25 January 2012 Internal T.I. 2011-0422741I7 - Exception to Transfer of Property Assessment

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.

Principal Issues: What is the scope of the separation agreement contained in subsection 160(4).

Position: The separation agreement must describe in detail the terms of the separation; a document merely attesting to a separation is insufficient.

Reasons: Case law.

								January 25, 2012

Toronto North Tax Services Office
								Income Tax Rulings
								  Directorate
Attention: Paul Laurie, Group Manager 		Lindsay Frank
	     Revenue Collections Division		(613) 957-2097

								2011-042274

Exception to Transfer of Property Assessment

We are replying to an inquiry from Randy Reynolds concerning the exception to an assessment under subsection 160(1) of the Income Tax Act (the "Act"). The exception is contained in subsection 160(4), and the inquiry relates to the scope of the separation agreement contained therein.

For subsection 160(1) to take effect, a number of conditions must exist at the time of the transfer. The transferor must be indebted under the Act. The transferee must be a person who was under eighteen years' old, or a person with whom the transferor did not deal at arm's length within the meaning of subsection 251(1). The fair market value of the property transferred must exceed that of the consideration that the transferee gave for the property.

Subsection 160(4) negates the application of subsection 160(1) by deeming the fair market value of the property in question to be nil when certain circumstances prevail. Pursuant to this provision, the transferee is not obligated to pay the transferor's liability where the transfer was made in the context described below. Subsection 160(4) consists of a two-pronged test.

The first prong requires that the property be transferred pursuant to a decree, order, or judgment of a competent tribunal, or pursuant to a written separation agreement, which must contain terms and conditions. It was held in Carriere v. The Queen, [2007] 2 C.T.C. 2709, 2006 D.T.C. 3098 (T.C.C.), that a written separation agreement, made by spouses seeking a divorce or legal separation, must include, in general, provisions in writing for the custody and support of any children, alimony, and division of property.

The second prong of the test requires that the spouses be separated and living apart as a result of the breakdown of their marriage or common law relationship. To assist in arriving at such a determination, the courts rely on a checklist of aspects, see Lavoie v. The Queen, [2000] 2 C.T.C. 2137 (T.C.C.); aff'd in 2001 D.T.C. 5083 (F.C.A.); and Sanford v. The Queen, [2001] 1 C.T.C 2273, 2001 D.T.C. 2662 (T.C.C.); aff'd in [2003]1 C.T.C. 221, 2002 D.T.C.7442 (F.C.A.).

Whether a written separation agreement is valid, and whether the transferor and the transferee are living separate and apart are questions of fact. To that end, we recommend that consultations be made with the Department of Justice.

Should you have any questions or require additional information, please do not hesitate to contact Lindsay Frank at the number provided at the outset of this memorandum.

Terry Young CA
Manager
Administrative Law Section
Income Tax Rulings Directorate

c.c. Randy Reynolds
Revenue Collections Division
Toronto North Tax Services Office

Jean-Marc Raymond
Senior General Counsel
Legal Services