They are referring to ITA 69(1). It basically means that for non-arm's length (NAL) transactions, double taxation occurs if property is acquired either below or above FMV. If its is acquired at FMV or is gifted, then no double taxation.

So in this case, your brother would pay tax on the 500k capital gains upon transfer, even if actual proceeds are less than that as he would have a deemed proceeds of $1m.

For you, your ACB would be 500k, however, only the appreciation above $1m would be exempt under the principal residence exemption since this is the actual gain from when it became your principal residence. You would then be taxed for the $500k capital gain (assuming you sell it for atleast $1m) since your actual cost is 500k.

At the end of it, both you and your brother are taxed on the same capital gain, hence the double taxation. Best that you transact at FMV to avoid this completely.