27 January 1999 External T.I. 9900985 - SPOUSAL TRANSFER OF SHARES

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:

Is there a time limit for the transfer of property pursuant to subsection 73(1) of the Act?

Where shares are the subject to an escrow agreement, when is the transfer made?

Position:

There is no time limit for the transfer of property.

It is a question of fact as to when a property is transferred.

Reasons:

The provision states, in part, “where at any time after 1977 any particular capital property of a taxpayer has been transferred”.

The Department has indicated in paragraph 15 of IT-170R that the timing of disposition of shares in escrow is a question of fact.

XXXXXXXXXX 990098
J. E. Grisé
Attention: XXXXXXXXXX

January 27, 1999

Dear Sirs:

Re: Spousal Transfer

This is in reply to your letter of January 11, 1999, requesting a technical interpretation related to spousal transfers which arise due to a marriage breakdown.

Specifically, you would like to know if subsection 73(1) of the Income Tax Act (the Act) would apply to:

a) the transfer of shares either after or over a period of time, for example, four years to a former common-law spouse on the marriage breakdown;

b) the transfer of shares subject to an escrow agreement such that the shares must be transferred to the former common-law spouse either after or over a period of, say, four years in settlement of rights arising out of the marriage. The purpose of the escrow agreement would be to prevent the transferor spouse from selling or encumbering the shares prior to the transfer to the former common-law spouse. The shares would be released from escrow when transferred to the former common-law spouse; and

c) the transfer of shares to a former common-law spouse on the marriage breakdown subject to an escrow agreement. The purpose of the escrow agreement is to allow the transferor spouse to vote the shares and prevents the former common-law spouse from selling the shares for a period of four years.

Our response assumes that the transferor of the shares is the spouse or former spouse of the transferee pursuant to the extended meaning of “spouse” in subsection 252(4) of the Act. Furthermore, it is assumed that the shares are capital property to the transferor and that both the transferor and transferee were resident in Canada at the time of the transfer.

As indicated in your letter, subsection 73(1) of the Act does not mention any specific time limit on the transfer of a capital property. Accordingly, a transfer of shares under scenario a) above, over a period of years or at the end of four years following the separation of the individuals, would fall under subsection 73(1) of the Act, as long as the transfer was in settlement of rights arising out of their marriage.

The appointment of a third party by the two parties to retain the physical possession of shares for a period of time under an escrow agreement will not, in and by itself, be a transfer of the shares between the parties. The escrow agreement setting out the duties of the third party usually contains provisions that effectively modify the ownership rights of the parties to the agreement. In such cases, the time that ownership passes from the transferor to the transferee can be difficult to ascertain and each case can only be judged in the light of all relevant facts and circumstances.

When the shares are transferred in the three scenarios described above in settlement of rights arising out of their marriage, subsection 73(1) of the Act applies so that the transferor is deemed to dispose of the shares for proceeds equal to the transferor’s adjusted cost base of the shares immediately before the transfer. The transferee acquires the shares at the time of the transfer for an amount equal to the deemed proceeds of the transferor. It is understood that the transferor may elect not to have the provisions of subsection 73(1) of the Act apply to the transfer of a particular property.

We hope our comments are helpful but since they do not constitute an advance income tax ruling, are not binding on the Department with respect to any particular transaction.

Yours truly,

J.F. Oulton, CA
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch

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