Cases
Lipson v. Canada, 2009 DTC 5528, 2009 SCC 1, [2009] 1 S.C.R. 3
The taxpayer's wife ("Jordanna") borrowed $562,500 from the Bank of Montreal under an interest-bearing demand promissory note in order to purchase some of the shares of a family corporation from the taxpayer for that sum, with the sale proceeds being used by the taxpayer to purchase a family home. The inter-spousal rollover in s. 73(1) applied to this purchase. The next day, a mortgage loan on the home received from the Bank was used to retire the demand promissory note. The taxpayer included in the computation of his income both the dividends on the shares, and the interest expense incurred by her on the mortgage loan, on the basis that the attribution rules in s. 74.1(1) applied.
After stating (at para. 32) that “the attribution rules in ss. 74.1 to 74.5 are anti-avoidance provisions whose purpose is to prevent spouses (and other related persons) from reducing tax by taking advantage of their non-arm’s length status when transferring property between themselves,” Lebel J. found (at para. 42):
As ... the purpose of s. 74.1(1) is to prevent spouses from reducing tax by taking advantage of their non arm's length relationship when transferring property between themselves ..., the attribution by operation of s. 74.1(1) that allowed Mr. Lipson to deduct the interest in order to reduce the tax payable on the dividend income from the shares, and other income, which he would not have been able to do were Mrs. Lipson dealing with him at arm's length, qualifies as abusive tax avoidance ... .
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 245 - Subsection 245(4) | policy of spousal attribution rule: cannot exploit spousal status on property transfers | 346 |
The Queen v. Kieboom, 92 DTC 6382, [1992] 2 CTC 59 (FCA)
In finding that s. 74(1) applied to attribute dividend income to the taxpayer when he permitted his wife to subscribe for common shares of his private company for nominal consideration, Linden J.A. stated (p. 6386):
"In my view, the phrase 'transfer of property' is used in this provision in a rather broad sense ... The transfer, which in this case was indirect, in that the taxpayer arranged for his company to issue shares to his wife, is nevertheless a transfer from the husband to the wife. There is no need for shares to be transferred in order to trigger this provision ..."
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 246 - Subsection 246(1) | 60 | |
| Tax Topics - Statutory Interpretation - Interpretation Bulletins, etc. | 73 |
Garant v. The Queen, [1985] 1 CTC 153, 85 DTC 5408 (FCTD)
The taxpayer and his wife agreed to change their matrimonial regime from community of property to separation of property. Since the partition was a declaration of property rights, rather than a conveyance of property, there accordingly was no "transfer" of property.
Beique v. The Queen, 81 DTC 5050, [1981] CTC 75 (FCA)
Income derived from real property which the taxpayer's wife bought with money he had given her, was attributed to him.
Murphy v. The Queen, 80 DTC 6314, [1980] CTC 386 (FCTD)
Under a court-approved variation of trust, the plaintiff forewent his vested right to receive a ½ share of the income of a trust, and a discretionary trust was created whose beneficiaries included his wife. In the taxation years in question, the trustees of this trust directed that 1/4 of the trust income be paid to his wife, an eventuality which the plaintiff was found to have anticipated. It was held that he had by means of a trust transferred property to his wife, and the 1/4 share of the trust income was taxable as his income.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Property | included right to be included in class of discretionary beneficiaries | 46 |
| Tax Topics - Income Tax Act - Section 56 - Subsection 56(2) | 106 |
Lackie v. The Queen, 79 DTC 5309, [1979] CTC 389 (FCA)
Payments received by the wife of the taxpayer for gravel removed from land that had been conveyed to her by the taxpayer were found to be payments dependent upon use of the property rather than income from a gravel-selling business. The payments accordingly were "income ... from the property" and s. 74(1) applied to attribute the income to the taxpayer.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 12 - Subsection 12(1) - Paragraph 12(1)(g) | 66 |
Administrative Policy
7 October 2016 APFF Roundtable Q. 19, 2016-0655841C6 F - Reimbursement of attributed income
Situation 1
CRA assesses Spouse A under s. 74.1(1) on the basis that interest received by Spouse B on transferred funds should be included in A’s income.
