Subsection 74.1(1) - Transfers and loans to spouse or common-law partner
Cases
The Queen v. Kieboom, 92 DTC 6382 (FCA)
In finding that s. 74(1) applied to attribute dividend income to the taxpayer when he permitted his wife to subscribe for common shares of his private company for nominal consideration, Linden J.A. stated (p. 6386):
"In my view, the phrase 'transfer of property' is used in this provision in a rather broad sense ... The transfer, which in this case was indirect, in that the taxpayer arranged for his company to issue shares to his wife, is nevertheless a transfer from the husband to the wife. There is no need for shares to be transferred in order to trigger this provision ..."
Garant v. The Queen, [1985] 1 CTC 153 (FCTD)
The taxpayer and his wife agreed to change their matrimonial regime from community of property to separation of property. Since the partition was a declaration of property rights, rather than a conveyance of property, there accordingly was no "transfer" of property.
Beique v. The Queen, 81 DTC 5050, [1981] CTC 75 (FCA)
Income derived from real property which the taxpayer's wife bought with money he had given her, was attributed to him.
Murphy v. The Queen, 80 DTC 6314, [1980] CTC 386 (FCTD)
Under a court-approved variation of trust, the plaintiff forewent his vested right to receive a ½ share of the income of a trust, and a discretionary trust was created whose beneficiaries included his wife. In the taxation years in question, the trustees of this trust directed that 1/4 of the trust income be paid to his wife, an eventuality which the plaintiff was found to have anticipated. It was held that he had by means of a trust transferred property to his wife, and the 1/4 share of the trust income was taxable as his income.
Lackie v. The Queen, 79 DTC 5309, [1979] CTC 389 (FCA)
Payments received by the wife of the taxpayer for gravel removed from land that had been conveyed to her by the taxpayer were found to be payments dependent upon use of the property rather than income from a gravel-selling business. The payments accordingly were "income ... from the property" and s. 74(1) applied to attribute the income to the taxpayer.
Administrative Policy
27 March 2013 Folio S4-F3-C1
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).
19 April 1995 T.I. 5-943123
Where an individual's contributions to his RRSP is funded with cash transferred to him from his spouse, s. 74.1(1) will apply to the amount withdrawn from the individual's RRSP, given that an interest in the RRSP is "property substituted for" the cash.
26 September 1994 T.I. 941201 (C.T.O. "Attribution and Community Property")
Where a person transfers property to his or her spouse prior to becoming a resident of Canada, s. 74.1(1) would apply to any income earned from such transferred property. It is possible that if under the applicable community property laws in a foreign jurisdiction, a spouse acquires a vested 50% interest in each property acquired or owned by the other spouse, the first spouse might be considered to have acquired his or her interest in such property by virtue of the relevant provisions of such law and not to have had the property transferred to him or her.
31 May 1994 T.I. 941179 (C.T.O. "Inter-spouse Transfers and RRSPs")
Where an individual transfers cash to a spouse for no consideration, the spouse contributes the cash to an RRSP of which she is the annuitant, the spouse claims a contribution deduction under s. 146(5) and later withdraws the money, the total amount received by her out of the RRSP will be income from substituted property and included in the individual's income under s. 74.1(1) and will not be income of the spouse. S.74.1(1) will not apply to income earned on the reinvestment of the amount withdrawn from the RRSP.
93 C.R. - Q. 36
The Act does not provide specifically that attribution ceases when a loan to which s. 74.1(1) applies is repaid. Accordingly, if the loan is repaid with property other than the original property loaned or property substituted, the attribution continues.
8 May 1991 T.I. (Tax Window, No. 3, p. 22, ¶1250)
Where Mr. X purchases real property from his spouse, generates $10,000 of net rental income from the property, but fails to pay the $9,000 of interest which has accrued on the unpaid purchase price within the time provided in s. 74.5(1), the income which is attributed to his spouse will be the net income of $1,000.
4 May 1994 T.I. 940082 (C.T.O. "Attribution Rules")
A taxpayer who transferred cash from his wife to assist her in purchasing a property that was subsequently sold by her at a gain was referred to Trinca v. MNR, 51 DTC 91 "wherein it was decided in circumstances similar to yours that only a portion of the gain was attributed".
14 January 1991 T.I. (Tax Window, Prelim. No. 3, p. 12, ¶1091)
"Income from property" for purposes of ss.74.1, 110.6 and 207.5 includes annuity income taxed under ss.56(1)(d), (d.1) and (d.2).
86 C.R. - Q.43
Where the property loaned or property substituted therefor is used to repay a low-interest loan to which s. 74.1(1) applies, there will not be any income from the property loaned to which attribution would apply.
86 C.R. - Q.45
S.74.1 only attributes income from property, and s. 96(1)(f) applies for purposes of determining the source of income received by a partner.
