable property in a non-arm's length transaction from:
- an individual resident in Canada
- a partnership with at least one partner who is an individual resident in Canada
- a partnership with at least one partner who is another partnership
If you pay more for the rental property than the seller paid for it, calculate the capital cost as follows:
Capital cost calculation (Non-arm's length – Resident of Canada transaction)
The seller's cost or capital cost
The seller's proceeds of disposition
Amount from line 1
Line 2 minus line 3 (if negative, enter "0")
Enter any capital gains deductions claimed for the capital gains related to the depreciable propertyFootnote 1
Line 4 minus line 5 (if negative, enter "0")
Capital cost: line 1 plus line 6
You can also acquire depreciable property in a non-arm's length transaction from:
- a corporation
- an individual who is not resident in Canada
- a partnership with no partners who are individuals resident in Canada or with no partners that are other partnerships
If you pay more for the rental property than the seller paid for it, calculate the capital cost as follows:
Capital cost calculation (Non-arm's length – Non-resident transaction)
The seller's cost or capital cost
The seller's proceeds of disposition
Amount from line 1
Line 2 minus line 3 (if negative, enter "0")
Capital cost: line 1 plus line 4Footnote 2
If you acquire depreciable property in a non-arm's length transaction and pay less for it than the seller paid, your capital cost is the same amount as the seller paid. The difference between what you paid and what the seller paid is considered to be deducted as capital cost allowance (CCA). Enter the amount you paid in column 3 of Area A. Enter the same amount in Area B or C, whichever applies.
Example
Teresa bought a refrigerator from her father, Roman, for $400 to use in her rental operation. Roman paid $1,000 for the refrigerator and was using it in his rental operations. Since the amount Teresa paid is less than the amount Roman paid, the CRA considers Teresa's cost to be $1,000. It also considers that Teresa has deducted CCA from the amount of $600 in the past ($1,000 – $400).
In Area B, Teresa enters $1,000 in column 3, "Total cost."
In Area A, she enters $400 in column 3, “Cost of additions in the year,” as the addition for the current tax year.