30 June 1995 External T.I. 9507285 - ATTRIBUTION - TRANSFER OF PROPERTY TO SPOUSE

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

whether sale of shares to spouse at FMV will trigger attribution. Spouse to pay for shares from dividends paid thereon. Interest on $XXXXXXXXXX loan at $XXXXXXXXXX per month

Position TAKEN:

attribution will apply

Reasons FOR POSITION TAKEN:

criteria in paragraph (b) of paragraph 21 of IT-511R not met (74.5(1) of the Act) as interest is below prescribed rate and significantly less than that which would be charged between arm's length parties

				950728
XXXXXXXXXX			Sandra Short

June 30, 1995

Dear XXXXXXXXXX

Re: Transfer of Property to Spouse and Attribution Rules

This is in reply to your letters of March 2 and April 5, 1995 concerning the sale of XXXXXXXXXX Preferred A shares to your spouse at fair market value. We understand from your letter of April 5, 1995 that

XXXXXXXXXX

We have enclosed a copy of Interpretation Bulletin IT-511R which addresses the income tax consequences of property transfers and loans between spouses. Generally, the Income Tax Act (the Act) provides that 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. An exception to this rule occurs where fair market value consideration is paid by the spouse.

A transfer for fair market consideration is not considered to have taken place for purposes of the Act unless a number of conditions are met. These conditions are explained in paragraph 21 of the bulletin. It would appear that the sale transaction between yourself and your spouse does not meet the criteria in paragraph (b) that the sale price be either fully paid by your spouse in cash or kind (and not from property furnished by you) or that the sale price be satisfied in whole or in part by indebtedness on which interest is charged at a rate not less than the lesser of the prescribed rate and the rate that would be agreed upon between arm's length parties under similar circumstances. For these purposes, the prescribed rate of interest for the first quarter of 1995 was 6% (and is 8% for the period April 1 - June 30). In our view, an interest charge of $XXXXXXXXXX is significantly less than that which would be charged in an agreement between arm's length parties.

Ordinarily the disposition of capital property results in a taxable capital gain, based upon the appreciation in value, to be included in the transferor's income. However, subsection 73(1) of the Act provides an exception to this rule for an inter vivos transfer of property to a spouse. Subsection 73(1) provides that where you transfer capital property (shares, in this case) to your spouse and you are both resident in Canada at the time of the transfer, the particular property shall be deemed to have been disposed of by you for proceeds equal to the adjusted cost base of the property immediately before the transfer and to have been acquired by your spouse for an amount equal to those proceeds. Subsection 73(1) also permits you to elect out of its provisions such that you may, when filing your 1995 income tax return, elect not to have these provisions apply. This gives you greater flexibility by allowing you to choose whether the transfer is at fair market value (thereby creating a capital gain in 1995 based upon the increase in the value of the shares) or at adjusted cost base (a deferral of the realization of any capital gains).

If you do not elect out of the provisions of subsection 73(1) of the Act, you are not required to report any capital gains resulting from the sale of the shares to your spouse. However, any dividends or other income earned by the shares after the sale to your spouse, will be deemed your income and any capital gains or losses realized on these shares will be deemed your capital gains or losses.

Our comments above have assumed that your shares have appreciated in value since acquired by you. If the value of the shares decreased from the time of acquisition by you to the date of the sale of the shares to your wife, we would point out that the Income Tax Act prohibits a loss from being claimed by you. A "superficial loss" is a loss incurred on the disposition of property where the taxpayer, the taxpayer's spouse or a controlled corporation acquires the same or identical property (referred to as "substituted property") within 30 days before or after the disposition and still owns the property 30 days after the original disposition. The Act requires that the amount of a superficial loss be added proportionately to the cost base of each identifical property held immediately after the disposition resulting in the superficial loss.

We trust our comments will be of assistance to you.

Yours truly,

J.A. Szeszycki
for Director
Business and General Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch

Encl.