Subsection 74.1(2) - Transfers and loans to minors
Cases
Romkey v. The Queen, 2000 DTC 6047, Docket: A-405-97 (FCA)
Trusts, that were established for the taxpayers' children, subscribed for non-voting common shares of the corporation for a nominal amount. The Court affirmed the finding of the trial judge that s. 74.1(2) applied in the absence of being satisfied that the trusts had paid for the shares issued to them and in light of the broad meaning accorded to the concept of a transfer of property in the Kieboom case.
Sachs v. The Queen, 80 DTC 6291, [1980] CTC 358 (FCA)
The appellant settled a trust and sold shares of a company to his wife in her capacity of trustee. The trust deed basically provided that until the division date in 1991 the trustee could pay some or all of the income and capital to the appellant's children, and that after the division date the children would be paid 1/3 of their share upon attaining 25, and the remainder at 30. In 1975 and 1976 the infant children and the trustee jointly filed preferred beneficiary elections and the children were paid dividends on the shares.
It was held that the appellant had transferred property rights to his children by means of a trust, and the dividends were deemed to be income of the appellant. In the view of Thurlow, C.J., it was irrelevant that in 1975 and 1976 the shares had not yet vested in the infant children, as was the fact that only one of the children had been born at the time of settling the trust.
See Also
Krauss v. The Queen, 2009 DTC 1394 [at 2155], 2009 TCC 597
The taxpayer and her son transferred real estate on a rollover basis to a partnership in consideration for Class A units of the partnership having a redemption value, subject to a price adjustment clause, of approximately $1.25 million for each of them. Several days later, the partnership issued Class C units to a family trust for consideration of $100. In the following taxation year, the partnership earned approximately $343,000, of which approximately $127,000 was allocated to the family trust in respect of the Class C units.
S.74.1(2) applied to attribute the income allocated to the family trust equally to the taxpayer and her son.
Harvey v. The Queen, 98 DTC 1089 (TCC)
Given that minors could not contract and be parties to a proper loan, the taxpayer was found to have transferred funds to his infant children for purposes of s. 75(1) when monies transferred by him to them was evidenced by demand promissory notes signed on their behalf by his wife.
Romkey v. The Queen, 97 DTC 719 (TCC)
Dividends on shares of a family corporation supposedly received by trusts for the benefit of the taxpayer's children were attributed to the taxpayer because (in the case of the initial dividends) the shares supposedly issued to the trust had not yet been fully paid, the taxpayers were unable to establish that the purchase of the shares had been funded out of family allowance payments received by their wives and, because it had not been proven that the shares issued to the trust had a fair market value equal to the nominal subscription price, (which indicated that there was a transfer of property by the taxpayers to their children as a result of the dilution of their share interest in the corporation).
Administrative Policy
2001 Advanced Life Underwriting Roundtable Q. 1, 2001-0072705
"Subsection 74.1(2) will generally not apply to attribute, to a freezor, dividends paid on shares held by a trust for minor children as part of a typical estate freeze, provided that the shares held by the trust are issued for an amount equal to their fair market value and are paid for with funds that are not obtained from the freezer".
3 March 1995 T.I. 942711
The word "transfer" means to "divest, deprive or dispossess of title". Accordingly, there is no transfer of property to a taxpayer's child where the taxpayer opens up an informal "in trust for" account for the child, contributes funds on a monthly basis to the account to fund the purchase of mutual fund investments, and under the arrangement is permitted to withdraw the investment or a portion thereof for the taxpayer's personal benefit.
21 March 1994 T.I. 940525 (C.T.O. "Attribution of Capital Gains Earned by Mutual Fund")
Where an individual (the "transferor") has bought units in a mutual fund trust for a related minor, s. 74.1(2) will not attribute capital gains earned by the mutual fund and distributed to the minor to the transferor. In such a situation, the capital gain reported on the T-3 Supplementary issued by the mutual fund trust "is not in respect of a disposition of transferred property but is merely in respect of a transaction or transactions undertaken by the mutual fund that has resulted in a capital gain being generated by that trust."
18 February 1994 T.I. 931818 (C.T.O. "ABIL - Attribution of Allowable Capital Loss to Spouse")
An allowable business investment loss is a type of allowable capital loss. Accordingly, in a situation where Mr. and Mrs. X are jointly and severally liable for the debts of an operating corporation in which they both own shares, and Mr. X funds the guarantee liability of both by selling marketable securities and giving a portion of the proceeds to Mrs. X who uses those proceeds to honour a portion of the guarantee, the allowable business investment loss that she realizes when she honours the guarantee will be attributed to him only as an allowable capital loss and not as an ABIL. It could not be said that her capital loss for the year on the disposition of the property is also deemed to be his capital loss for the year on the disposition of that property, with the result that he cannot satisfy the requirements in s. 39(1)(c).
25 January 1991 T.I. (Tax Window, Prelim. No. 3, p. 29, ¶1109)
The proceeds of a life insurance policy are "substituted property" for purposes of the attribution rules.
87 C.R. - Q.8
The phrase "relating to any period" means accrued in a period.