CHAPTER 8 TAX

Why are there special rules for non-arm’s length transactions

To prevent the elimination or reduction of tax by selling at a price other than fair market value.

When are taxpayers considered not to be dealing at arm’s length?

When they are related to each other, or based on the facts of the situation.

Which individuals are considered related for non-arm’s length purposes?

• Grandparents

• Parents

• Children

• Grandchildren

• Brothers

• Sisters

• Spouses

• In-laws

What are the two main areas considered for NAL transactions?

1. Immediate tax consequences on transfer

2. Further tax implications through attribution 

What does attribution determine?

Who will pay tax on the investment income in the future.

What are the four possible situations when property is transferred to a NAL person other than a spouse?

1. Proceeds = FMV

2. Proceeds < FMV

3. Proceeds > FMV

4. Property is gifted 

What does P of D = FMV mean?

The transfer is similar to a transaction with an unrelated party.

What does P of D < FMV mean?

The property is sold to the NAL person for less than what would normally be paid under normal market forces.

What does P of D > FMV mean?

The property is sold to the NAL person for more than what would normally be paid under normal market forces.

What happens when property is transferred to a NAL person for FMV?

• Seller’s P of D = amount received

• Purchaser’s ACB = amount paid

• No potential double taxation

What happens when P of D is less than FMV?

• Seller’s P of D is adjusted upward to FMV

• Purchaser’s ACB = amount actually paid

• Potential for double taxation

What happens when property is gifted to a NAL person?

• Seller’s P of D is deemed to be FMV

• Purchaser’s ACB = FMV

• No potential double taxation

What happens when P of D is greater than FMV?

• Seller’s P of D = actual proceeds received

• Purchaser’s ACB is adjusted downward to FMV

• Potential for double taxation

Which two NAL situations create potential for double taxation?

• P of D < FMV

• P of D > FMV

what happens with gifting and attribution?

Gifting → attribution applies.

what type of transaction avoids the attribution problem?

A transaction at fair market value.

What automatically happens when property is transferred between spouses?

The transfer occurs at ACB under subsection 73(1).

Does the automatic spousal rollover create immediate tax on transfer?

No

Does attribution apply when the automatic spousal rollover is used?

Yes

Can a taxpayer elect out of the automatic spousal rollover?

Yes

What happens if the taxpayer elects out of subsection 73(1)?

Immediate tax implications are determined using the rules in ITA 69.

How is a spousal transaction treated after electing out of the rollover?

It is treated like a related-party transaction other than a normal spousal rollover.

Do the spousal rollover rules have to be specifically elected into?

No. They automatically apply.

What happens when property is gifted to a spouse and there is NO election out of the spousal rollover?

• Transferor P of D = ACB/UCC

• Transferee ACB = ACB/UCC

• No immediate gain

What happens when property is gifted to a spouse and the taxpayer ELECTS OUT of the spousal rollover?

• Transferor P of D = FMV

• Transferee ACB = FMV

• Immediate gain

If property is sold to a spouse for consideration and there is NO election out of the spousal rollover, what happens?

• Transferor P of D = ACB/UCC

• Transferee ACB = ACB/UCC

• No immediate gain

If property is sold to a spouse for consideration and the taxpayer ELECTS OUT of the spousal rollover, what are the seller’s proceeds?

The greater of:

• Actual P of D

• FMV

If property is sold to a spouse for consideration and the taxpayer ELECTS OUT of the rollover, what is the purchaser’s ACB?

The lesser of:

• Actual cost

• FMV

Does electing out of the spousal rollover potentially create an immediate gain?

Yes

What is income attribution?

Income earned on property transferred to a non-arm’s length individual is allocated back to the original owner.

What is the purpose of income attribution rules?

To prevent taxpayers from splitting income with family members who earn less income and pay tax at a lower rate.

What types of property income are included for attribution purposes?

• Interest income

• Dividends

• Rental income

When can the attribution rules apply?

When an asset earning property income and/or capital gains and losses is transferred by an individual to:

• A spouse

• A NAL/related minor

• A niece or nephew who is a minor

Can capital gains and losses be relevant to attribution rules?

Yes, the rules can apply when an asset earning property income and/or capital gains and losses is transferred.

Does business income attribute back?

no

When does attribution apply to a transfer between spouses?

At cost under ITA 73(1) and (2).

Can a taxpayer choose to recognize an immediate gain on a spousal transfer?

Yes

What must the taxpayer do to recognize an immediate gain on a spousal transfer?

Elect out of the rollover provisions.

When does attribution apply to a transfer between spouses?

• If there is no election out of subsection 73(1) at the time of transfer, attribution applies, OR

• If FMV consideration is not paid

How long does spousal attribution apply?

As long as they are married.

What is an exception to the spousal attribution rules?

TFSA

According to the note on the slide, what is needed to shift income to the spouse’s lower tax bracket?

• Elect out of subsection 73(1)

• Receive/pay FMV

What happens to income from property transferred to a minor child?

The income attributes back to the parent.

Until when does attribution to the parent apply?

Until the year in which the child turns 18.

Do capital gains or losses on property transferred to a minor child attribute back?

No.

Does attribution apply if the asset is sold at FMV for FMV consideration?

No.

Does this attribution rule apply to income subject to “kiddie tax”?

No

What methods of avoiding income attribution are identified?

• FMV transfer

• Interest charged at the prescribed rate

• Spousal election

• Marital breakdown

What two things must a transferor do to avoid future spousal attribution?

1. Elect out of the interspousal rollover

2. Receive FMV consideration 

Does attribution apply to second-generation income from property?

No

Does attribution apply to loans or transfers to NAL individuals who are 18 or older?

No

What happens to property when a taxpayer dies?

There is a deemed disposition. 

What happens when property passes to a spouse on death?

It is deemed disposed of at ACB/UCC

What happens when property passes to someone other than a spouse on death?

It is deemed disposed of at FMV

What generally happens to capital property when a taxpayer ceases to be a resident of Canada?

It is deemed to be disposed of at FMV

what is the general tax result if the property transfers to the surviving spouse?

No tax is payable immediately.

what happens if property goes to someone other than the spouse?

There is a taxable event

What are examples of property deemed disposed of when leaving Canada?

• Shares, including private company shares

• Bonds

• Real estate outside Canada

• Boats

• Automobiles

What property is excluded from the deemed disposition when leaving Canada?

• Taxable Canadian Property

• Certain Canadian property that is not very movable

• Certain Canadian property that is not very liquid or marketable

• Property of a business carried on by the individual in Canada

• Rights to certain pension and retirement payments