15 September 2006 External T.I. 2006-0199361E5 - Attribution rules - spouses

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: General questions regarding attribution rules relating to spouses

Position: General comments provided

Reasons: The law

								2006-019936
XXXXXXXXXX 							G. Moore
(613) 957-9232
September 15, 2006

Dear XXXXXXXXXX:

Re: Attribution Rules - Transfer of Property Between Spouses

This is in response to your letter of July 21, 2006, inquiring about the transfer of property by you to your spouse for the purpose of splitting investment income and gains between you and your spouse.

The situation outlined in your letter appears to relate to a factual one, involving a specific taxpayer. It is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advanced income tax ruling. For more information about how to obtain a ruling, please refer to Information Circular 70-6R5, "Advanced Income Tax Rulings, dated May 17, 2002. This Information Circular and other CRA publications can be accessed on the internet at http://www.cra-arc.gc.ca. Should your situation involve a specific taxpayer and a completed transaction, you should submit all relevant facts and documentation to the appropriate Tax Services Office ("TSO") for their views. A list of TSOs is available on the "Contact Us" page of the CRA website. Although we cannot comment on your specific situation, we are prepared to provide the following general comments, which may be of assistance.

The Income Tax Act (Canada) (the "Act") contains a comprehensive set of rules intended to prevent a taxpayer and the taxpayer's spouse from splitting income from property so as to reduce the total amount of tax payable on that income. Except where fair market value consideration is paid by the spouse or the parties are living separate and apart by reason of a breakdown of their marriage, 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 (the "Attribution Rules").

Subsection 73(1) of the Act provides that where an individual transfers capital property to his or her spouse and both are resident in Canada at the time of the transfer, the particular property transferred shall be deemed to have been disposed of for proceeds equal to the adjusted cost base of the property immediately before the transfer and to have been acquired by the individual's spouse for an amount equal to those proceeds. However, the transferor may elect out of the provisions of subsection 73(1) of the Act.

If the transferor does not elect out of the provisions of subsection 73(1) of the Act, he or she is not required to report any capital gains resulting from the sale of the property to their spouse. However, pursuant to subsections 74.1(1) and 74.2(1) of the Act and subject to subsection 74.5(11) of the Act, any dividends or other income from the property after the sale to the spouse, will be deemed to be the transferor's income, and any capital gains or losses realized on the subsequent disposition of the property will be deemed to be the transferor's capital gains or losses. In this regard, income from property would generally be the income after deducting those expenses that are deductible in computing income from that particular property. Finally, subsection 82(2) of the Act provides that where a dividend is included in the transferor's income because of the attribution rules, the dividend is deemed to have been received by the transferor. This will enable the transferor to claim the dividend tax credit.

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 the Attribution Rules would apply to property transferred by the Contributing Spouse to the other spouse. As a consequence, 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.

You may wish to refer to Interpretation Bulletin IT-511R, Interspousal and Certain Other Transfers and Loans of Property, for additional information on the application of the attribution rules and to Interpretation Bulletin IT-325R2, Property Transfers after Separation, Divorce, and Annulment, for comments on subsection 73(1) of the Act.

We trust that these comments will be of assistance.

Yours truly,

S. Parnanzone
For Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch