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:
attribution of income from the investment of funds received for the disposition of a principal residence which was held jointly by a married couple but which was acquired primarily by means of a mortgage which was paid by only one spouse
Position:
income should be reported in proportion to each spouse's respective contribution of capital to acquire the property
Reasons:
-the joint acquisition of the residence represents an indirect transfer of property when only one spouse has the funds to pay the mortgage
-since attribution applies to substituted property and the entire proceeds are substituted property, the fact that the gain on the disposition of the property was exempt does not affect the application of the attribution rules
-the date of acquisition of the residence and the date of the transfer of property is relevant to the extent of determining which attribution rules apply, section 22 of the pre-71 Act, section 74 or sections 74.1 to 74.5
A. Humenuk
XXXXXXXXXX 963751
Attention: XXXXXXXXXX
February 25, 1997
Dear Sirs:
Re: Attribution
We are replying to your letter of November 4, 1996, in which you ask for our comments concerning the application of the attribution rules to a particular fact situation.
In the situation you describe, a husband and wife purchased their principal residence jointly in 1968. Each spouse contributed one half of the initial downpayment for the residence but all of the mortgage payments were made by one spouse, even though both spouses were jointly liable for the mortgage. As a result, when the mortgage was discharged one spouse had contributed 92% of the financial capital invested in the property and the other, 8%, even though they each contributed time and effort to the upkeep and maintenance of the property. You asked several specific questions relating to the attribution of any income generated from the proceeds derived from the sale of that principal residence.
As stated in paragraph 22 of Information Circular 70-6R3, "Advance Income Tax Rulings" dated December 30, 1996, when a request relates to a specific proposed transaction, an advance income tax ruling must be requested rather than a technical interpretation. If the transaction is completed, the request is handled at the tax services office which serves the area in which the taxpayer resides. In addition, it should be noted that 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.
When income is derived from assets held jointly by a married couple, it should be reported proportionately according to each one's respective contribution of capital to acquire that asset. The ownership of the property and the issue of whether such ownership results from a transfer of property is not affected by any division of duties with respect to the care and maintenance of that property. When a jointly-held property is mortgaged and only one spouse makes payments on that mortgage, it is our view that an indirect transfer of property has occurred and that any income earned from that property or from property substituted for it, will attribute to the spouse who indirectly transferred the property. With specific reference to the situation outlined, it is our view that the spouse who contributed 92% of the financial capital will be required to report 92% of the income generated from the invested proceeds from the sale of the principal residence.
Income earned on any property which is substituted for the transferred property (i.e. investments purchased with proceeds from the sale of the principal residence) is attributed to the transferor by reason of the interaction of subsection 248(5) and the relevant attribution rule, currently subsection 74.1(1) of the Act. As indicated in the fourth example in paragraph 27 of IT-511R, Interspousal and Certain Other Transfers and Loans of Property, when property is substituted for transferred property after December 30, 1987, the entire amount of income earned by that substituted property attributes to the spouse who transferred the original property. It is our view that for the purpose of the definition of substituted property in subsection 248(5) of the Act, the entire amount of proceeds from the disposition of property is deemed to be substituted property regardless of whether any gain realized as a result of the disposition of the original property is taxable or exempt from taxation by reason of the principal residence exemption.
While the Income Tax Act has undergone significant changes over the years, the various attribution rules which have been in place all require that income earned on property transferred directly or indirectly from one spouse to the other, be included in the income of the spouse who transferred the property. However, the date of the transfer of property is relevant for the purpose of determining the specific attribution rule which applies to a particular situation. For example, when the attribution rules were modified in 1985, subsections 74.1(3) and 74.5(7) of the Act were added to clarify the rules in situations where the transfer was accomplished by means of the repayment of the other spouse's loan obligations or by means of a loan guarantee. Consequently, while the overall result may generally be the same, one must look to the specific provisions in force at the time of the particular transfer of property. Paragraphs 7 to 9 of IT-511R provide additional comment on these new provisions which may be helpful in respect of an arrangement entered into after May 22, 1985.
We trust our comments will be of assistance to you.
Yours truly,
John F. Oulton
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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