76
I. TAXATION ISSUES IN FAMILY LAW Alimony & Maintenance Payments A. Alimony 1 2 1. 2. 3. 4. 5. 6. 7. Paid in the Year Pursuant to a Decree, Order or Judgment of a competent Tribunal or Pursuant to a Written Agreement As Alimony or Other Allowance Payable on a Periodic Basis For the Maintenance of the Recipient and/or the Children of the Marriage Separated pursuant to a Divorce, Judicial Separation or Written Separation Agreement Actually Living Apart when the payment was made and throughout the Rest of Year 2 2 4 9 12 13 13 B. C. Maintenance Payments section 60.1 re Expenses 14 15 Alimony & Maintenance Deduction v. Dependent Spouse & Child Deduction D. 1. 2. 3. 4. 5. In Respect of Qualifying Expenses Incurred in the Year or the Immediately Preceding Year Specific Reference to the New Sections Ownership of the House re: Mortgage Payments Other Criteria 15 17 18 18 19 20 E. Legal Fees 20 II. Distribution of Property 22 A. B. Rollover to Spouse Attribution of Income 22 24 1. The Basic Rules 24

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Page 1: I.redengine.lawsociety.sk.ca/inmagicgenie/documentfolder/AC0843.pdf · The Gagnon decision was applied by the Tax Court of Canada in Gavin Wood v. M.N.R. 86 D.T.C. 1389. In that case,

I.

TAXATION ISSUES IN FAMILY LAW

Alimony & Maintenance Payments

A. Alimony

1

2

1.

2.

3.

4.

5.

6.

7.

Paid in the Year

Pursuant to a Decree, Order or Judgmentof a competent Tribunal or Pursuant to aWritten Agreement

As Alimony or Other Allowance

Payable on a Periodic Basis

For the Maintenance of the Recipientand/or the Children of the Marriage

Separated pursuant to a Divorce, JudicialSeparation or Written Separation Agreement

Actually Living Apart when the payment wasmade and throughout the Rest of Year

2

2

4

9

12

13

13

B.

C.

Maintenance Payments

section 60.1 re Expenses

14

15

Alimony & Maintenance Deduction v.Dependent Spouse & Child Deduction

D.

1.

2.

3.

4.

5.

In Respect of Qualifying Expenses

Incurred in the Year or the ImmediatelyPreceding Year

Specific Reference to the New Sections

Ownership of the House re: Mortgage Payments

Other Criteria

15

17

18

18

19

20

E. Legal Fees 20

II. Distribution of Property 22

A.

B.

Rollover to Spouse

Attribution of Income

22

24

1. The Basic Rules 24

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III. Addenda

Matrimonial Property Awards after Death

Spousal Joint and Several Liability for Tax

C.

D.

2.

3 •

1.2.

Exceptions: Separation & Divorce

Details of the New Attribution Rules

On Amounts Attributed Under s. 74-75.1Transfers when the Transferor wasunder a tax liability

25

30

38

39

39

40

42

A. The following sections of the Income Tax Act(Canada):

1. Section 60(b) I (c) I & (c.1)2. Sections 60.1 & 56.1(4)3. Sections 70(6)(part) and (6.1)4. Sections 73(1) and (1.1)5. Sections 74.1 to 74.5

42

B.

C.

D.

The following interpretation bulletins

1. IT - 118R22. IT. - 258R23. IT - 305R24. IT - 325R

Tax calculations respecting deductible v.non-deductible maintenance payments

Letter from Revenue Canada dated July 9, 1986.

57

69

74

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TAXATION ISSUES IN FAMILY LAW

I. ALIMONY & MAINTENANCE PAYMENTS

Sections 60(b), (c) & (c.1) of the Income Tax Act provide for the

deductibility of certain qualifying alimony and maintenance

payments from the taxable income of the payor. These sections

are set out in Addendum III A 1.

Sections 56(1)(b), (c) and (c.1) contain identical reciprocal

provisions for the inclusion of those qualifying payments in the

income of the recipient.

The result of these identical reciprocal sections is that, in

theory, any payments in the nature of alimony and maintenance

which are deductible for tax purposes to the payor should be

taxable income to the recipient. Likewise, any payments which are

not deductible to the payor should not be income to the

recipient.

Numerous court cases gave a very restrictive interpretation to

some aspects of sections 60(b), (c) and (c.1), and the reciprocal

subsections in section 56. Parliament then passed two separate

sets of additional provisions, now both found in sections 60.1

and 56.1, to expand the interpretation of these subsections.

Generally speaking, sections 60.1 and 56.1 contain deeming

provisions, which have the effect of expanding the circumstances

1

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in which payments made to third parties (rather than to the

estranged spouse or former spouse) are deductible to the payor.

Section 60.1 is set out in Addendum III A 2. Section 56.1 is its

reciprocal section.