Situation 2
Partner B (a corporation) is assessed under s. 103 on the basis that 40% rather than 10% of the income of the LP should have been included in its income (so that the share of Partner A, who is a related individual, should have been 60% rather than 90%).
Situation 3
CRA assesses corporation A under s. 56(2) and s. 69(1)(b) on a capital gain of $99,990 on the basis that it had exchanged preferred shares with a FMV of $100,000 for new common shares with a FMV of $10, thereby shifting value to the other shareholder (individual B) which was then realized by B on a sale to a third party.
Is the income allocated to the other taxpayer in Situations 1 and 2 under ss. 74.1(1) and 103 required to be reimbursed by the taxpayer who received the income – and similarly re Situation 3, is B required to reimburse A for the sale proceeds received by him? CRA stated:
[T]he provisions…mentioned...do not provide for a reimbursement obligation by a taxpayer where a benefit was allocated or when income was attributed to another taxpayer. …
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 103 - Subsection 103(1) | no obligation to repay income reallocated to other partner | 170 |
| Tax Topics - Income Tax Act - Section 69 - Subsection 69(1) - Paragraph 69(1)(b) | excess disposition proceeds not required to be repaid | 91 |
29 June 2016 External T.I. 2016-0642811E5 - attribution rules - spouses
An individual sold shares, with the proceeds placed in a non-registered joint investment account with the individual’s spouse for the purpose of acquiring and holding financial instruments such as bonds and mutual funds. Would capital gains and other income earned in the joint account that is reported by the spouse be attributed back to the individual unless a prescribed loan were made? CRA responded:
In circumstances where one spouse purchases property using funds which are provided solely from the assets or earnings of the other spouse (the "Contributing Spouse"), the Contributing Spouse is considered to have transferred property to the other spouse. It is our view that...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. ...
CRA went on to a general descussion of the exception in s. 74.5(2).
S4-F3-C1 - Price Adjustment Clauses
CRA will consider a price adjustment clause to represent pricing at fair market value if:
- the agreement reflects a bona fide intention of the parties to transfer property at FMV;
- the purported FMV is determined by method that is fair and reasonable in the circumstances (which does not necessarily entail using CRA's preferred method, nor engaging a valuation expert);
- the parties agree that a CRA or Court valuation, if any, will supersede the price otherwise determined; and
- the excess or shortfall is actually refunded or paid, or legal liability therefor is adjusted (para. 1.5).
Price adjustment clauses involving shares may use a number of adjustment mechanisms. CRA non-exhaustively mentions changes in redemption value, the issuance of a note or change in the principle amount of a note, or a change in the number of shares issued - although CRA recommends against using the latter because of inherent legal and technical difficulties (para. 1.6).
19 May 2010 External T.I. 2010-0364131E5 F - Issuance - Discretionary shares
Upon the incorporation of Opco, X subscribed for and continued thereafter to hold all the Class A voting participating shares of Opco, whose terms provide for a participating dividend. At that time or thereafter, a Holding company owned by X, or X’s spouse, subscribed a modest amount for Class B non-voting participating shares so that dividends thereon may accomplish a creditor-proofing or income-splitting objective.
CRA noted that it could consider that Opco had conferred a s. 15(1) benefit on the subscriber to the Class B shares if their fair market value was higher than the subscription price. Alternatively, there might be circumstances (referred to in the summary as the situation where “the benefit is conferred by a shareholder rather than by the corporation,” i.e., by X rather than Opco) where CRA would apply s. 69(1)(b) and Kieboom on the basis that X had disposed of an interest in Opco to the Class B share subscriber for the FMV of that interest. CRA then stated:
[I]f X disposed of any right or interest in Opco to X's spouse … we could also argue that the attribution rules in subsection 74.1(1) would apply to reallocate to X any dividends paid on the Class B shares held by X's spouse.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 15 - Subsection 15(1) | subscription for discretionary shares of Opco might represent a s. 15(1) benefit conferred by Opco on subscriber, or engage s. 69(1)(b) where this is benefit conferred by existing shareholder | 203 |
| Tax Topics - Income Tax Act - Section 69 - Subsection 69(1) - Paragraph 69(1)(b) | Kieboom/s. 69(1)(b) rather than s. 15(1) where benefit conferred by shareholder rather than corporation | 185 |
6 February 2004 External T.I. 2003-0044021E5 F - Les règles d'attribution et les REER
CRA noted that where an individual gifts money to enable the latter to make deductible RRSP contributions, which are used to acquire an interest-generating investment, s. 74.1(1) applies to amounts subsequently withdrawn by the spouse from the RRSP, stating:
[A]mounts received by the spouse as an RRSP benefit that are income pursuant to subsection 146(8) and paragraph 56(1)(h) are income from property for the purposes of subsection 74.1(1) and, as such, will be included in the individual's income.
