26 September 1994 External T.I. 9412015 - ATTRIBUTION AND COMMUNITY PROPERTY

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

Would attribution rules apply to property acquired by spouse under community property laws of the State or Province?

Position TAKEN: Yes, provided not a continued resident of the particular State or Province governed by the community property laws.

Reasons FOR POSITION TAKEN: refer to Henry Wertman v. MNR 64 DTC 5158 and Richard Griffith Reese v. MNR 55 DTC 488

		941201
XXXXXXXXXX	M.P. Sarazin
(613) 957-8953

Attention: XXXXXXXXXX

September 26, 1994

Dear Sirs:

Re: Attribution Rules and Income from Community Property

This is in reply to your letter dated April 21, 1994 wherein you requested our comments regarding the possible application of the attribution rules to the investment income and capital gains realized by a married couple, currently residing in Canada, on property accumulated while they were resident in a state of the United States of America which is governed by community property laws. Unless otherwise stated, all statutory references are to the Income Tax Act R.S.C. 1985 (5th Supp.), c.1, as amended, consolidated to June 23, 1994 (the "Act").

For discussion purposes, we will assume that a married couple accumulated a significant amount of investments during the years that they resided in the State of California and that all of such investments were acquired by investing the salary income earned by one of the spouses. However, you have advised us that pursuant to the community property laws of the State of California, one half of the salary income earned and invested by the working spouse is legally owned and held by the non-working spouse. The married couple have now taken up residence in Canada for a short duration.

You are of the view that, under the provisions of subsection 74.1(1) of the Act, the investment income and capital gains realized on the investment portfolio by the non-working spouse while resident in Canada would be deemed to be investment income and capital gains realized by the working spouse for purposes of the Act. However, arguments have been presented that where the community property laws governing the ownership of funds states that one-half of the wage income earned and invested by the working spouse is legally owned by the non-working spouse, the attribution rules found in subsection 74.1(1) of the Act would not apply.

Comments

The provisions of subsection 74.1(1) apply whenever an individual has transferred property, either directly or indirectly, by means of a trust or by any other means whatever, to or for the benefit of his or her spouse. Where a person transfers property to his or her spouse prior to becoming a resident of Canada, we are of the view that the provisions of subsection 74.1(1) of the Act would apply to any income earned from such transferred property. Our view is based on the decision in Henry Wertman v. Minister of National Revenue 64 DTC 5158 (E.C.) wherein Mr. Justice Thurlow stated at page 5163:

"There is not, in my opinion, any element of retroactivity involved, as contended by Counsel for the appellant, in applying the words of the provision to transactions which occurred before the appellant, and his wife came to Canada. The subsection to my mind is nothing more than a statutory prescription of the manner in which the income of a person is to be measured or computed for the purposes of the Act...and I can see no valid reason why its terms, which on their face are as applicable to residents as to non-residents should be confined to situations in which the transfer was made when the transferor was resident in Canada. Accordingly, I reject the contention that the subsection does not apply to transfers made by the appellant to his wife prior to their coming to Canada and as all that is necessary to constitute a transfer within the meaning of the subsection is that the owner of property should so deal with as to divest of it and vest it in his spouse, ...".

Even though Mr. Weldon in Jean Duplessis v. Minister of National Revenue 71 DTC 153 (T.A.B.) considered the above passage to be obiter dictum and rendered a decision which is in conflict with Mr. Justice Thurlow's views, we believe that the courts would follow the Wertman case and conclude that the attribution rules would apply to transfers of property made by a spouse prior to becoming a resident of Canada.

The determination of whether there has, in fact, been a transfer of property by one spouse to the other spouse is a question fact which can only be determined subsequent to a review of all of the facts including the applicable community property laws.

It may be possible that under the applicable community property laws a spouse acquires a vested 50% interest in each property acquired or owned by the other spouse whereby such spouse may be considered to have acquired his or her interest in such property by virtue of the relevant provisions of such law and there may not be a transfer of property for the purposes of subsection 74.1(1) of the Act. In this regard, we refer you to the case of Richard Griffith Reese v. Minister of National Revenue 55 DTC 488 (T.A.B.) wherein Mr. Fisher concluded that because the appellant and his wife's domicile continued to be in the State of California, they continued to be governed by the laws in force in the State of California and at page 491 he stated:

"... I am of the opinion that the ownership of the over-riding royalty in question herein is to be decided by the laws of that State, ..., the appellant's wife became the owner of a one-half interest in the royalty by virtue of the provisions of the community property of California, from the moment the royalty was conferred by Humble Oil Company, even although the company may have agreed to give the royalty to her husband personally and even although the first cheques for the royalties which were paid in 1951 may have been issued in the name of her husband alone.".

This decision, however, appears to be dependant on the conclusion that the Reeses continued to be domiciled in California. Consequently, we would also have to consider the effects, if any, that the particular community property laws would have on the property owned (whether separately or jointly) by the spouses when they cease to reside in that jurisdiction.

As stated in paragraph 21 of Information Circular 70-6R2 dated September 28, 1990, the opinions expressed in this letter are not rulings and are consequently not binding on the Department.

Yours truly,

for Director
Reorganizations and Foreign Division
Rulings Directorate
Policy and Legislation Branch