7 February 2007 External T.I. 2007-0219871E5 - Splitting interest on GICs between spouses

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: Will CRA authorize the taxpayer's proposal that he and his spouse be allowed to split the interest income on GICs that have become the property of his spouse as a consequence of the death of her father?

Position: No.

Reasons: There is no provision in the Act that would allow it.

XXXXXXXXXX 							2007-021987
P. Kohnen, CMA
February 7, 2007

Dear XXXXXXXXXX:

Re: Technical Interpretation - Income Splitting Between Spouses

This is in response to your e-mail submissions of January 5th, 6th, 8th and 10th, 2007 and several recent telephone conversations (XXXXXXXXXX/Chua) and (XXXXXXXXXX/Albert) in which you requested our comments on your proposal to split the interest income in respect of three guaranteed investment certificates ("GICs") between yourself and your spouse.

Based on the content of your submissions, the relevant facts, as we understand them, are as follows:

1. In early 2005, funds belonging to your father-in-law were used to invest in three GICs, each having a locked-in term of three years.

2. The financial institution that sold the three GICs was advised that your spouse and your father-in-law were to be joint owners of the three GICs, and their records indicated that the GICs were jointly owned.

3. In July 2005 your father-in-law passed away, leaving the GICs to your spouse.

4. The financial institution has since revised its records to reflect the passing of your father-in-law, such that your spouse is now shown as the owner of record for the three GICs, and interest payments thereon are being paid to her.

You have requested that we authorize splitting the interest payments received on these GICs such that you would include in your income for 2006 the portion of the interest that, when combined with your other sources of income, would result in all of your reported income being taxed at the lowest personal tax bracket, and your spouse would include the remainder of the interest payments in her income.

Our comments

The confidentiality provisions of the Income Tax Act (the "Act") prohibit the Canada Revenue Agency ("CRA") from discussing or providing information on any matter relating to a specific taxpayer without written authorization from that taxpayer. We are prepared, however, to provide the following general comments in respect of the issues that you have raised. It should be noted that the comments contained herein are not intended to provide an exhaustive summary of the potential tax implications that may apply to the above fact scenario, but rather a discussion of only some of the more relevant issues that may be applicable.

Generally, when a person dies, their property at the time of death will form part of the deceased's estate until such time as it is distributed to the beneficiaries of the estate, either in accordance with the terms of the deceased's will or, if the person died intestate, in accordance with the laws of intestacy that are relevant to the estate. The definition of "property" in subsection 248(1) of the Act is very broad, and would include the GICs and various other forms of investments.

One exception to the general rule above occurs where property is held in joint tenancy at the time of death. Under joint tenancy, each joint tenant has concurrent ownership and undivided possession of the entire property. By operation of the law dealing with property held in joint tenancy, in the event of the death of one of the joint tenants, the property will usually belong solely to the surviving joint tenant. In a scenario in which GICs are held in joint tenancy between a father and his adult child, the adult child must declare their share of the interest relating to the GICs. The determination of whether a property is held in joint tenancy is a question of fact and law to be determined on a case-by-case basis, and no such determination is being made herein.

It is generally presumed that a transfer of property from a parent to a child, including a transfer of property into joint ownership, is a gift to the child unless a contrary intent is evident. If such a case of gifting involved GICs transferred into joint tenancy, then pursuant to paragraph 69(1)(c) of the Act, the child would be deemed to have acquired a 50% interest in each of the GICs at 50% of the fair market value of each GIC at the time of the transfer. Where a contrary intent is evident, the presumption of gift is rebutted and the child is considered to hold the legal title in trust for the parent and the parent's estate. This type of "in trust" arrangement is referred to in "trust law" as a resulting trust. In the case of a resulting trust, the adult child would not have to report any of the income in respect of the property while the parent is still living. However, in such cases, probate in respect of such property is not avoided on the parent's death, as the property forms part of the parent's estate.

Following the death of the father, if the GICs in question are the property of the adult child, either because the adult child is the surviving joint tenant, or because the GICs have passed through the estate of the deceased and have been distributed as part of the estate, the adult child must report any subsequent interest income. Given that the CRA is responsible for administering and enforcing the income tax legislation that is enacted by Parliament, and because there is no provision in the Act that would accommodate a request to split the interest payments received by the adult child, it is not possible to accommodate a request to split the income. It should be noted that the Act contains various anti-avoidance provisions specifically designed to curtail income splitting between spouses.

In regard to income splitting between spouses, as was noted above, it is generally possible in law for one taxpayer to create, via gifting, a joint tenancy in property (such as a GIC) with another taxpayer. As is noted on page 19 of the 2006 General Income Tax and Benefit Guide, an individual must report their share of interest from a joint investment based on the amount that the individual contributed to it. However, where the other owner of the investment is a spouse of the individual, the individual's contribution to the investment is considered to include any amount gifted to their spouse, thus resulting in all of the income being attributed back to the individual (eliminating any income splitting opportunity in respect of the gift). We have attached Interpretation Bulletin IT-511R - Interspousal and Certain Other Transfers and Loans of Property, which provides detailed discussion of the rules relating to the attribution of income to a spouse.

In the event that a Canadian-resident taxpayer does not transfer ownership of their property into a joint tenancy with their spouse, but instead simply transfers the right to receive all or a portion of the income from that property to their spouse, it is our view that subsection 56(4) of the Act would apply, such that that income would be included in computing the income of the transferor taxpayer (again eliminating any income splitting opportunity).

We trust that the above comments will be of assistance to you. You may contact Phil Kohnen at (613) 957-2093 should you require further information.

Yours truly,

Roberta Albert, CA
For Director
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch