24 September 1998 External T.I. 9816705 - ATTRIBUTION - DIVS'N OF ASSETS ON DIVORCE.

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: Whether the fact that a court overseeing a divorce orders the proceeds of rental property to be apportioned between ex-spouses on a 60:40 basis will be cause for the Department to reassess such ex-spouses where income or losses from the particular rental property were reported by only one spouse.

Position: Not necessarily.

Reasons: It is a question of fact whether attribution applies, that is, whether property is transferred or lent by an individual to or for the benefit of his or her spouse, whether directly or indirectly. However, since attribution on capital gains ceases to apply after a divorce or separation (if an election is filed), a court order may affect how capital gains or losses arising after the divorce or separation will be reported.

XXXXXXXXXX 	J. Gibbons
		5-981670
Attention:  XXXXXXXXXX 

September 24, 1998

Dear XXXXXXXXXX:

We are replying to your letter of June 8, 1998, in which you inquire whether the attribution rules apply in a situation in which a rental property is registered in both spouse’s names, but the husband reports 100% of the rental losses. Presumably, your concern stems from the fact that the particular marriage has broken down, and a Court has ruled that 40% of the proceeds of the sale of the rental property should go to the wife.

As indicated in paragraph 22 of Information Circular 70-6R3 dated December 30, 1996, a request for a written opinion on a completed transaction is generally considered by the taxpayer’s local tax services office. Further, since it is a question of fact whether attribution applies to a particular situation, the issue can only be decided on a case by case review of all of the pertinent information. Nonetheless, while we are unable to provide an opinion in respect of the situation outlined in your letter, we are prepared to offer the following general comments.

In general terms, the attribution rules in subsections 74.1(1) and 74.2(1) of the Income Tax Act apply whenever property is transferred or lent by an individual to or for the benefit of his or her spouse, whether directly or indirectly, by means of a trust or by any other means whatever. Under subsection 74.1(1), any income or loss from the transferred property is deemed to be the income or loss of the transferor and not the spouse. Likewise, under 74.2(1) a taxable capital gain or allowable capital loss on the disposition of the transferred property is deemed to be the taxable capital gain or allowable capital loss of the transferor and not the spouse. These rules ensure that any income or loss from a property or taxable capital gain or allowable capital loss from the disposition thereof will be reported according to each spouse’s financial contribution. Therefore, if one spouse contributes 100% towards the purchase of a property, that particular spouse is required to report 100% of the income or losses or taxable capital gains or allowable capital losses related thereto.

When spouses are co-owners of a property whose purchase was financed entirely by only one of them, the attribution rules in subsections 74.1(1) apply so that the particular spouse who provides 100% of the financing would also report 100% of any income or losses from the property. Further, under subsection 74.2(1), the particular spouse would have to report 100% of any taxable capital gains or allowable capital losses arising on the disposition of the property.

The attribution rules discussed above do not apply after a divorce. Similarly, where spouses are living separate and apart by reason of marriage breakdown, the attribution rules in subsections 74.1(1) and 74.2(1) (if a proper election is filed) do not apply. (See paragraphs 18 to 20 of Interpretation Bulletin IT-511R, “Interspousal and Certain Other Transfers and Loans of Property.”) This being the case, each spouse would report taxable capital gains or allowable capital losses, if any, arising on the sale of jointly owned property after a divorce or separation in proportion to his or her ownership interest. Finally, we note that on divorce or separation ownership interests may, under certain provincial laws dealing with the division of property on divorce or separation, be altered automatically by statute or by the direction of a court. Accordingly, the determination of the correct reporting of taxable capital gains or allowable capital losses on the disposition of matrimonial property after a divorce or separation requires a review of the pertinent provincial legislation, as well as separation agreements, court orders, and any other related documentation.

We trust that these comments will be of assistance.

Yours truly,

J.F. Oulton, CA
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate

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