Section 73

An individual and his spouse, who had been married under the separation of property regime, stopped living together. The following year, they entered into an agreement relating to ancillary matters under which the spouse undertook to transfer to the individual her 50 common shares of their jointly-owned corporation. In the same year, that agreement was ratified and became enforceable by the divorce order, and the shares were transferred as agreed. In finding that s. 73(1.01)(b) could apply, CRA stated:

Paragraph 73(1.01)(b) addresses, inter alia, the transfer of a property by an individual to the individual’s former spouse in settlement of rights arising out of their marriage. We are of the view that the term "in settlement of rights arising out of their marriage" is sufficiently broad in scope to include the rights created by an ancillary agreement entered into in a divorce context as is the case in the situation you described.

Respecting the rollover under ss. 73(1.01)(b), 146(16) and 146.3(14) provide to a common-law partner or a partner plan pursuant to a written separation agreement governing the division of the common-law partners’ assets in settlement of their rights arising on the breakdown of their relationship, CRA considered that, although there is no right in Quebec arising out of a common-law partnership (as per Éric v. Lola, 2013 SCC 5), it nonetheless “is not impossible for the annuitant to determine to create rights under a written separation agreement between the annuitant and the annuitant’s common-law partner or former common-law partner relating to the division of property ” – and that “such an agreement could be concluded at the time of separation, whether or not a common-law union agreement providing for the rights of each in the event of the union's failure had been previously signed.”

The employment benefit associated with the exercise by Taxpayer A of the stock options was deferred under s. 7(8) (since repealed). Taxpayer A is transferring the shares to Taxpayer B as part of the settlement of rights arising out of their marriage. What are the consequences? The Directorate responded:

Although subsection 7(8) was repealed in 2010 the deferral of the employment benefit continues to be permitted, for stock options exercised on or before March 4, 2010 4:00 P.M.(EST), until either the employee disposes of the share, dies, or becomes a non-resident. …[W]hen Taxpayer A transfers the shares to Taxpayer B…Taxpayer A will be required to include the deferred employment benefit in income in the year of the disposition. …

[W]here capital property is transferred by Taxpayer A to Taxpayer B in settlement of rights arising out of their marriage or common-law partnership (see paragraph 73(1.01)(b) and subsection 73(1)), Taxpayer A will be deemed to have disposed of the shares for proceeds equal to Taxpayer A’s adjusted cost base (ACB) of the shares immediately before the disposition. Pursuant to paragraph 53(1)(j) the ACB of the shares will be increased by the amount of any benefit deemed to have been received under paragraph 7(1)(a)….

Mr agreed in his separation agreement with Mrs to transfer to her a capital property. However, he died before the transfer was made. Does CRA still consider that s. 73(1) does not apply following death? CRA responded:

[A]ny particular capital property of an individual (other than a trust) is required to be transferred in circumstances to which subsection 73(1.01) applies. … Accordingly, since Mr. died before having completed the transfer of the capital property, that transfer instead was effected by his estate, which is a trust and does not comply with the requirements of subsection 73(1).

When queried on this, a Finance representative stated:

The Department of Finance is ready to consider the issue identified in the question to determine whether the rules give rise to anomalies in certain circumstances in tax policy terms, in the context of its on-going revision of the ITA rules.

Pursuant to a judgment for the divorce of X and Y, the Court awarded X an lump sum as support but, in order for this support obligation to be paid to X, the Court ordered X to transfer specified property to Y. Would this transfer by X be considered to be for settlement of rights arising out of the marriage of X and Y for the purposes of s. 73(1.01)(b)? CRA responded:

[W]here a court orders one spouse to pay maintenance to another then, as regards the spouse to whom the court has granted the support, this is a situation respecting an entitlement a right arising out of the marriage of such spouses … .

[T]he …. transfer [by X] was made under such a court order for the payment of maintenance to X and was intended to have the support granted to X under the court order be effected in in a more liquid form.

A corollary relief agreement, subsequently ratified by the divorce judgment, declared that Madame owned a chalet to which Monsieur renounced any claim, provided that Madame was to transfer to him woodlots currently registered in her name, and that, upon payment by Monsieur to Madame of the book value of Madame’s shares of XYZco, Madame was to transfer those shares to her.

Before addressing the application of s. 73(1) to such transfers, CCRA noted the preliminary question of whether there was a transfer of property, summarized ss. 248(22) and (23), and then noted that, if in fact there was a transfer of property by Madame to Monsieur, then, in the case of the shares:

It has been stated in some interpretations issued by our Directorate in the past that for the purposes of subsection 73(1), property transferred in settlement of rights arising out of marriage also includes property transferred in settlement of rights arising out of the matrimonial regimes. In your particular situation, we believe that the sale of the shares between the parties is likely in settlement of rights arising out of a matrimonial regime as this transaction was covered by a corollary relief agreement made in accordance with the provisions of the Divorce Act, 1985 and the Civil Code of Quebec.

