15 October 1997 External T.I. 9716955 - ATTRIBUTION OF INCOME

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 on an inter-vivos transfer of property between spouses.

Position:

This is an actual fact situation, gave general position on the tax consequences of an inter-vivos transfer between spouses and on the deductibility of interest.

Reasons:

	 						971695
XXXXXXXXXX	 					M.P. Baldwin

October 15, 1997

Dear XXXXXXXXXX:

Re: Real Estate Tax Ruling

This is in reply to your facsimile June 23, 1997 requesting an income tax ruling with respect to a particular real estate transaction.

The situation described in your letter is an actual fact situation and written confirmation of the tax implications inherent in proposed transactions are given by this Directorate only where the transactions are the subject of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R3. Where a completed transaction is involved the enquiry should be addressed to your local District Tax Services Office. Consequently, we can only offer the following general comments.

We have enclosed a copy of Interpretation Bulletin IT-511R which addresses the income tax consequences of property transfers and loans between spouses. Generally, the Income Tax Act (the "Act") provides that income earned and capital gains and losses realized on property transferred or loaned from an individual to the individual's spouse (and on property substituted for that property) are generally deemed to be the income, gains or losses of the individual and not of the individual's spouse. An exception to this rule occurs where fair market value consideration is paid by the spouse.

A transfer for fair market value consideration is not considered to have taken place for purposes of the Act unless a number of conditions are met. As noted in paragraph 21 of Interpretation Bulletin IT-511R we state:

"Pursuant to subsection 74.5(1), income or loss from transferred property or any taxable capital gains or allowable capital losses on the disposition of the transferred property does not attribute to the transferor in a particular year where

(a)the sale or other transfer is made to the transferor's spouse for consideration equal to fair market value of the transferred property,

(b)the sale price or other consideration for the transfer is

(i)fully paid by the transferee in cash or kind (and not from property furnished by the transferor) or

(ii)satisfied in whole or in part by indebtedness on which interest is charged at a rate not less than the lesser

(A)the prescribed rate and

(B)the rate that would be agreed upon between arm's length parties under similar circumstances

at the time the indebtedness is incurred, if all such interest is paid no later than 30 days after the end of each calendar year in which it becomes payable, and

(c)the transferor elects not to have the provisions of subsection 73(1) apply (i.e. any gains or loss is realized at the time of transfer).

If the interest in (b)(ii) is not paid within the described time then the indebtedness will not meet the requirements for exemption from the attribution rules under subsection 74.5(1) in the particular year or in any later year.

Ordinarily the disposition of capital property results in a taxable capital gain, based on the appreciation in value, to be included in the transferor's income. However, subsection 73(1) of the Act provides an exception to this rule for an inter-vivos transfer of property to a spouse. Subsection 73(1) provides that where an individual transfers capital property to his/her spouse and both are resident in Canada at the time of the transfer, the particular property transferred shall be deemed to have been disposed of for proceeds equal to the adjusted cost base of the property immediately before the transfer and to have been acquired by the individual's spouse for an amount equal to those proceeds. Subsection 73(1) also permits the transferor to elect out of its provisions such that when the transferor files his/her income tax return he/she may elect not to have the provisions apply.

If the transferor does not elect out of the provisions of subsection 73(1) of the Act, he/she is not required to report any capital gains resulting from the sale of the property to their spouse. However, any dividends or other income earned by the property after the sale to the spouse, will be deemed the transferor's income and any capital gains or losses realized on the subsequent disposition of the property will deemed to be the transferor's capital gains or losses.

Interest expense would be deductible in computing income if certain conditions set out in paragraph 20(1)(c) of the Act are met. With respect to the deductibility of interest expense, it is the Department's position that it is the current use of the funds which must satisfy the eligible purpose test, since paragraph 20(1)(c) of the Act establishes the requirement to trace the use of the funds. Accordingly, it is not the purpose of the borrowing but rather the purpose of the use of the funds which is looked at when determining whether the criteria of paragraph 20(1)(c) of the Act is met.

Generally, where a taxpayer uses borrowed money to repay money previously borrowed, or to repay an amount for previously acquired property, pursuant to subsection 20(3) of the Act, the borrowed money will be treated as having been used for the same purpose as the original borrowing, or having been used to acquire the same property as the case may be.

We trust our comments will be of assistance to you.

Yours truly,

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