Why selling assets to Children for $1 doesn't work (Section 69: Non-arm's length transfers)?
- Elkhanagry Accounting
- 21 minutes ago
- 3 min read
Table of Contents
Introduction – The $1 Sale Story
Not long ago, a client came to us with what they thought was a clever way to pass on their rental property. The plan? Sell it to their children for $1. Their reasoning was simple: If I sell for a dollar, I won’t make a gain, and I won’t owe tax.
The reality was very different. Under the Income Tax Act (ITA), the CRA ignores the $1 price and instead taxes the parent as though the property was sold at its fair market value (FMV). That meant our client could have been hit with a surprise tax bill of nearly $100,000 on “phantom income” they never received.
Even worse, the children would inherit the property with a cost base of only $1, meaning they would eventually face tax on almost the entire future sale price — creating double taxation for the family.
Thankfully, we were able to explain the rules and guide them to a better structure. By avoiding the $1 sale and planning properly, we prevented the mismatch and helped them avoid paying tax twice.
This is where Section 69: Non-arm's length transfers comes into play.
Section 69: Non-arm's length transfers: The Rule You Can’t Ignore
ITA s.69(1) governs non-arm’s-length transfers when the transaction price doesn’t match FMV.
Selling below FMV → deemed proceeds = FMV (s.69(1)(b)).
Buying above FMV → deemed cost = FMV (s.69(1)(a)).
Receiving by gift → deemed cost to recipient = FMV (s.69(1)(c)).
These provisions prevent families from:
Transferring property for $1 to sidestep capital gains.
Inflating costs to create artificial losses.
Passing business value into the next generation without paying tax.
In short, the CRA taxes based on economic reality, not the contract price.
What Does “Non-Arm’s Length” Mean?
Section 69 only applies when the parties are not dealing at arm’s length.
Under s.251, related persons (parents, children, siblings, spouses, and commonly controlled corporations) are automatically deemed non-arm’s length.
But even unrelated parties can be non-arm’s length if their transaction doesn’t reflect independent bargaining. Courts apply a three-part test:
Common Mind – Are the parties acting together under one influence?
De Facto Control – Does one party dominate the other’s decisions?
Ordinary Business Dealings – Would this transaction look normal if negotiated between strangers?
Almost all family transfers fall into the non-arm’s-length category.
Why Selling Below Fair Market Value Creates Tax Problems
Two problems arise when selling for $1:
1. Phantom Income Problem: The parent is deemed to sell at FMV but only receives $1. They face a large tax bill without any cash.
2. Mismatch Problem
Parent taxed at FMV gain.
Child’s ACB = what they paid ($1).
On a future sale, the child pays tax again on almost the entire value.
Why Gifting Is Better: A gift still triggers FMV for the parent (s.69(1)(b)), but the child’s ACB is stepped up to FMV (s.69(1)(c)). That means no double tax on the next sale.
A $1 sale is the worst of both worlds: full tax for the parent, heavier tax for the child.
Example: A $1 House Sale Gone Wrong
Item | $1 Sale | Gift |
Parents’ Proceeds (Deemed) | $500,000 | $500,000 |
Parent’s ACB | $200,000 | $200,000 |
Parent’s Gain | $300,000 → taxable = $150,000 | $300,000 → taxable = $150,000 |
Parents’ Tax (approx. 48%) | $72,000 (plus possible CCA recapture) | $72,000 (plus possible CCA recapture) |
Child’s ACB | $1 | $500,000 |
Child’s Gain on Later Sale ($600,000) | $599,999 → taxable ≈ $300,000 | $100,000 → taxable = $50,000 |
Child’s Tax (approx. 48%) | $144,000 | $24,000 |
Total Family Tax | ≈ $216,000+ | ≈ $96,000+ |
CRA & ITA References
ITA s.69(1)(a), (b), (c) – Non-arm’s-length deemed disposition and ACB rules
ITA s.251 – Arm’s length definition
ITA s.13(1) – Recapture of depreciation (rental property)
Contact Us – How We Can Help
At Elkhanagry Accounting, we help families and business owners navigate the complex rules around property transfers and succession planning.
We can help you:
Avoid taxation traps of all kinds!
Align your plan with your long-term goals, not just short-term tax savings.
Contact us today to discuss your situation. The wrong move could cost your family hundreds of thousands — the right plan preserves both wealth and legacy
Disclaimer
This article provides general information that is current as of the posting date and is not updated, which means it may become outdated. The content is not intended to provide accounting, tax, or financial advice and should not be relied upon as such. Tax and financial situations are unique to each individual and may differ from the examples discussed in this article. For personalized advice, please consult a qualified tax professional.
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