We wish to point out that the exclusion in paragraph 74.5(12)(a) demonstrates that Parliament considered RRSP income, which is included under paragraph 56(1)(h), to be income from property. The exclusion in subsection 74.1(1) regarding certain transfers of pension income that are included in income pursuant to clause 56(1)(a)(i)(B) confirms this view.
14 January 2004 External T.I. 2003-0029571E5 F - Attribution - société de personnes
A couple (Monsieur and Madame) formed a farming partnership. Monsieur contributed all of the farming business (which previously had been carried on by him as sole proprietor, and whose net assets were valued at $500,000) to the partnership, and she contributed $100. Monsieur and Madame were equally and actively involved in the farming business on a regular, continuous and substantial basis.
After indicating that s. 103(1.1) might apply to reallocate the agreed allocation of the partnership income as between the two, CRA went on to state:
[B]ased on the information you provided, it does not appear that [Monsieur] transferred any of his interest in the partnership to her. Madame acquired her interest by investing $100.
The fact that the Madame invested only $100 in relation to the capital invested by Monsieur should be reflected in a reasonable allocation of the partnership income between the spouses; otherwise subsection 103(1.1) would apply to modify the allocation. In this situation, if the wife's interest is derived solely from her cash investment and her reasonable share of the partnership income, it is our view that the husband would not have transferred anything to his wife, either directly or indirectly, and subsections 74.1(1) and 74.2(1) would not apply.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 103 - Subsection 103(1.1) | allocation of farming partnership income did not appear reasonable | 152 |
27 March 2003 External T.I. 2002-0180045 F - DEDUCTION DES INTERETS
In order to generate an interest deduction, Ms. A borrowed money from a bank to purchase shares from Mr. A (also in the top bracket), who used the proceeds to pay off the loan that had been used to acquire the residence. CCRA noted that “it is the net loss or income determined under the Act that is … attributed” pursuant to s. 74.1(1), so that “the interest expense paid by Ms. A … will be taken into account in determining the loss or income to be attributed to her spouse … pursuant to subsection 74.1(1)” – but that s. 245(1) might be determined to apply.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(c) - Subparagraph 20(1)(c)(i) | s. 245(1) might be applied to transactions to convert non-deductible mortgage interest to deductible interest pursuant to sale of shares to borrowing wife and use of s. 74.1(1) | 120 |
20 June 2001 External T.I. 2001-0066825 F - REGLES D'ATTRIBUTIONS
Dividends and capital gains generated in 2001 by the taxpayer on property acquired from the taxpayer’s spouse before May 23, 1985 would be deemed to be dividends or capital gains of the spouse pursuant to ss. 74 (1) and (2) rather than being subject to s. 74.1 et seq.
8 June 2000 External T.I. 1999-0006105 F - TRANSFERT DE BIENS A UN CONJOINT
An individual transferred property to his spouse in consideration for her owing the purchase price to him. The property was subsequently transferred back to him as payment of the balance due. Would the attribution rule cease to apply when the property was thus retransferred?
The Agency indicated that the answer to Q. 36 of the 1993 CTF Roundtable only concerned the repayment of a loan either with the property loaned or with other property. Regarding the repayment of a debt other than a loan, the Agency was undertaking a study to examine its comments in 9616635 in light of its position on the word "transfer" as set out in IT-325-R2, para. 13.
