8 May 1991 Ministerial Letter 910238 F - Attribution Rules

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:  Section 74.1 of the Income Tax Act

This is in reply to your letter of January 15, 1991 which requests an interpretation of section 74.1 of the Act.  You have asked that we consider a situation where a taxpayer purchases a property from his spouse.  There remains an unpaid portion of the sale price on which interest is charged.  You have asked us to make the following assumptions:

1.     Interest payable by the taxpayer to his spouse on the unpaid portion of the sale price is otherwise deductible by him in computing income.

2.     No election under subsection 73(1) of the Act has been made.

3.     Interest has not been paid on a timely basis.

For the purposes of our reply, we have made a few additional assumptions.  We assume that the income generated from the property in question is income from property and not income from a business and that subsection 74 5(11) does not apply to this situation.

The attribution rules in sections 74.1 and 74.2 apply to attribute the taxpayer's income and loss, taxable capital gains and allowable capital losses in respect of the transferred property to his spouse.

We agree that an exception to the attribution rules, as provided in section 74.5 of the Act, is not available, in part because of assumption 3 above.  It was also unclear from the facts presented whether the transaction took place at fair market consideration or whether the interest charged was at a rate equal to or greater than the applicable prescribed rate or a rate that would have been agreed upon between parties dealing with each other at arm's length.

You have queried whether 74.1(1) of the Act applies to attribute the interest deduction available to the taxpayer to his spouse and whether the unpaid portion of the sale price constitutes "loaned property" for the purposes of subsection 74.1 of the Act.  In your letter you offered an example where the income generated by the transferred property is $10,000 and the interest expense, payable by the transferee spouse, on the unpaid portion of the purchase price is $9,000.  You ask whether the transferor includes $19,000 in income and whether the taxpayer deducts a $9,000 interest expense.

Using the example data, it is our view that $1,000 income attributes to the taxpayer's spouse under subsection 74.1(1) of the Act as income from business or property.  His spouse also reports $9,000 interest income, taxable under paragraph 12(1)(c) of the Act.  Subsection 9(1) of the Act provides that a taxpayer's income for a taxation year from a business or property is the profit therefrom except where Part I of the Act expressly provides to the contrary.  "Profit" has been interpreted by case law as implying the deduction of all commercially reasonable expenses made or incurred by the taxpayer in earning the revenue in question.  The taxpayer's interest expense of $9,000 is, because of assumption 1. above, a deductible expense from the gross income generated by the property, in his case, $10,000. The "profit" or net income of $1,000 is the amount that attributes to the spouse under the provisions of 74.1(1) of the Act.  The comments in paragraph 12 of Interpretation Bulletin IT-109R should also be reviewed to determine whether section 78 would have application to a given situation.

We believe that loan payments or repayments do not constitute a transfer of property.  Whether or not a loan is genuine is a question of fact and its genuine nature can be demonstrated by, inter alia, the borrower's intention to honour the loan and the lender's efforts in exhausting all recourse in the recovery of the amounts advanced.  An outright transfer of property may be considered to have been made, subject to the attribution rules in sections 74.1 and 74.2 of the Act, where a loan is not considered genuine.

We trust the above comments are of assistance to you.

Yours truly

for DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch