Part I – Personal Attribution

This blog has been written by Pritika Deepak /Associate at Fasken LLP

Gifting property or making loans to family members is a common way for individuals to transfer and share their wealth with their loved ones. There are, however, several rules in the Income Tax Act (Canada)[1] (the “Act”), commonly referred to as the attribution rules, which prevent or restrict an individual from “income splitting”. Income splitting is the term used to describe arrangements aimed at saving tax by shifting the tax burden from a taxpayer in a high tax bracket to a family member in a lower tax bracket, with the ultimate goal of reducing the total amount of tax paid by the family. The attribution rules generally apply in circumstances when an individual transfers property or makes a loan to another individual, a trust, or a corporation.

When applicable, the attribution rules generally attribute income or loss arising from property transferred by a taxpayer, and in some circumstances, taxable capital gains or allowable capital losses realized on the disposition of the property, to the transferor for the purposes of calculating the transferor’s net income.

This three part series will provide a high level overview of the attribution rules dealing with transfers and/or loans to: (1) an individual, (2) a trust, and (3) a corporation.

We begin with transfers of property or loans to an individual.

(i)         Income Attribution

Subsection 74.1(1) of the Act states that where an individual transfers or loans property to or for the benefit of their spouse or common-law partner, any income or loss of the spouse/common-law partner from the property (or property substituted therefor), is deemed to be the income or loss of the transferor. A similar rule in subsection 74.1(2) of the Act applies to transfers or loans of property to related minors who do not deal at arm’s length with the transferor, or who are the niece or nephew of the transferor. This attribution of income applies where such transfers are made “…either directly or indirectly, by means of a trust or by any other means whatever..”[2] , intending to capture a broad range of transfers. It is also worth noting that the attribution rules under subsection 74.1(1) applies to individuals who have become spouses since the transfer or loan , but does not apply to periods of time where spouses are living separate and apart due to a breakdown of a marriage or common-law partnership.

(ii)       Capital Gain/Losses Attribution

Subsection 74.2(1) of the Act attributes capital gains or losses realized by the transferee spouse/common law partner from the disposition of transferred or lent property, to the transferor spouse/common law partner.

There is no attribution of capital gains and losses in respect of property transferred or loaned to related minors. Further, the attribution rules in 74.1(1) and (2) cease to apply following the death of the transferor and throughout the period when the transferor is not resident in Canada.

It is important to note that there are some exceptions to the attribution rules described above, including the fair market value exception. As some of these exceptions apply to the attribution rules involving trusts and corporations, the exceptions will be addressed in the next series of this blog.

[1]      Income Tax Act (RSC, 1985, c.1 (5th Supp.))

[2]      Ibid. at subsections 74.1(1) and 74.1(2).