Ch9: Non-Arm’s Length, Deceased And Income Attribution

Question 1

What is the meaning of non-arm’s length?

Answer 1

Individuals: connected by blood, marriage, common-law partnership, or adoption.
- for tax purposes, you are not related to aunts, uncles, cousins, nieces, nephews.
Corporation: many possibilities.

Question 2

Explain the 4 possibilities of non-arm’s length transfers.

Answer 2

1. If you sell at FMV and you are related, POD is FMV for the seller and ACB is FMV for purchaser.
2. If you sell at less than FMV and you are related, seller’s POD is FMV and purchaser’s ACB is the amount paid.
3. If you sell at more then FMV and you are related, seller’s POD is amount sold and purchaser’s ACB is FMV of the asset.
4. When you gift anything your POD is the FMV of the asset. The beneficiary’s ACB of the gift will also be FMV (this rule applies to all gifts, related or not related).

Question 3

What are inter vivo (while you are still alive) transfers to a spouse?

Answer 3

• at tax values under ITA 73 (priority over ITA 69. Even if you are related to your spouse, you have to use these rules).
• a rollover provision.
• ITA 69 does not apply unless the taxpayer elects out of rollover (you have to tell the government you want the sale to be at FMV).

Transferor (seller):
- non-depreciable assets: POD = ACB
- depreciable assets: POD = UCC
- no tax consequences

Transferee (purchaser):
- non-depreciable assets: ACB = old ACB
- depreciable assets: UCC = old UCC, capital cost = old capital cost retained.

Electing out of ITA 73:
- in tax return (no required form)
- ITA 69 becomes available
- if you don’t want the sale to be at tax cost, then you must elect for the sale to be at FMV.
- tax cost is automatic.
- why would you want to elect? Your spouse will have a higher ACB, but you can apply some loss against TCG.

Question 4

What are the tax consequences of the death of a taxpayer?

Answer 4

Non depreciable property:
- deemed disposition of all assets at FMV.
- beneficiary acquires at FMV.

Depreciable property:
- deemed disposition of all assets at FMV.
- if capital cost > FMV, beneficiary retains old capital cost.

Calculate recapture & TCG

Exception: if the assets go to spouse
- non-depreciable assets: POD = ACB
- depreciable assets: POD = UCC
- no tax consequences to the deceased, unless you elect FMV (in your will), to apply against capital loss.

Question 5

What is income attribution?

Answer 5

Income attribution is applicable to property income and capital gains.
Income attribution is not applicable to business income and income subject to tax on split income.

1. If the taxpayer transfers an asset to spouse
   - while the spouse owns the asset the income or loss the spouse earns on that asset is attributed back to the taxpayer on a yearly basis (i.e., dividend income, interest income, rental and other property income or loss).
   - when the spouse sells the asset the capital gain or capital loss is also attributed back to the taxpayer.
2. If the taxpayer transfers an asset to a related minor (in this case, includes nieces and nephews that are minors)
   - must be under 18 at year end.
   - while the minor owns the asset the income or loss the minor earns on that asset is attributed back to the taxpayer on a yearly basis (until the minor turns 18 in the year).
   - when the minor sells the asset the capital gain or capital loss is retained by the minor (no matter what age).

Question 6

How do you avoid income attribution?

Answer 6

1. No attribution if you transfer an asset to a related minor or spouse if you follow the following rules:
   - you must sell the asset at FMV and they must pay you (if spouse she/he must elect the sale to be at FMV).
   - if the minor/spouse doesn’t have all the proceeds you must charge them the prescribed interest rate.
   - they must pay you the interest on a yearly basis (latest January 30 following year).
   ==> income will stay with them.
2. No attribution if you transfer an asset to a related adult (except spouse).
   - attribution may apply if you make loans to related adults.
   - only applies if the proceeds from the loan are used by the related adult to earn property income (i.e., interest income, dividend income).
   - this income can be attributed back to the lender.
   - the CRA must make the case that the loan was made for the purposes of paying less tax.
   - doesn’t apply if you incur a CG, CL, or property loss (i.e., rental loss).