CCRA further stated:

[I]f the transferor, i.e. Madame, decided to avail herself of the provisions of subsection 73(1) and transfer her shares to Monsieur at their adjusted cost base, the latter would be deemed to have acquired such shares at that same adjusted cost base, regardless of the consideration actually paid.

Does the CRA position on the use of personal-use property (e.g., homes, cottages, boats and cars) by an individual beneficiary also apply to a trust that is an alter ego trust or a joint spousal trust or a common-law partner trust? After noting that the referenced policy was that where, pursuant to the terms of the trust indenture or will, a trust owns personal-use property for the benefit or personal use of a beneficiary, no taxable benefit will be assessed to that beneficiary for the rent-free use of such property, CRA stated:

When considering the use of the personal-use property by another individual, one must remember that in order for an alter ego trust to meet the conditions outlined in s. 73(1.01)(c), the alter ego trust must be a trust under which no person except the settlor may receive or otherwise obtain the use of any of the income or capital of the trust before the settlor’s death. Similarly, in the case of a joint spousal trust or a common-law spousal trust, the terms of the trust must provide that no person other than the settlor or the spouse may obtain the use of any of the income or capital of the trust before the death of these individuals.

In the event that the terms of the deed of trust for one of the trusts intended to qualify under ss. 73(1.01) and (1.02) provide for the possibility of making gifts to a registered charity before the death of the individual (and/or spouse or common-law partner) would this have the effect of disqualifying the trust for the purposes of the s. 73 rollover, e.g., where no such gift in fact occurred? CRA responded:

Where the terms of a trust indenture provide for the possibility of making gifts to a qualified donee, that is to a person other than the taxpayers referred to in paragraph 73(1.01)(c), before the death of the latter, we are of the view that the condition set out in that paragraph is not satisfied.

The fact that no gift was made during the lifetime of the taxpayers referred to in paragraph 73(1.01)(c) does not change our position. Indeed, the mere possibility that a person other than the latter may, before their death, receive or otherwise obtain the use of any of the income or capital of the trust is sufficient to disqualify the trust for the purposes of the rollover provided for in subsection 73(1).

In finding that the use of income or capital from a purported spousal trust to pay life insurance premiums on spouse's life would disqualify trust from inception, CRA stated:

[T]he relevant legislation does not contain a requirement that the spouse “benefit” from the trust while alive... . [However] a trustee’s duty to maintain certain income producing or capital appreciating properties which may potentially benefit a spouse during their lifetime, is not...analogous to the payment of insurance premiums by the trustee to maintain rights to receive the insurance proceeds by the policy beneficiary after the death of the spouse. ...[W]e consider the payment of premiums by the trust to be property used to establish the residual beneficiaries’ rights to funds from the policy that will be realized after the death of the spouse.

Easingwood v. Cockroft, 2013 BCCA 182, found that an Attorney under a general power of attorney could establish an inter vivos trust on behalf of the grantor of the power. If an Attorney creates an alter ego or joint partner trust for the benefit of the grantor of the power, and transfers capital property of the grantor to the trust, will s. 73(1.01) apply? CRA responded:

… Easingwood does not stand for the general proposition that an Attorney may create such trusts for the grantor of a Power of Attorney for Property. … CRA would expect that an Attorney that is contemplating the creation of an alter ego trust would seek the affirmation of the applicable court that the particular terms of the Power of Attorney for Property provide for such a power and that the terms of the proposed trust conform with the terms of the existing will and any other relevant agreements.

The settlor of an inter vivos trust is entitled to receive all the trust income during his or her lifetime and, if survived by his or her spouse or common-law partner, such spouse or partner is entitled to all such income until death. Does this trust satisfy the requirement that the settlor and spouse/partner be "entitled" in "combination with the other" to receive all the trust income. CRA stated:

[I]f the terms of the trust provide that the taxpayer who transferred property to the trust was entitled to receive all of the income of the trust during his or her lifetime and the surviving spouse or common-law partner was only entitled to receive the trust's income after the death of the taxpayer and no other person could, before the later of those deaths receive or otherwise obtain the use of any of the income or capital of the trust, this in and of itself, would not prevent the trust from qualifying as a "joint spousal or common-law partner trust".

Upon being appointed to a public office an individual was required to settle a blind trust of which he was the beneficiary. What are the consequences of his death?

