13 February 2004 External T.I. 2003-0032245 - interspousal transfer of property

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues:

Where a taxpayer transfers property to the taxpayer's spouse and the spouse subsequently invests the proceeds of sale, would the attribution rules apply such that the income earned and capital gains or losses realized on the investments would be deemed to be income, capital gains or losses of the taxpayer.

Position TAKEN:

None. Determination requires a review of all relevant facts.

Reasons FOR POSITION TAKEN:

In the circumstances described in the present case, it is a question of fact as to whether both the taxpayer and the Spouse have made equal financial contributions to the purchase of the principal residence including principal and interest payments on any mortgage obligation.

In circumstances where a couple jointly purchases property which they register in both their names but the purchase funds including principal and interest payments on any loan obligation are provided solely from the assets or earnings of only one of the spouses (the "Contributing Spouse") it is our view that the attribution rules would apply to property transferred by the Contributing Spouse to the other spouse as consideration for the other spouse's share of the jointly held property.

XXXXXXXXXX 							2003-003224
P. Diguer, CGA
February 13, 2004

Dear XXXXXXXXXX:

Re: Interspousal transfer of property - Attribution rules

We are writing in response to your letter dated June 04, 2003 in which you request our views in regard to the attribution of income earned on property transferred by a taxpayer to the taxpayer's spouse.

In particular, you describe a situation where a taxpayer transfers for valuable consideration, using legally effective steps, including having the title for the property changed, his or her share of the principal residence to the taxpayer's spouse (the "Spouse"). The taxpayer invests the proceeds from the sale of his or her share of the principal residence.

You ask

For written confirmation that the investment income earned by the taxpayer on investment property acquired using the proceeds of sale received by the taxpayer from the Spouse would, in the situation described above, be considered income of the taxpayer and not be deemed to be income of the Spouse.

Our comments

Written confirmation of the tax implications inherent in particular transactions are given by this Directorate only where the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular IC-70-6R5 dated May 17, 2002. However, advance income tax rulings are not given where the major issue is whether a transaction should be viewed as being of an income or capital nature. Where the particular transaction is completed, the inquiry should be addressed to the relevant Tax Services Office.

Additionally, it is a question of fact as to whether or not the attribution rules apply to any particular situation and the issue can only be decided on a case by case review of all the pertinent information. For example, in the situation described above, it is a question of fact as to whether both the taxpayer and the Spouse have made equal financial contributions to the purchase of the principal residence including principal and interest payments on any mortgage obligation. Although we are unable to provide an opinion in respect of the specific transactions described in your letter, we offer the following general comments in connection with your request which we hope are of assistance to you.

The Income Tax Act (Canada) (the "Act") contains a comprehensive set of rules intended to prevent a taxpayer and the taxpayer's spouse from splitting income from property so as to reduce the total amount of tax payable on that income. Except where fair market value consideration is paid by the spouse or the parties are living separate and apart by reason of a breakdown of their marriage, income earned and capital gains and losses realized on property transferred or loaned from a taxpayer to the taxpayer's spouse (and on property substituted for that property) are generally deemed to be the income, gains or losses of the taxpayer and not of the taxpayer's spouse (the "Attribution Rules").

Subsection 73(1) of the Act provides that where an individual transfers capital property to his/her spouse and both are resident in Canada at the time of the transfer, the particular property transferred shall be deemed to have been disposed of for proceeds equal to the adjusted cost base of the property immediately before the transfer and to have been acquired by the individual's spouse for an amount equal to those proceeds. However, the transferor may elect out of the provisions of subsection 73(1) of the Act.

If the transferor does not elect out of the provisions of subsection 73(1) of the Act, he/she is not required to report any capital gains resulting from the sale of the property to their spouse. However, pursuant to subsections 74.1(1) and 74.2(1) of the Act and subject to subsection 74.5(11) of the Act, any dividends or other income from the property after the sale to the spouse, will be deemed to be the transferor's income, and any capital gains or losses realized on the subsequent disposition of the property will be deemed to be the transferor's capital gains or losses. In this regard, income from property would generally be the income after deducting those expenses that are deductible in computing income from that particular property. Finally, subsection 82(2) of the Act provides that where a dividend is included in the transferor's income because of the attribution rules, the dividend is deemed to have been received by the transferor. This will enable the transferor to claim the dividend tax credit.

The Act also provides certain exclusions from the Attribution Rules. For example, pursuant to subsection 74.5(1) of the Act, income or loss from transferred property or any taxable capital gains or allowable capital losses on the disposition of the transferred property does not attribute to the transferor in a particular year where:

(a) the sale or other transfer is made to the transferor's spouse for consideration equal to fair market value of the transferred property,

(b) the sale price or other consideration for the transfer is

(i) fully paid by the transferee in cash or kind (and not from property furnished by the transferor), or

(ii) satisfied in whole or in part by indebtedness on which interest is charged at a rate not less than the lesser of

(A) the prescribed rate and

(B) the rate that would be agreed upon between arm's length parties under similar circumstances at the time the indebtedness is incurred, if all such interest is paid no later than 30 days after the end of each calendar year in which it becomes payable, and

(c) the transferor elects not to have the provisions of subsection 73(1) of the Act apply (i.e., any gain or loss is realized at the time of transfer).

If the interest in (b)(ii) is not paid within the described time then the indebtedness will not meet the requirements for exemption from the attribution rules under subsection 74.5(1) in the particular year or in any later year.

However, in a circumstances where a couple jointly purchases property which they register in both their names but the purchase funds including principal and interest payments on any mortgage obligation are provided solely from the assets or earnings of only one of the spouses (the "Contributing Spouse") it is our view that the Attribution Rules would apply to property transferred by the Contributing Spouse to the other spouse as consideration for the other spouse's share of the jointly held property. As a consequence, any income earned and capital gains or losses realized on the investments by the other spouse from the property transferred by the Contributing Spouse would generally be deemed to be income, gains or losses of the Contributing Spouse and would therefore not be considered to be income of the other spouse.

We enclose a copy of Interpretation Bulletin IT-511R, dated February 1, 1994 which sets out the Canada Revenue Agency's views on the attribution rules relating to spouses.

We trust our comments will be of assistance to you. .

Yours truly,

Steve Tevlin
for Director
Financial Industries Division
Income Tax Rulings Directorate