19 March 2009 External T.I. 2008-0302831E5 - Attribution rules between spouse who are separated

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) Is section 74.2 applicable on disposition occurring during the period of separation?

2) How can information be obtained from the partner disposing the property, in order to report the gain?

Position: 1) Yes - if no joint election is filed
2) We cannot comment

Reasons: 1) Application of the Act

XXXXXXXXXX                          V. Srikanth
                                    2008-030283
March 19, 2009

Dear XXXXXXXXXX :

Re: Application of attribution rules

We are writing in response to our telephone conversation on June 10, 2008 and your letter dated December 1, 2008, in which you requested a technical interpretation on the attribution of capital gains pursuant to paragraph 74.5(3)(b) of the Income Tax Act (the "Act").

The relevant facts can generally be summarized as follows:

• Prior to your divorce, you and your ex-wife, had a joint investment account, and you were the sole contributor to this account
• Subsequent to your separation, the investments in this account were divided equally between the two of you
• Neither of you made an election, provided under paragraph 73.5(3)(b) of the Act, for section 74.2 of the Act not to apply
• Your ex-wife then sold her share of investments, after the separation, but prior to the legal date of divorce

You would like our opinion on the following issues:

1. Is section 74.2 of the Act applicable, such that the capital gains on the disposition of the investments by your ex-wife are attributed back to you?

2. If so, how could you obtain details of the disposition transaction since neither your ex-wife nor the investment corporation is willing to provide you with any information on the disposition?

Our comments:

Please note that written confirmation of the tax implications inherent in particular transactions are given by this Directorate only where the transactions are proposed and are the subject of an advance income tax ruling request submitted in a manner set out in Information Circular 70-6R5. As stated in paragraph 22 of Information Circular 70-6R5,

written opinions are not advance tax rulings and, accordingly, are not binding on the Agency. Therefore, although we are not able to comment directly on the facts submitted with your correspondence, we would offer the following general comments regarding the attribution of capital gains.

We agree with the previous views that you had received verbally from us, in that, based on the information provided, the capital gains on the disposition of the investments by your ex-wife, during the separation period, will be attributed back to you, pursuant to subsection 74.2(1) and paragraph 74.5(3)(b) of the Act. Assuming the facts have not since changed, our views on the issue remain the same.

Paragraph 16 of the Interpretation bulletin IT-325R2, entitled, Property Transfers After Separation, Divorce and Annulment, lists situations when the attribution rules do not apply. They are:

(a) The attribution rules cease to apply after divorce.

(b) The rules concerning the attribution of income do not apply for the period that the parties are living separate and apart by reason of a marriage breakdown.

(c) The rules concerning the attribution of capital gains and losses do not apply to dispositions of property while the parties are living separate and apart by reason of a marriage breakdown, if the parties jointly elect not to have section 74.2 of the Act to apply.

(d) The attribution rules do not apply if fair market consideration is paid for the property transferred and an election is made to not have the subsection 73(1) rollover apply.

Pursuant to paragraph 74.5(3)(b) of the Act, the attribution rules for capital gains under subsection 74.2(1) of the Act, do not apply to dispositions of property occurring at any time while the spouses are living separate and apart because of a breakdown of their marriage, if the spouses jointly elect not to have section 74.2 of the Act to apply. Section 74.2 of the Act will cease to apply for the year the joint election is filed and thereafter. In your case, the disposition of the transferred property took place during the separation period but before the legal divorce date. This means, in order for section 74.2 of the Act not to apply, you will have to file a joint election along with your income tax return.

Please note that, for transfers of property made after May 22, 1985, you can file this election with your return for any tax year ending after the time you separated. However, for the election to be valid, you have to file it no later than the year your spouse or common-law partner disposes of the property. You have indicated in your letter, that such an election was not filed, and further, you have been advised not to make this election at the current time.

As regards the question of how to obtain the information on the disposition transaction, we suggest that you seek assistance from your legal advisor, as this is outside the mandate of the Income Tax Rulings Directorate.

We trust our comments will be of assistance to you.

Yours truly,

for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch