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:
A series of interspousal transfers pursuant to 73(1) of the Act have occurred. Determination of the period of deemed ownership for the purposes of 40(2), 40(4), 40(6), and 110.6(1) of the Act.
Position TAKEN:
We are in agreement that W (wife 1) is deemed to have owned the property throughout the period H (husband) owned it. Gain on sale of the property to be determined from December 31, 1971. Agree that the pproperty was last acquired by W December 31, 1971 for the purposes of the definition of "eligible real property gain" in subsection 110.6(1).
Reasons FOR POSITION TAKEN:
Interpretation of legislation and application to the transfers outlined.
940502
XXXXXXXXXX D. Zion
Attention: XXXXXXXXXX
July 14, 1994
Dear XXXXXXXXXX:
Re: Calculation of Gain on Property Transferred from a Spouse
We are writing in reply to your letter of February 23, 1994, wherein you request a technical interpretation regarding the deemed date of acquisition for purposes of calculating a gain on a disposition in a hypothetical situation. We regret our delay in providing you with our response. In the comments that follow, unless otherwise stated, all statute references are to the Income Tax Act S.C. 1970-71-72, c.63 as amended, consolidated to June 10, 1993 (the "Act").
The hypothetical situation, as we understand it, is as follows:
1.H and W were spouses from 1972 to 1978. H and W2 became spouses in 1987. H, W and W2 are all residents of Canada.
2.On December 31, 1971, H and W jointly owned a cottage and a house.
3.In 1973 H transferred his interest in both the house and the cottage to his spouse (W).
4.In 1978 W transferred the cottage to her spouse H. H and W then separated. W sold the house and designated it as her principal residence for the 1972 to 1977 taxation years.
5.In 1991 H transferred the cottage to his new spouse W2.
6.In 1993, W2 transferred the cottage to her spouse H. H then transferred the cottage to his former spouse W in final settlement of rights arising out of their marriage. W sold the cottage to a third party purchaser.
7.The transfers described in items 3 to 6 above were made pursuant to subsection 73(1) of the Act.
You are of the view that W's gain from the disposition of the cottage in 1993 for the purposes of subsection 40(2) of the Act is to be determined from December 31, 1971, the date W last acquired the cottage. This view is based on your understanding of the application of subsections 73(1) and 40(4) of the Act to the series of inter-spousal cottage transfers. Furthermore, you are also of the view that the cottage property will be considered to have been owned at the end of 1981 and continuously thereafter for purposes of the alternative gain determination pursuant to subsection 40(6) of the Act.
Finally, for the purposes of the definition of "eligible real property gain" in subsection 110.6(1) of the Act, it is your view that the date the cottage property was last acquired by W is December 31, 1971.
Where one spouse has transferred his or her interest in a particular capital property to the other, subsection 73(1) will apply to deem the property to be transferred at the "cost amount" of the property (as that term is defined in subsection 248(1)) unless the transferor elects not to have the subsection apply. In this situation no such election has been made.
Subsection 40(4) applies on the disposition of a principal residence where the principal residence was acquired from a taxpayer in a transaction to which the provisions of subsection 73(1) applied, for the purposes of computing the transferee's gain from the disposition of the property under paragraphs 40(2)(b) or (c). Thus, pursuant to subsection 40(4), the transferee will be deemed for the purposes of paragraph 40(2)(b) to have owned the property throughout the years the transferor owned the property and the property shall be deemed to have been the transferee's principal residence for any year that it was the transferor's principal residence. In order for it to have been the transferor's principal residence the property had to have met the criteria described in paragraph 54(g) of the Act including the one which stipulates that the property must be so designated by the transferor for the years in question.
Accordingly, we are in agreement that W is deemed to have owned the cottage property throughout the period H owned it. This would include the years 1991 and 1992 in which he was deemed by subsection 40(4) to have owned the cottage by virtue of the inter-spousal transfer from W2 under subsection 73(1). Furthermore, W's gain from the disposition of the cottage to a third party in 1993 for the purposes of subsection 40(2) is to be determined from December 31, 1971. This would be contingent on the ability of H to designate the property as his principal residence and to do so in "prescribed form and manner" pursuant to paragraph 54(g). Such a designation must be made at the time of filing of the tax return for the year in which the property is disposed of. If H did not make the designation then the subsequent gain on disposition by W would be determined under the general provisions of subsection 40(1) of the Act.
It is our view that, in the circumstances under review, the cottage property will be considered to have been owned at the end of 1981 and continuously thereafter by W for purposes of the alternative determination of the gain pursuant to 40(6). However, if subparagraph 40(2)(b) does not apply because the property is not W2's principal residence then subsection 40(6) would not apply because its purpose it qualify the amount determined under paragraph 40(2)(b).
Where the transfer of property is made under subsection 73(1), paragraph 110.6(18)(c) will apply. When the transferee spouse acquires the property for an amount not exceeding the adjusted cost base of the property to the transferor, the transferee spouse will be treated, for the purpose of determining his or her eligible real property gain or loss on the disposition, as having acquired the property at the time it was last acquired by the transferor. Assuming that this is the case then we agree that the date the cottage property was last acquired by W is December 31, 1971, for purposes of the definition of "eligible real property gain" in subsection 110.6(1).
These comments represent a general interpretation of the law and, as such, may not be applicable in every situation. The determination of the tax consequences of a particular situation can only be made following a review of all the relevant facts and documentation.
We trust our comments will be of assistance to you.
Yours truly,
J.A. Szeszycki
for Director
Business and General Division
Rulings Directorate
Legislative and Intergovernmental
Affairs Branch
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