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: Whether subsection 74.5(1) has an impact on the rules in subsection 85(1).
Position: No.
Reasons: 74.5(1) does not contain a deeming rule re the fair market value of a property.
XXXXXXXXXX 2005-014058
September 29, 2005
Dear XXXXXXXXXX:
Re: Spousal Transfers and the Attribution Rules
We are writing in response to your letter dated June 30, 2005, wherein you requested our opinion on income tax consequences relating to the attribution rules. In particular, you asked about the interaction of subsections 74.5(1) and 73(1) and paragraph 85(1)(c) of the Income Tax Act (the "Act)".
Our understanding of the hypothetical situation that is of interest to you is as follows:
Spouse A transfers property #1 with an adjusted cost base ("ACB") of $90 and a fair market value (FMV") of $100 to Spouse B (transfer #1). Spouse A elects not to have the rollover provisions in subsection 73(1) of the Act apply. In consideration for this transfer, Spouse B transfers property #2 with an ACB of $200 a FMV of $400 to Spouse A (transfer #2). Spouse B does not elect out of subsection 73(1) of the Act. Spouse A transfers property #2 to her corporation using the rollover provisions of subsection 85(1) of the Act (transfer #3).
Written confirmation of the consequences 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 70-6R5. Nonetheless, we shall provide some comments of a general nature.
In our opinion, the income tax consequences of the scenario described above would be as follows:
Transfer #1
Subsection 74.5(1) of the Act would apply because, at the time of transfer #1, the FMV of property #1 ($100) did not exceed the FMV of property #2 ($400) and because Spouse A elected not to have the rollover provisions in subsection 73(1) of the Act. Therefore neither subsection 74.1(1) of the Act nor subsection 74.1(2) of the Act would apply with respect to property #1.
Spouse A would have a capital gain of $10 on the transfer of property #1 to Spouse B and property #1 would then have an ACB of $100.
Transfer #2
Subsection 74.5(1) of the Act would not apply because, at the time of transfer #2, the FMV of property #2 ($400) exceeds the FMV of property #1 ($100) and because Spouse A did not elect out of the rollover provisions in subsection 73(1) of the Act. Therefore both subsection 74.1(1) of the Act and subsection 74.1(2) of the Act would apply to attribute the income, capital gains, etc. with respect to property #2 to Spouse B.
Since Spouse B did not elect out of the provisions of subsection 73(1) of the Act, Spouse B would have deemed proceeds of disposition of property #2 of $200 and Spouse A would have an ACB of $200 in property #2. Spouse B would not realize a capital gain on the disposition of property #2. The provisions of subsection 75.4(1) would have no impact on subsection 73(1) and vice versa.
Transfer #3
On the transfer of property #2 by Spouse A to her corporation, the shares and any other consideration (the "consideration") that Spouse A received on the transfer would be "property substituted" for property #2 and subsection 74.1(1) of the Act and subsection 74.1(2) of the Act would apply to attribute the income, capital gains, etc. relating to the consideration to Spouse B. If, for example, the fair market value of property #2 was $400 at the time when it is transferred by Spouse A to her corporation and this is the elected amount, a capital gain of $200 would be attributed to Spouse B.
Finally, while the deeming provisions in subsection 73(1) of the Act (the deemed ACB of property #2) would be relevant for the purposes of subsection 85(1) of the Act, and while the fair market value of asset #2 at the time it is transferred by Spouse A to her corporation is a factor that must be considered in applying the provisions of subsection 85(1) of the Act, the rules in subsection 74.5(1) of the Act do not have an impact on a subsection 85(1) rollover because subsection 74.5(1) of the Act does not contain a deeming rule with respect to the FMV of a property.
The foregoing comments represent our general views with respect to the subject matter. As indicated in paragraph 22 of Information Circular 70-6R5, the above comments do not constitute an income tax ruling and accordingly are not binding on the Canada Revenue Agency. Our practice is to make this specific disclaimer in all instances in which we provide an opinion.
Yours truly,
Steve Tevlin
Manager
Corporate Financing Section
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
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