24 August 1989 Income Tax Severed Letter 58352A F - Inter-spousal Transactions

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.

Dear Sirs:

Re:  Inter-Spousal Transactions

We are responding to your letter of July 5, 1989, concerning the transfer of property between spouses.  You have asked whether section 245 of the Income Tax Act (the Act) would apply in the following situation:

The principal residence has been previously registered solely in the lower income earning (or non-income earning) spouse's name.  The income earning spouse or higher income earning spouse has a significant investment portfolio.  The lower earning spouse in whose name the principal residence is registered sells 50% of the residence to the higher income earning spouse.  The transaction occurs after May 22, 1985 and at fair market value.  The higher income earning spouse transfers a proportionate share of investment portfolio to the lower income earning spouse in consideration of the purchase.

As we understand the situation you present, both spouses would elect in the appropriate return of income not to have subsection 73(1) of the Act apply and as a result, the higher income earning spouse would include in income a taxable capital gain on the disposition of assets transferred to the lower income earning spouse.

You have indicated that the income derived from the assets transferred to the lower income earning spouse would be included in the lower income earning spouse's income.  We assume that your statement is based on the presumption that section 74.5 of the Act would apply to the transaction so that attribution would not.  However, in such a situation it may well be that the attribution rules in the Act would apply.

It is a question of fact as to whether or not attribution applies to any particular situation and the issue can only be decided on a case by case review of all the pertinent information.  However, we would like to offer you the following general comments which may assist in making such a determination.

Although you stated that the legal title to the principal residence was registered in the name of the lower income earning spouse, you did not indicate the source of funds used to acquire the principal residence.  If the principal residence was acquired after 1971 with funds transferred form the higher income earning spouse or if the higher income earning spouse transferred funds to the lower income earning spouse for the purpose of meeting the mortgage obligations resulting from the purchase of the property, it is our view that attribution will apply to the transaction described above.  If the higher income earning spouse's funds were used to acquire the principal residence (whether used for the mortgage payments or the downpayment), it is our view that the portfolio which is subsequently transferred will be considered "substituted property" within the meaning of subsection 248(5) of the Act. Accordingly, section 74, 74.1 or 74.2 of the Act could apply depending on when the original transfer of property took (place, that is, if the transfer of property from the higher income earning spouse to the lower income earning spouse took place before 1971, attribution would apply to the income earned on the substituted property but not to any gain or loss on the disposition of such property.

If, however, the lower income earning spouse has acquired the property and met all mortgage obligations in respect of the purchase with his or her own funds, we agree that attribution will not apply to the property acquired in the exchange provided that section 74.5 of the Act otherwise applies to the transaction.  Given that the intent of section 74.5 of the Act otherwise applies to the transaction.  Given that the intent of section 74.5 of the Act is to exempt transfers of property, where fair market consideration is received in return, from the attribution rules in subsections 75.1(1) and (2) of the Act, it is our view that a transfer such as that described in paragraph 21 of IT-511 "Interspousal Transfers and Loans of Property made May 22, 1985" (copy of which is attached) would not be a misuse of the provisions of the Act.  Therefore, it is unlikely that GAAR would apply.

We trust our comments have clarified our position in this matter.

Yours truly,

for Director Small Business and General DivisionSpecialty Rulings Directorate Legislative and Intergovernmental Affairs Branch