Pay Less Tax - Learn Exceptions From Attribution Rules

• Transfers for fair market consideration: The Attribution Rules will not apply to any income, gain or loss from transferred property if at the time of transfer, consideration was paid for the equivalent of fair market value for the transferred property by the transferee.
• Transfers for indebtedness: The Attribution Rules will not apply if the consideration received by the transferor included indebtedness, providing that interest was charged to the transferee at a rateof at least the lesser of the prescribed interest rates in effect at the time the indebtedness was incurred and the rate that would have been charged if the parties had been dealing with one another at arm's length.
• Payment of Interest on Inter-Spousal Loans: Where the transfer was for indebtedness, interest must actually be paid on the indebtedness incurred by the spouse (or minor child) at the prescribed interest rate by January 30 of each year, following the tax year, or the loan will be subject to attribution.
• Election Not to Have S. 73(1) Apply. The general rule under S. 73(1) is that property transfers between spouses and common-law partners at its tax cost (undepreciated capital cost (UCC) or adjusted cost base (ACB)), so that no gain or loss arises. When property is transferred to the spouse for fair market consideration, the transferor can elect to have S. 73(1) not apply. Where this election is made, the transferor will realize a gain or loss on the transfer.
• Income resulting from assets transferred to an adult child (over 18). Such income will, in general, not be subject to attribution. However, see S. 56(4.1), which applies specifically to inter-family loans, but not transfers, made to adult children, but not spouses and minor children. This provision applies when income splitting is the main reason for the loan to an adult child, and the income will be attributed back to the transferor, unless the loan is a bona fide loan with interest paid as described above, by January 30 of the year following the end of the calendar year.
• Attribution When Spouses Living Apart. If spouses are living separate and apart due to a relationship breakdown, they can jointly elect to have attribution rules not apply to the period in which they were living apart. Spouses can choose not to have this section apply, with the result that any property sold in the time the spouses were living apart will be taxed in the hands of the transferor.
• Spousal RRSP. Investments made in a spouse's name, as a contribution to a spousal RRSP will not be subject to attribution.
• Wages paid to spouse and children. Where a spouse or children receive a wage from the family business, attribution rules will not apply. The major issue with family salaries is whether the amount is reasonable in light of the services rendered, as S. 67 denies a deduction for an unreasonable amount. If the wage is reasonable, it is deductible to the payor.
• Interest income from Child Tax Benefit (CTB) payments or Universal Child Care Benefit (UCCB) payments. If these amounts are invested in the name of a child, the interest income will not be subject to attribution.
• Income earned in a TFSA. S. 74.5(12)(c) excludes income earned within a Tax-Free Savings Account so long as there is not an excess amount in the TFSA.

Example: Child Tax Benefit Investment Income

Issue: The Smiths have always taken their monthly Child Tax Benefit payments and invested them in their children's names. This year, their children, Tom (15), and Mary (12) earned $5,000 and $3,500 respectively in interest from these investments. How much income must be reported by their parents, under on attribution rules?

Answer: Nil. Interest on investments from CTB payments invested in the name of minor children is specifically excluded from the attribution rules.

• Kiddie Tax. The Attribution Rules will not apply when an amount is included in the calculation of tax on Split Income on line 424 on Schedule 1 Federal Tax, using Form T1206Tax on Split Income. This special tax was introduced in tax year 2000 on specific types of income earned by minor children.