A. ALIMONY

- Section 60(b) and Section 60.1

- Section 56(l)(b) and Section 56.1

For a payment to a spouse or former spouse to fall within section

60(b) and thus be deductible from the income of the payor, and

therefore income for tax purposes to the recipient, it must be:

1. Paid in the Year

As individuals are cash basis taxpayers, only payments actually

paid in cash in the taxation year are deductible. An obligation

to pay is not sufficient.

2. Pursuant to a Decree, Order or Judgement of a CompetentTribunal or Pursuant to a Written Agreement

Generally speaking, there must be a court order or written

agreement in place in order for payments to be deductible. Under

the Income Tax Act as it existed in 1983, if payments were made

voluntarily before a separation agreement was entered into, or

before a court order for maintenance was obtained, the payments

were not deductible to the payor, and accordingly not taxable

income to the recipient, because the payments, when made, would

2

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not have been made pursuant to the written agreement or court

order. Obviously, that document or order would not have been in

existence at the date the payment was made. Further, payments

made after the date of the order but in respect to the time

period prior to the order were probably not deductible either.

The problem of non-deductibility of the prior payments was in

many cases avoided by having the written separation agreement

state that the agreement was a verbal agreement made on an

earlier date (the time the payments started) and subsequently

reduced to writing. The agreement would also contain a covenant

by the recipient to include those payments in income for tax

purposes. As a matter of local assessing practice at Revenue

Canada, if the recipient did include those payments in income the

payor would be allowed a deduction for them, even though they

would not technically qualify for deductibility under the Act.

Sections 60.1(3) and 56.1(3) of the Income Tax Act (which came

into effect in 1984) are intended to allow the deductibility of

payments made before there is an order or written agreement,

provided the order eventually made or the agreement eventually

signed provides for such payments. Naturally, if the payments

are covered by the agreement or order so as to be deductible to

the payor, they will also be income to the recipient.

Section 60.1(3) merely deems, in relation to such payments, that:

a. payments made in the year the order is issued or the

3

Page 6: I.redengine.lawsociety.sk.ca/inmagicgenie/documentfolder/AC0843.pdf · The Gagnon decision was applied by the Tax Court of Canada in Gavin Wood v. M.N.R. 86 D.T.C. 1389. In that case,

written agreement is entered into, or in the immediately

preceeding year, were paid pursuant to the court order

or written separation agreement; and

b. the person who made the payments was separated from the

recipient pursuant to a divorce, judicial separation or

a written separation agreement at the time the payment

was made and throughout the remainder of the year.

All of the other requirements of section 60(b) must be complied

with for the payment to be deductible. Also, these payments are

deductible to the payor only if the order or agreement provides

that the prior payments are considered as having been paid and

received pursuant to the order or agreement. This requirement

will necessitate careful attention to the wording of orders and

agreements if deductibility of prior payments is to be assured.

3. As Alimony or Other Allowance

In order to meet the requirements of the Income Tax Act, a

payment must either:

a. Meet the definition of "alimony or other allowance" from

the relevant cases; or

b. Qualify under section 60.1(2).

The second issue is discussed under I. C. infra. This part of

4

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the paper will address the issue of deductibility of payments

under section 60, without the assistance of section 60.1(2).

There have been several recent cases surrounding the definition

of "allowance". The results from older cases such as Brooke,

infra, and Pascoe, infra, have been modified in some important

respects.

The Tax Review Board in Brooke v. M.N.R. 77 DTC 38 defined

"alimony" as an allowance payable at regular intervals to provide

a sum adequate to maintain the payee until the next payment.

The Queen v. Pascoe [1975] CTC 656 (FCA) defined "allowance"

as:

"a limited predetermined sum of money paid to enable therecipient to provide for certain kinds of expense; ifthe amount is determined in advance and, once paid, itis at the complete disposition of the recipient who isnot required to account for it. A payment insatisfaction of an obligation to indemnify or reimbursesomeone or to defray his or her actual expenses is notan allowance; it is not a sum allowed to the recipientto be applied in his or her discretion to certain kindsof expense."

The result of the Pascoe decision was to deny the deductibility

of mortgage payments made directly to the mortgage company (as

they would not be at the complete disposal of the separated

spouse) or payments made for house maintenance expenses or

educational or medical expenses. These latter payments would be

merely reimbursement of expenses already incurred, and

accordingly could not be described as an allowance. (Some of

5

Page 8: I.redengine.lawsociety.sk.ca/inmagicgenie/documentfolder/AC0843.pdf · The Gagnon decision was applied by the Tax Court of Canada in Gavin Wood v. M.N.R. 86 D.T.C. 1389. In that case,

these payments, particularly ones made in reimbursement of

expenses incurred, were also not deductible in that they did not

meet the periodicity test described in 4. below.)

