3 April 1989 Income Tax Severed Letter 7-3692 - [Section 69 Non-Resident Divorce Settlements]

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.

APR 3 1989

Small Business and General Division R.B. Day 957-2136

SUBJECT: Section 69 Non-Resident Divorce Settlements Your File HAK 8437-2

We are writing in reply to your memorandum of February 22, 1989, wherein you requested our views regarding what you believe to be an anomaly between the income tax treatment for residents and non-residents where taxable Canadian property is transferred, at less than fair market value (FMV), between former spouses pursuant to a divorce settlement.

Our understanding of the situation set out in your memorandum and the enquiry from Sherbrooke District Office is as follows:

Normally, the disposition of this type of property invokes the application of section 116 of the Income Tax Act, which requires the non-resident vendor to notify the department of the disposition and make a payment as or on account of tax or provide security acceptable to the Minister. Subsection 116(5.1) provides that inter vivos gifting or transactions which are not at arm's length are deemed to be disposed of at fair market value.

The problem is the timing of the disposition in a divorce situation where proceeds are less than FMV. It appears from the wording of section 251 that once divorced, the individuals are no longer considered to be related and neither section 69 nor subsection 116(5.1) are applicable.

Our Comments

Prior to the 1978 amendment to subsection 73(1) (which extended the tax-free rollover of property to transfers between ex-spouses) IT-325 made the following comments regarding the income tax consequences of transfers of property between ex-spouses.

"1. When a taxpayer transfers property to an ex-spouse after the final decree of divorce, whether or not pursuant to a court order or prior separation agreement, he will be considered to have disposed of the property with proceeds equal to the fair market value of the property at the time of transfer. This will result in the realization of any recaptured capital cost allowance, any income or capital gains or any capital loss.

2. The ex-spouse who receives the property will be considered to have an adjusted cost base equal to the taxpayer's proceeds of disposition."

The above commentary is based on common law and continues to apply to transfers of property between ex-spouses when they either elect to have subsection 73(1) not apply to their situation or subsection 73(1) does not apply for other reasons, such as the non-resident situation described in your memorandum.

The basis for the above position is that the courts have held that where a taxpayer transfers appreciated property to his former spouse the former spouse relinquishes certain rights in exchange therefore. The value of the rights thus relinquished can be presumed to be equivalent to the FMV of the property transferred by taxpayer at the time of the transfer. As a result, transfers of property between divorced spouses who are dealing at arm's length is considered to occur at FMV and section 69 and subsection 116(5.1) are irrelevant.

The above common law principle applies whether neither, one, or both of the parties are non-resident.

In closing we note that at the time of a divorce settlement or divorce judgement, the two parties are still legally married to each other and do not deal at arm's length with one another until the decree absolute is issued, which is usually ninety days after the decree nisi. As a result, any property that changes hands during this period would be considered to occur while the parties were not dealing at arm's length. In this situation, it is our view that depending on the circumstances either section 69 or subsection 116(5.1) could be applied to deem the transfer to be at FMV.

We trust that these comments will be helpful.

for Director Small Business and General Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch