9 February 2000 External T.I. 1999-0005405 - BC FAMILY RELATIONS ACT-DIV. OF ASSETS

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:

1. Whether the occurrence of a triggering event described in subsection 56(1) of the Family Relations Act of British Columbia (the "FRA") results in a transfer of property (i.e., of an interest in a family asset), and the timing of such a transfer, if any.

2. How income is to be reported following a triggering event; that is, do the attribution rules will apply?

Position TAKEN:

1. Generally there results a disposition by one spouse and an acquisition by the other spouse, at the time of the triggering event, of an interest in the family assets in which each spouse did not have a 50% interest immediately before the triggering event.

2. In situations where property passes on the triggering event, each spouse will generally be responsible for reporting his or her share of related income as of that time, subject to the application of the attribution rules. However, assuming that as of the triggering event the parties are living separate and apart (and, where applicable, the paragraph 74.5(3)(b) election is made), or divorced, the attribution rules should generally not apply.

Reasons FOR POSITION TAKEN:

1. Based on positions taken in other files. On the occurrence of a triggering event described in subsection 56(1) of the FRA, each spouse is entitled to an interest in each family asset. Subsection 56(2) of the FRA then provides that the interest under subsection 56(1) of the FRA "is an undivided half interest in the family asset as a tenant in common". In addition, subsection 64(4) of the FRA essentially provides that the interest of a spouse arising under subsection 56(1) of the FRA is enforceable against the other spouse from the date the interest comes into being.

The comments made by the B.C. Court of Appeal and the B.C. Supreme Court in Blackett v. Blackett and in Biedler v. Biedler and Henfrey & Company Ltd., respectively, support the view that the interest created by the triggering event vests at the time of the triggering event and, accordingly, the above view that the disposition and acquisition occurs at that time. These views as to the time at which property passes under the FRA were also accepted by the Tax Court of Canada in the cases of Leigh v. The Queen, 98 DTC 2121 and Erskine v. The Queen, 97-3125(IT)G, 98-153(IT)G. In addition, the "for greater certainty" provisions of subsection 73(1.1) of the Act support the view that the provisions of the laws of a province, or of an order made under those laws, such as the above provisions of the FRA, result in a disposition and acquisition of property. In this regard, we would also note that former subsection 73(1.1) of the Act referred to "prescribed provisions of the law of a province", which under subsection 6500(2) of the Regulations included sections 43, 51 and 52 of the former Family Relations Act (now sections 56, 65 and 66 of the FRA).

2. The attribution rules under subsection 74.1(1) of the Act, in respect of income or loss from property, and subsection 74.2(1) of the Act, in respect of capital gains and capital losses, do not apply to the period after the transferee ceases to be the transferor's spouse (e.g., after divorce). In addition, pursuant to paragraph 74.5(3)(a) of the Act, the attribution rules concerning income or loss from property do not apply for the period when spouses are living separate and apart by reason of a breakdown of their marriage. Also, by virtue of paragraph 74.5(3)(b) of the Act, the attribution rules for capital gains and losses do not apply to dispositions of property occurring at any time while the spouses are living separate and apart because of a breakdown of their marriage, if the spouses jointly elect not to have section 74.2 of the Act apply.

XXXXXXXXXX 1999-000540
M. Azzi
Attention: XXXXXXXXXX

February 9, 2000

Dear Sirs:

Re: Family Relations Act

This is in reply to your letter of September 30, 1999, wherein you requested our views on the tax implications of certain provisions of the Family Relations Act of British Columbia (the "FRA"), as they apply to rights to property on marriage breakdowns.

In particular, you have requested our views on whether the occurrence of a triggering event described in section 56 of the FRA results in a transfer of property (i.e., of an interest in a family asset), and as to the timing of such a transfer, if any. You also question how income is to be reported following a triggering event; that is, whether the attribution rules will apply. You also request our views on the timing of the transfer of property, and on the application of the attribution rules, in situations involving a trial of an issue, such as disputes on whether a property constitutes a "family asset" for purposes of the FRA, and situations where the court, in the proceedings or on application, rules on the apportionment, on compensation, or on other issues related to the interests in property under the FRA. In this regard you refer to sections 60, 65 and 66 of the FRA.

Our Comments

Written confirmation of the tax implications inherent in particular transactions is given by this directorate only where the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R3, dated December 30, 1996. Where the particular transactions are completed, the enquiry should be addressed to the relevant tax services office. However, we are prepared to offer the following general comments.

Subsection 56(1) of the FRA (this subsection being in part 5 of the FRA) states: "Subject to this Part and Part 6, each spouse is entitled to an interest in each family asset on or after March 31, 1979 when

(a) a separation agreement,

(b) a declaratory judgment under section 57,

(c) an order for dissolution of marriage or judicial separation, or

(d) an order declaring the marriage null and void

respecting the marriage is first made" (hereinafter, the first of the events in (a) to (d) above to be made in a particular situation is referred to as the "triggering event"). Subsection 56(2) of the FRA then provides that the interest under subsection 56(1) of the FRA "is an undivided half interest in the family asset as a tenant in common", and subsection 56(3) of the FRA states that an interest under subsection 56(1) of the FRA "is subject to (a) an order under this Part or Part 6, or (b) a marriage agreement or a separation agreement". In addition, subsection 64(4) of the FRA essentially provides that the interest of a spouse arising under subsection 56(1) of the FRA is enforceable against the other spouse from the date the interest comes into being.

