12 July 2005 External T.I. 2004-0106021E5 - jointly owned real estate and securities

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: 1. The basis of allocating of income and capital gains from a source in Canada or the United States where the property is held jointly by spouses resident in Canada. 2. The basis of allocating of income and capital gains from a source in Canada where the property is held jointly by spouses resident in the U.S.

Position: 1. When income or a capital gain is derived from property held in joint tenancy by spouses resident in Canada, it should generally be allocated proportionately according to each spouse's respective contribution of capital to acquire the property. This position applies regardless of whether the income or capital gain is from a source in Canada or the U.S. 2. Where an election is made under subsection 216(1) on rental property held in joint tenancy by spouses resident in the U.S. or there is a capital gain from the disposition of taxable Canadian property held in joint tenancy by spouses resident in the U.S., the rental income or capital gain would generally be allocated proportionately according to each spouse's respective contribution of capital to acquire that property.

Reasons: As per previous positions taken on reporting of capital gains and income from property held in joint tenancy.

XXXXXXXXXX 						2004-010602
							Catherine Bowen
(613) 957-8284
July 12, 2005

Dear Sir:

Re: Allocating Income from Jointly Owned Property

This is in response to your letter dated November 24, 2004, wherein you requested our comments on the allocation of income and gains from capital property in Canada or the United States that is jointly owned by spouses. We apologize for the delay in responding to your letter.

In particular, you requested our views on what basis rental income, dividend income, interest income, and capital gains on capital property from a source

a) in Canada or the United States where the property is held jointly by spouses resident in Canada; or

b) in Canada where the property is held jointly by spouses resident in the United States is to be allocated among the spouses.

With respect to the real estate held, you asked us to assume that the joint ownership is in the form of right of survivorship. You stated that the 2004 guide T4036, Rental Income, indicates on page 7 that if you are a co-owner of the rental property, your share of the rental income or loss will depend on your share of ownership. However, the word "ownership" is not defined.

You believe that the Canadian and the U.S. income tax rules for allocating income between spouses can result in a mismatching of income and foreign tax credits between the two countries.

Our Comments

Written confirmation of the income tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request as described in Information Circular IC 70-6R5 dated May 17, 2002 issued by the Canada Revenue Agency (the "CRA"). Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. However, we can provide the following general comments on the allocation of income and capital gains between spouses for purposes of the Canadian Income Tax Act (the "Act") that may be of assistance. Our comments assume that the property is not held by spouses in a partnership and that the rental operation carried on with the real estate is a source of property income and not business income.

Unfortunately, we cannot provide any comments on the allocation of income or gains between spouses under the United States Internal Revenue Code.

A) Joint tenancy

We confirm that the word ownership in the Rental Income guide would include property held in joint tenancy. A joint tenancy is a form of ownership of property in which the joint tenants have concurrent ownership and possession of the same property. The interest of each joint tenant is identical and the property cannot be sold or mortgaged without the consent of both joint tenants. By operation of the law dealing with property held in joint tenancy, in the event of the death of one of the joint tenants, the property will belong solely to the surviving joint tenant. As the deceased joint tenant has no interest in the property on death, it does not form part of the deceased's estate and, it is not necessary for a grant of probate to be obtained.

B) Canadian residents - allocation of income and capital gains

When income is derived from property held in joint tenancy by spouses who are resident in Canada, it should generally be reported proportionately by the spouses according to each spouse's respective contribution of capital to acquire the property. An example of the calculation required to report interest income from a joint owned investment is provided under the heading Line 121 - Interest and other investment income on page 18 of the 2004 T1 General Income Tax and Benefit Guide. This position applies to spouses resident in Canada reporting

a) capital gains on securities and real estate, and

b) rental income from real estate, interest income and dividend income

from a source in Canada or the U.S. where the property is held in joint tenancy by the spouses.

However, in a situation where an individual

a) transfers capital property owned by him or her into joint tenancy with the individual's spouse, or

b) has loaned money to his or her spouse in order that the spouse may purchase his or her share of the property,

the attribution rules of section 74.1 and 74.2 of the Act may apply. For more information, please see Interpretation Bulletin IT-511R, Interspousal and Certain Other Transfers and Loans of Property. Where the attribution rules apply, income earned and capital gains and losses realized on property transferred or loaned from a taxpayer to the taxpayer's spouse are deemed to be the income, gains or losses of the taxpayer and not of the taxpayer's spouse. These rules apply throughout the period in the year that the individual is resident in Canada.

The above comments apply to spouses resident in Canada regardless of whether the source of the income or the capital gain is from property in Canada or the U.S. These comments are also applicable to common-law partners (as described in paragraph 7 of IT-419R2, Meaning of Arm's Length) who are resident in Canada.

For purposes of the foreign tax credit, paragraph 15 of IT-270R3, Foreign Tax Credit, indicates that if spouses resident in Canada have paid a foreign income tax on a community income basis (e.g., by filing a joint return in the United States), an appropriate share of the foreign tax paid generally may be included in the foreign tax credit calculation of each spouse. The amount paid is generally apportioned based on the relationship of their respective foreign incomes that gave rise to the foreign tax, rather than the amount actually paid by each spouse.

C) U.S. residents - allocation of income and capital gains

Interest income, dividend income and rental income paid to a U.S. resident by a person resident in Canada are subject to withholding tax under Part XIII of the Act (unless exempt from such withholding under the Canada - U.S. Income Tax Convention (1980) (the "Convention")). Therefore, such amounts of Canadian-source income would not generally be reported as income under Part I of the Act by a U.S. resident unless that resident makes an election under subsection 216(1) of the Act to have net rental income received on real property in Canada taxed under Part 1 of the Act. Where this election is made on rental property held in joint tenancy by spouses resident in the U.S., the rental income would generally be reported proportionately according to each spouse's respective contribution of capital to acquire that property.

Where there is a capital gain from the disposition of taxable Canadian property (as defined in subsection 248(1) of the Act - which includes real estate and certain shares) held in joint tenancy by spouses resident in the U.S., the capital gain would generally be allocated (unless exempt from reporting such amount under the Convention) for Canadian income tax purposes proportionately according to each spouse's respective contribution of capital to acquire that asset.

D) Conflicting rules

No information was provided in your letter as to the nature of the conflicting rules between Canada and the U.S. and the mismatching of income and foreign tax credits for spouses holding property in joint tenancy. Therefore, we can only suggest that where a situation exists in which spouses are subject to taxation that is not in accordance with the provisions of the Convention (including situations of double taxation), the spouses may request the assistance of the Canadian Competent Authority. For more information on this service and the procedure to follow, we refer you to Information Circular 71-17R5, Guidance on Competent Authority Assistance Under Canada's Tax Conventions.

E) Other comments

Copies of the CRA's Interpretation Bulletins, Information Circulars and Guides are available on the Internet at the following site - www.cra-arc.gc.ca/formspubs/type/menu-e.html.

Our comments are provided in accordance with the practice outlined in paragraph 22 of IC 70-6R5. We trust our comments are of assistance.

Yours truly,

for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Policy and Planning Branch