Assuming the blind trust was a trust, a transfer of capital property to the blind trust would be treated as a disposition of the property at fair market value, unless its terms satisfied the conditions in ss. 73(1.01)(c)(ii) and 73(1.02), in which case the transfer would qualify for the 73(1) rollover and the property would generally be subject to deemed disposition under s. 104(4)(a) at fair market value at the time of the settlor's death. These conditions are:

• the settlor and the trust are resident in Canada at the time of the transfer;
• only the settlor is entitled to receive or use all of the income or capital of the trust arising during the settlor's lifetime;
• either the settlor has attained the age of 65 at the time the trust was created or the transfer of property to the trust does not result in a change of beneficial ownership in the property;
• no person other than the settlor may have any absolute or contingent right as a beneficiary under the trust; and
• the trust does not make an election under s. 104(4)(a)(ii.1).

In one of the two examples presented:

Mr. A started renting land from an unrelated person in 1987. In 2000, he and Mrs. A purchased the parcel from the unrelated owner person, and in 2004, they started renting the parcel of land to non-eligible persons for purposes of s. 73(3)(c) until its transfer to a child in 2020. Would the principal-use test in s. 73(3)(c) be satisfied even though the 17 years of use of the land in a farming business in which Mr. A was actively engaged on a regular and continuous basis (as contrasted to the subsequent 16-year period) was a period during much of which Mr. A was merely a renter of the land?

CRA indicated:

[T]he “principally” test would generally be met where the farming or fishing use is more than 50% of the years while the test would generally not be met where the farming or fishing use is less than 50% of the years. …

[F]or [these] purposes … the period of active farming or fishing by one or more eligible persons (i.e., the taxpayer, the taxpayer’s spouse (or common-law partner), a child of the taxpayer, or a parent of the taxpayer), does not have to coincide with the period of ownership [of the particular property by the taxpayer.

In response to a request for clarification regarding the forest management plan ("FMP") criterion in s. 73(3)(c), CRA stated:

The mere absence of a FMP does not prevent the woodlot from being used primarily in a farming business, but the taxpayer must demonstrate that one of the persons listed in paragraph 73(3)(c) was actively engaged on a regular and continuous basis. …

However, where there is a FMP, the taxpayer must simply demonstrate that one of the persons listed in paragraph 73(3)(c) was involved in the farming business to the extent required by the FMP.

The taxpayer acquired farmland and rented 50% of it to an unrelated farm producer and 50% to a corporation that operated a nursery there and whose shareholders were him, his children and some of his brothers. During that time, the income from the nursery was his principal source of income. The corporation then was dissolved, and thereafter the taxpayer has been leasing all the farmland to a farm producer.

What would be the tax consequence if the taxpayer made a gift of the land to his sons during his lifetime? CRA responded:

[P]ursuant to paragraph 73(3)(a), the property must include, among other things, land of a farming business that is carried on by the taxpayer. In this case, the taxpayer has never carried on a farming business himself. We therefore do not believe that he can avail himself of the rollover provided for in subsections 70(3) and 70(3.1).

Work was carried out on some of the woodlots of a taxpayer, with a forest producer's certificate under s. 120 of the Québec Forest Act and also forest management plans issued by the Minister of Natural Resources and Wildlife, in accordance with those plans, was not performed on a timely basis for other lots - and some woodlots did not require any work under the plan.

In the course of a response describing the requirements for a rollover under s. 73(3) (or 70(9), CRA

• noted the distinction in IT-373R2, para. 14 (approved in Desrosiers Estate) between a woodlot operation that was a farm and a logging operation, and that if the correspondent’s statement that “the land was used principally in a logging business” was correct, then the rollover would not be available,
• discussed in detail the requirements of the 17 Quebec regional agencies for forest management plans, indicated that “a forest management plan certified as complying with the regulations of a regional agency for the development of private forests by a forest engineer would be a plan that is approved as complying with the requirements of a provincial program for the sustainable management and conservation of forests for the purposes of paragraph 7400(1)(a), and
• stated that the “engaged” test “may be satisfied with respect to a woodlot even if no work has been done, as long as the forest management plan does not require any work or task to be performed.”

Respecting the consequences of an inter vivos transfer of an interest in a family farm or fishing partnership (for which the s. 73(4.1)(c) election is made) with a negative adjusted cost base ("ACB"), CRA stated:

[W]here all the conditions for the application of subsection 73(4) are satisfied, paragraph 73(4.1)(c) applies and subsection 98(5) does not apply, the taxpayer is not required to include in computing the taxpayer’s income at the time of the transfer a capital gain equal to the negative ACB of the taxpayer’s interest in a family farm or fishing partnership. In addition, the child will be required to take into account subparagraphs 73(4.1)(c)(ii) and (iii) in computing the ACB of the child’s interest.