In our view, the effect of the above provisions is that they will generally result in a disposition by one spouse and an acquisition by the other spouse, at the time of the triggering event, of an interest in the family assets in which each spouse did not have a 50% interest immediately before the triggering event. Accordingly, in a situation where, immediately before the triggering event, one spouse is the sole owner of a family asset, the general result of the above provisions is that, at the time of the triggering, that spouse disposes of an undivided 50% interest in the asset and the other spouse acquires, at that time, that interest. These results are, of course, "subject to" any overriding provision or order under parts 5 and 6 of the FRA, or a marriage or separation agreement, as provided in section 56 of the FRA (and noted above).

As indicated in your letter, the comments made by the B.C. Court of Appeal and the B.C. Supreme Court in Blackett v. Blackett and in Biedler v. Biedler and Henfrey & Company Ltd., respectively, support the view that the interest created by the triggering event vests at the time of the triggering event and, accordingly, the above view that the disposition and acquisition occurs at that time. These views as to the time at which property passes under the FRA were also accepted by the Tax Court of Canada in the cases of Leigh v. The Queen, 98 DTC 2121 and Erskine v. The Queen, 97-3125(IT)G, 98-153(IT)G. In both these tax cases, the court accepted that the spouse's undivided 50% interest in family assets was acquired (from the other spouse) at the time of the triggering event under section 43 of the former Family Relations Act (now section 56 of the FRA). In addition, in our view, the "for greater certainty" provisions of subsection 73(1.1) of the Income Tax Act (the "Act") support the view that the provisions of the laws of a province, or of an order made under those laws, such as the above provisions of the FRA, result in a disposition and acquisition of property. In this regard, we would also note that former subsection 73(1.1) of the Act referred to "prescribed provisions of the law of a province", which under subsection 6500(2) of the Income Tax Regulations included sections 43, 51 and 52 of the former Family Relations Act (now sections 56, 65 and 66 of the FRA).

When a disposition of an interest between spouses has occurred at the time of the triggering event, as explained above, and all of the requirements of subsection 73(1) of the Act have been met, the disposition can be made on a rollover basis, as provided under this provision. In order for subsection 73(1) of the Act to apply, the transferred property must, inter alia, have been capital property to the transferor, both the transferor and transferee must be resident in Canada at the time of the transfer, and the transferor must not elect out of subsection 73(1) of the Act. Accordingly, as noted in your letter, if the interest in the family asset which is being disposed of is not a capital property to the disposing spouse, or any of the spouses is not resident in Canada, the subsection 73(1) rollover cannot apply to the transfer, such that the disposition will generally be considered to have occurred at fair market value at the time of the triggering event.

In situations where property passes on the triggering event, each spouse will generally be responsible for reporting his or her share of related income as of that time, subject to the application of the attribution rules. Whether the attribution rules apply in a particular situation is a question of fact which requires a review of all relevant circumstances. These rules are explained in IT-511R, Interspousal and Certain Other Transfers and Loans of Property. However, it is noteworthy that the attribution rules under subsection 74.1(1) of the Act, in respect of income or loss from property, and subsection 74.2(1) of the Act, in respect of capital gains and capital losses, do not apply to the period after the transferee ceases to be the transferor's spouse (e.g., after divorce). In addition, pursuant to paragraph 74.5(3)(a) of the Act, the attribution rules concerning income or loss from property do not apply for the period when spouses are living separate and apart by reason of a breakdown of their marriage. Also, by virtue of paragraph 74.5(3)(b) of the Act, the attribution rules for capital gains and losses do not apply to dispositions of property occurring at any time while the spouses are living separate and apart because of a breakdown of their marriage, if the spouses jointly elect not to have section 74.2 of the Act apply. Accordingly, assuming that as of the triggering event the parties are living separate and apart (and, where applicable, the paragraph 74.5(3)(b) election is made), or divorced, the attribution rules should generally not apply.

Finally, we would note that we are not in position to comment on situations involving disputes and where the court must rule on an issue related to the interests in property under the FRA, such as on apportionment, ownership or compensation, as the determination of the tax implications in such situations requires a review of all the relevant facts of each situation. For instance, such a determination would require a review of the claims made by each party, any relevant agreement and, in particular, the court order. In this regard, we would note that, under sections 65 and 66 of the FRA, the court is provided with the authority and flexibility to resolve issues in a number ways. In addition, as indicated above, the provisions of section 56 of the FRA are "subject to" any overriding provision or court order under parts 5 and 6 of the FRA, or in a marriage or separation agreement. Accordingly, the tax implications in such situations would, as indicated above, best be addressed in the context of an advance tax ruling, in the case of proposed transactions, or by officials of your local tax services office, if the transactions are completed. We would then provide assistance to the tax service office should it be required.

We trust that these comments will be of assistance.

Yours truly,

Jim Wilson
for Director
Business and Publications Division
Income Tax Rulings Directorate
Policy and Legislation Branch

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