13 April 2000 External T.I. 1999-0014465 F - UTILISATION DE PRODUITS D'ASSURANCE-VIE
In the course of a general discussion, the Agency stated:
[I]ncome from a life insurance policy that is included in income under subsection 12.2(1) and paragraph 56(1)(j) is property income. Consequently … the attribution rules set out in section 74.1 of the Act could apply to income from a life insurance policy that is a substitute for the property loaned.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 148 - Subsection 148(9) - Disposition - Paragraph (d) | addition of disability option clause to an insurance policy results in its disposition by operation of law if under the CCQ such change “results in the creation of a new contract” | 166 |
19 April 1995 External T.I. 9431235 - ATTRIBUTION RULES AND RRSP
Where an individual's contributions to his RRSP is funded with cash transferred to him from his spouse, s. 74.1(1) will apply to the amount withdrawn from the individual's RRSP, given that an interest in the RRSP is "property substituted for" the cash.
26 September 1994 External T.I. 9412015 - ATTRIBUTION AND COMMUNITY PROPERTY
Where a person transfers property to his or her spouse prior to becoming a resident of Canada, s. 74.1(1) would apply to any income earned from such transferred property. It is possible that if under the applicable community property laws in a foreign jurisdiction, a spouse acquires a vested 50% interest in each property acquired or owned by the other spouse, the first spouse might be considered to have acquired his or her interest in such property by virtue of the relevant provisions of such law and not to have had the property transferred to him or her.
31 May 1994 External T.I. 9411795 - INTERSPOUSE TRANSFERS AND RRSP'S
Where an individual transfers cash to a spouse for no consideration, the spouse contributes the cash to an RRSP of which she is the annuitant, the spouse claims a contribution deduction under s. 146(5) and later withdraws the money, the total amount received by her out of the RRSP will be income from substituted property and included in the individual's income under s. 74.1(1) and will not be income of the spouse. S.74.1(1) will not apply to income earned on the reinvestment of the amount withdrawn from the RRSP.
93 C.R. - Q. 36
The Act does not provide specifically that attribution ceases when a loan to which s. 74.1(1) applies is repaid. Accordingly, if the loan is repaid with property other than the original property loaned or property substituted, the attribution continues.
8 May 1991 T.I. (Tax Window, No. 3, p. 22, ¶1250)
Where Mr. X purchases real property from his spouse, generates $10,000 of net rental income from the property, but fails to pay the $9,000 of interest which has accrued on the unpaid purchase price within the time provided in s. 74.5(1), the income which is attributed to his spouse will be the net income of $1,000.
4 May 1994 External T.I. 9400825 - ATTRIBUTION RULES
A taxpayer who transferred cash from his wife to assist her in purchasing a property that was subsequently sold by her at a gain was referred to Trinca v. MNR, 51 DTC 91 "wherein it was decided in circumstances similar to yours that only a portion of the gain was attributed".
14 January 1991 T.I. (Tax Window, Prelim. No. 3, p. 12, ¶1091)
"Income from property" for purposes of ss.74.1, 110.6 and 207.5 includes annuity income taxed under ss.56(1)(d), (d.1) and (d.2).
86 C.R. - Q.43
Where the property loaned or property substituted therefor is used to repay a low-interest loan to which s. 74.1(1) applies, there will not be any income from the property loaned to which attribution would apply.
86 C.R. - Q.45
S.74.1 only attributes income from property, and s. 96(1)(f) applies for purposes of determining the source of income received by a partner.
Articles
Elie Roth, Tim Youdan, Chris Anderson, Kim Brown, "Taxation of Beneficiaries Resident in Canada", Chapter 4 of Canadian Taxation of Trusts (Canadian Tax Foundation), 2016.
Whether attribution rules apply from a release or surrender (p. 343)
The CRA states m paragraph 1.15 of Income Tax Folio S6-F2-C1 that the attribution rules in subsections 74.1(1) and (2) apply if the taxpayer's spouse or minor children benefit under the terms of the trust as a consequence of the release or surrender of the income interest in the trust by the taxpayer. These rules apply even when the taxpayer does not direct in any manner what person is entitled to benefit in respect of the interest or if the person so designated would be entitled to benefit under the trust in the same manner without the taxpayer's direction. This conclusion appears to be incorrect because neither a release or surrender of the income interest without directing who will benefit therefrom nor the release or surrender of an income interest when a designation or agreement is made in favour of a person who would otherwise benefit under the terms of the trust appears to constitute a "transfer" of property within the meaning of the attribution provisions.