Tax attribution rules.

Question:

What are the income tax attribution rules, especially when property is transferred?

Answer:

Attributions rules are very complex. Get specific tax advice from an experienced income tax professional; do not rely on the general descriptions below as tax advice.

Gifts or transfers to your spouse

Generally, when you transfer (i.e. gift or loan) property to your spouse, income from such property continues to be attributed back to you, which means you must report interest, rental income, dividends and capital gains earned by the asset on your tax return (however “2nd generation” income, that is, income earned on interest or dividends already attributed to you, is usually not attributed again to you).

Spousal “Rollover” at your ACB:

A “rollover” is a transfer to your spouse at your own adjusted cost base (ACB), so there is generally no capital gain or loss for you initially (on the portion of the asset you transfer to your spouse); instead the capital gain or loss is deferred until the property is later disposed of; Income attribution continues, so all future capital gains, losses and “1st generation” income would generally be reported on your tax return.

Transfers at Fair Market Value (FMV):

If your spouse opts-out of the spousal rollover, and pays FMV for the transferred asset (i.e. pays with their own sources, such as cash, or a loan from you at the “prescribed rate”, or with another asset they own of equal FMV), then future income and capital gains may not be attributed back to you (so you could potentially income split with your spouse); But for future income to be taxed to your spouse, opting out of spousal rollover rules can mean any accrued capital gains and/or recapture of capital cost allowance is reported by you, in the tax year of transfer (capital losses may not be claimed by you, due to “superficial loss rules”).

Which option is better?

This depends on many factors which can include tax considerations:

Do you have any unused capital gains exemption room? Or, do you have unused capital losses you are carrying forward? Opting out of a “rollover” may let you use either (or both) of these.

Are you trying to shift future income, gains or losses to your spouse? Does your spouse have their own assets, to pay FMV for an asset transfer? Or, will you properly document a prescribed rate loan to them, and ensure they pay interest as required, on time?

Note that if your spouse misses a deadline for an interest payment to you on a prescribed rate loan, future capital gains/losses could again be attributed back to you (this might be used in a desirable way, depending on your current tax situation); Have you considered the risks involved in transferring property to your spouse (such as risk of exposing the asset to your spouse’s creditors, and/or losing protection under the Family Law Act of the asset as an “excluded property”, amongst other possible risks?

What if you separate or divorce?

In British Columbia, part or all of the assets could be deemed a “family property” subject to division; Capital gains can continue to be attributed back to you, if your spouse disposes of the property before your divorce is granted (or file a joint election with both your tax returns, to opt out of the attribution back to you); Income is not attributed back to you, as long as you remain living separate and apart throughout the year; If you reconcile as a couple, income attribution restarts, as if you never separated; Ideally, create a separation agreement to specify what each party is expected to do, including tax treatment of transferred property.

Gifts, transfers or loans to Adult children

You may gift assets to adult children (over 18 years old) and not have future income attributed back to you, as long as the gift is bona fide (i.e. you did not just change names on the asset to reduce tax, or continue to control the asset yourself); a deemed disposition occurs, and you must include in your income any gain or loss on the portion of the assets transferred, based on the asset’s adjusted cost base (ACB) and fair market value (FMV) on the date of transfer; if the above steps are followed, your child would generally report future income, gains or losses on their tax return. 

Gifts, transfers or loans to Related Minors

For attribution purposes, a related minor is under age 18 and a child or stepchild, or grandchild or step grandchild, or any other descendant with whom you do not deal at arm’s length (a question of fact), or a niece or nephew; Generally, when you transfer (i.e. make a bona fide gift or loan) property to your minor child, a deemed disposition occurs, and you must include in your income accrued capital gains or losses, on the portion of the asset transferred, based on the ACB and FMV on the date of transfer; future income from such property generally continues to be attributed to you, which means you report future interest, rental income and dividends earned on your tax return (“interest on interest” may not be attributable to you, but instead taxed as the minor’s income); however, future capital gains and losses are generally not attributed back to you if a bona fide gift was made (i.e. you do not still control the asset), and might be reported on your minor child’s tax return, instead.

Special Anti-Avoidance rules

To deter people from transferring income earning assets to other family members to reduce taxes, watch these additional rules from the Income Tax Act:

Guarantees: If your spouse or related minor receives a loan based on your strength as a guarantor attribution rules apply.

Back-to-back loans and transfers: If you lend or transfer property to a third party and they in turn lend or transfer it to your spouse or related minor, it will generally be treated as if you had loaned or transferred the property directly to your spouse or related minor (attribution will apply).

Substituted Property: If you gift an income-earning asset to your spouse, and they sell it to buy another asset with the proceeds, income earned by the replacement asset is attributed to you.

Repayment of existing loan: If your spouse pays off a loan, for which attribution rules applied, by getting another loan, attribution rules will apply to the second loan.

Transfers to a Trust: Transfers made to a trust for the benefit of a spouse or related minor will potentially have attribution applied as if the transfer were made directly to the spouse or related minor.

 

The response set out above is for your information only and is based on general assumptions and the facts presented to Vancity. While our goal is to offer current, accurate and clearly expressed information, Vancity does not warrant the accuracy, adequacy or timeliness of this information. Changes to the assumptions or facts or to any applicable laws or regulations could affect the validity of this information. The information is not intended to be investment, legal, accounting, tax or other advice and you should not rely on it without seeking the advice of professional advisors to ensure your particular circumstances are properly considered. Vancity is not responsible for loss or damage that results from reliance on this information.

(c) 2024 Vancouver City Savings Credit Union. All rights reserved.

Date Modified: 2024-01-02

10:15:48