Section 74.2

Subsection 74.2(1) - Gain or loss deemed that of lender or transferor



purpose of ensuring that a gain deferred under interspousal rollover is attributed back to the transferor

The taxpayer’s wife (Mrs. Gendron) purchased 1.04M preferred shares from the taxpayer (Mr. Gervais) at a cost of $1.04M (with Mr. Gervais electing out of s. 73 rollover treatment) and was gifted a further 1.04M shares (having a $1M accrued capital gain) on a s. 73 rollover basis, so that her cost of the gifted shares was $0.04M. The transactions were reported on the basis that on the immediately following sale of those shares to a third party for $2.08M, the effect of basis averaging under s. 47 was that there was a $0.5M capital gain attributed back to Mr. Gervais on the gifted shares, and the other $0.5M capital gain was "hers," so that she could claim the capital gains exemption.

In agreeing with the CRA approach of adding “her” $0.5M capital gain to Mr. Gervais’ return, Noël CJ stated that the above result was:

contrary to the object, spirit and purpose of subsections 73(1) and 74.2(1), the purpose of which is to ensure that a gain (or loss) deferred by reason of a rollover between spouses or common-law partners be attributed back to the transferor. … Because the rollover provided for in subsection 73(1) deferred this accrued gain [of $1M] in its entirety, the whole of the gain realized on the sale to [the third party] had to be attributed back to Mr. Gervais when regard is had to the object, spirit and purpose of subsection 74.2(1).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 245 - Subsection 245(4) basis averaging to attribute only half of a gain back to transferor spouse abused the purpose of s. 74.2(1) 399

Holizkivi v. The Queen, 95 DTC 5591 (FCTD)

Rothstein J. accepted that 1/2 of the assets of a proprietorship (and, following its incorporation, entailing the issuance of 99 shares to the taxpayer and one share to his wife) 49 shares of the corporation, were held by the taxpayer under a resulting trust for his wife given that she contributed her earnings, time and, where necessary, working capital, to the business. Accordingly, a later transfer of registered ownership of 49 of the shares from the taxpayer to his wife did not represent a "transfer" for purposes of s. 74(2).

See Also

Zeitler v. Zeitler (Estate), 2010 DTC 5199 [at 7026], 2010 BCCA 216

The taxpayer transferred two properties to her husband. When her husband died intestate (giving rise to a capital gain on the two properties as a result of their deemed disposition under s. 70(5)(a)), the taxpayer received $65,000 plus a third of the residue, with the remaining going to the husband's children. The taxpayer discovered from an accountant that she was liable under the capital gains attribution rule in s. 74.2(1) for $234,888 of capital gains tax on the deemed disposition of the two properties. She applied to the court for an order "holding the Estate liable to pay the [capital gain] Tax based upon [an] implied term to do so, and to indemnify and save harmless [the taxpayer] therefrom."

The court found that there was such an implied term in the agreement for the 2007 transfer of the properties. Low J. stated at para. 36:

Any other view of the issue would mean that, although [the taxpayer] contractually divested herself of all interest in the property, she retained a contingent tax liability that was entirely outside her control and for which she was entitled to receive no corresponding benefit. That view of the contract would destroy its business efficacy.

St-Pierre c. La Reine, 2008 DTC 3730, 2007 TCC 90

The taxpayer transferred shares of a corporation ("3101") to a management company controlled by him and the management company disposed of a portion of those transferred shares to the taxpayer's wife approximately a year later. Approximately half a year after that, the taxpayer's wife exchanged her shares of 3101 for shares of another class of 3101, following which 3101 was merged with another corporation and the taxpayer's wife disposed of her shares of the merged company to a purchaser at a capital gain.

Tardif J. found that the taxpayer had transferred "by any means whatever" his shares of 3101 by these transactions to his wife, so that s. 74.2(1) applied to attribute the capital gain realized by her to him.

Administrative Policy

S4-F3-C1 - Price Adjustment Clauses

CRA will consider a price adjustment clause to represent pricing at fair market value if:

  • the agreement reflects a bona fide intention of the parties to transfer property at FMV;
  • the purported FMV is determined by method that is fair and reasonable in the circumstances (which does not necessarily entail using CRA's preferred method, nor engaging a valuation expert);
  • the parties agree that a CRA or Court valuation, if any, will supersede the price otherwise determined; and
  • the excess or shortfall is actually refunded or paid, or legal liability therefor is adjusted (para. 1.5).

Price adjustment clauses involving shares may use a number of adjustment mechanisms. CRA non-exhaustively mentions changes in redemption value, the issuance of a note or change in the principle amount of a note, or a change in the number of shares issued - although CRA recommends against using the latter because of inherent legal and technical difficulties (para. 1.6).

21 February 2013 External T.I. 2012-0465711E5 F - Attribution Rules after Divorce

entire rather than only pro rata portion of a post-divorce capital gain is not subject to attribution

Does the attribution rule in s. 74.2(1) ceases to apply after the divorce of the transferor and the transferee of a capital property so that the entire gain (and not just the portion that accrued after divorce) is taxable only in the hands of the transferee? CRA confirmed:

[T]he entire capital gain resulting from the disposition of property after the divorce of the transferor and the recipient of the transfer of the property in question would be taxable only in the hands of the transferee.

9 January 2012 External T.I. 2011-0427461E5 F - Attribution Rules and Suspended Loss Rules

stop-loss rule in s, 40(3.6) trumped s. 74.2(1) so that denied capital loss was added to transferee spouse’s common share ACB

Ms. A and her spouse, Mr. B, each held 50% of the common shares of Opco, with Ms. A also holding Opco preferred shares with a paid-up capital ("PUC") of $200, a redemption value and fair market value (“FMV”) of $2,000,000, and an adjusted cost base ("ACB") of $1,000,000. Ms. A transferred to Mr. B, for no consideration, ½ of her preferred shares, thereby realizing under s. 73(1) proceeds of disposition deemed to be equal to the ACB of those shares of $500,000. Five years later, Opco redeemed those preferred shares for their FMV of $1,000,000).

Would Mr. B's capital loss on the redemption be attributed to Ms. A under s. 74.2(1)(b) or would it instead be added to the ACB of Mr. B’s Opco common shares pursuant to s. 40(3.6)(b). CRA responded:

[T]he loss of $499,900 ("Denied Loss") sustained by Mr. B … would be deemed to be nil by virtue of paragraph 40(3.6)(a). Consequently, no amount of the Denied Loss could be attributed to Ms. A under subsection 74.2(1) … .

By virtue of paragraph 40(3.6)(b), the amount of the Denied Loss … could, however, be added to … the ACB, to Mr. B, of each of the common shares of the capital stock of Opco that is owned by him immediately following the disposition … .

… [A subsequent] taxable capital gain or an allowable capital loss [realized by Mr. B] on the disposition of a common share … of Opco … would not be realized or sustained by Mr. B on the disposition of a property lent or transferred by Ms. A or a property substituted therefor and, consequently, could not be attributed to Ms. A by virtue of subsection 74.2(1).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 40 - Subsection 40(3.6) stop-loss rule in s, 40(3.6) gave ACB addition to common shares of transferee spouse who redeemed preferred shares gifted to him by spouse 235

19 September 1994 External T.I. 9418825 - ATTRIBUTION RULES

S.74.2(1) (and former s. 74(2)) will not apply to attribute a capital gain on a property to a husband where he transferred the property to his spouse before 1972.

30 October 89 T.I. (March 1990 Access Letter, ¶1159)

Where a condominium was purchased solely out of the funds of the husband but was held in joint tenancy with his wife, any capital gain or loss from the disposition of the wife's portion would be attributed to him.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 47 - Subsection 47(1) 24

Paragraph 74.2(1)(a)

Administrative Policy

4 January 2012 External T.I. 2011-0418291E5 F - Transfert entre conjoints

s. 74.2 attribution cease on divorce/s. 74.5(3)(b) election available after marriage breakdown

Two spouses who were the equal co-owners of their principal residence and second home effected the transfer of a ½ interest in the principal residence from him to her, and of a ½ interest in the second home from her to him, shortly before their divorce. In the course of a general discussion, CRA stated:

[P]aragraph 74.5(3)(b) allows spouses who are separated because of a breakdown of their marriage or common-law partnership to make an election in order to avoid the application of section 74.2.

… [T]he attribution rules in section 74.2 cease to apply after the divorce. Consequently, if a taxpayer disposes of a residence to which subsection 73(1) applies after the taxpayer’s divorce, the taxpayer’s former spouse does not have to make an election in order to avoid the application of the attribution rules set out in section 74.2, since those attribution rules automatically cease to apply after the divorce.

Subsection 74.2(2) - Deemed gain or loss

Administrative Policy

7 July 1999 External T.I. 9911325 - SECTION 48.1 AND SUBSECTION 74.2(2)48.1

A taxable capital gain arising from an election under s. 48.1 and that is attributed to an individual under s. 74.2(1) will be deemed, for purposes of the capital gains deduction, to have arisen on a disposition by the individual at the time provided in s. 48.1 of the Act (i.e., immediately before the corporation ceased to be a small business corporation). As the reference to "the day" in s. 74.2(2)(b) is not restricted to a specified time, the Department has the flexibility to adopt this position.