Section 60.1 (an earlier version than that set out in Addendum

III A) was introduced in an attempt to get around the restrictive

interpretation which had been given by the courts and the Tax

Review Board to "allowance", so as to make deductible payments

made to third parties for the benefit of the separated spouse.

However, this section too was given a very restrictive

interpretation, particularly in leading case of The Queen v.

Bryce [1982] CTC 133, 82 DTC 6126 (FCA) (this case is still

under appeal to the Supreme Court of Canada). In that case,

counsel for the Crown conceded that section 60.1 in effect made

qualifying payments actually paid to third parties deemed to have

been paid to the separated spouse. However, Revenue Canada's

position, which was supported by the Federal Court of Appeal, was

that these payments still did not constitute an "allowance" in

that the recipient had no discretion as to the use of the money.

As a result, the only time that payments made to third parties

could have qualified as an allowance is if they were made to

third parties with the consent of the deemed recipient spouse.

Presumably, in order for those payments to qualify as an

allowance, the deemed recipient spouse must have been able to

revoke the consent and require the payments to be made directly

to him or her.

The recent decision of the Supreme Court of Canada in Jean-Paul

6

Page 9: I.redengine.lawsociety.sk.ca/inmagicgenie/documentfolder/AC0843.pdf · The Gagnon decision was applied by the Tax Court of Canada in Gavin Wood v. M.N.R. 86 D.T.C. 1389. In that case,

Gagnon v. The Queen, 86 D.T.C. 6179, has considerably softened

the decision of the Federal Court of Appeal in The Queen v.

Pascoe. In the Gagnon case, at issue was a payment to the wife

of an amount equal to the monthly mortgage payment on the home.

The amount was paid to the wife rather than to the mortgage

company. The husband's obligation to pay the monthly amount was

contingent on the wife using the money to meet the mortgage and

tax payments. The Court states at 6184:

"Seen in this context, the third condition imposed byPascoe must be corrected: for an amount to be anallowance within the meaning of s. 60(b) of the IncomeTax Act, the recipient must be able to dispose of itcompletely for his own benefit, regardless of therestrictions imposed on him as to the way in which hedisposes of it and benefits from it."

Accordingly, the fact that the agreement required the wife to use

the monthly payments to meet the mortgage and tax payments on the

property did not disqualify the amount from being an allowance.

The Gagnon decision was applied by the Tax Court of Canada in

Gavin Wood v. M.N.R. 86 D.T.C. 1389. In that case, the taxpayer

claimed a deduction for mortgage payments made on his ex-wife's

residence. The payments were made pursuant to a court order

under the British Columbia Family Relations Act, and were made

directly to the mortgage company. The Tax Court allowed these

payments to be deductible to the taxpayer on the basis of Gagnon,

saying at 1392:

"According to the said decision, for an amount to be atthe complete disposition of the beneficiary, it is

7

Page 10: I.redengine.lawsociety.sk.ca/inmagicgenie/documentfolder/AC0843.pdf · The Gagnon decision was applied by the Tax Court of Canada in Gavin Wood v. M.N.R. 86 D.T.C. 1389. In that case,

sufficient that the said amount of money be completelyat the beneficiary's profit. In my opinion, this is thecase in the instant appeal. For these reasons theappeal is allowed ... "

There may be some question as to the scope of the decision of the

Supreme Court in Gagnon. With respect, it appears that the Tax

Court decision in Wood goes further than Gagnon. However, even

in that event, the Gagnon decision may be of use in obtaining the

deductibility of payments in the following circumstances:

1. If the agreement, like the one at issue in Gagnon, provides

for payments to be made to the recipient but requires that the

amounts be used to pay certain periodic obligations.

2. If the agreement provides for payment directly to the

mortgage company, and you are accordingly relying on the old s.

60.1(1) (now 60.1(1)) to make the payment deductible. The

problem in the ordinary case with payments made to the mortgage

company is that s. 60.1(1) deems them to be made to the

"recipient", but does not deem them to qualify as an allowance.

The main difficulty with them qualifying as an allowance comes

about as a result of the third branch of the Pascoe decision;

this problem appears to be alleviated by the Gagnon case. (Please

note, however, that if you have a more recent agreement that

specifically refers to section 60.1(2), in most cases you will

not need to have resort to section 60.1(1) to make the payments

deductible. The discussion in this paragraph should apply only

to agreements and court orders made before 1984.)

8

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4. Payable on a Periodic Basis

The order or written separation agreement must provide that the

maintenance payments be payable periodically, presumably weekly,

monthly, annually, or the like. Amounts paid for dental

expenses, special camps and so forth have in the past not

qualified for deductibility under section 60(b) due to the fact

that they were not payable periodically but rather were

occasional, sporadic and contingent payments. Again, the new

section 60.1 will make many of these payments deductible, as

discussed at I. C. infra.

Another common reason for the disallowance of a deduction for

payments due to the fact that they are not periodic payments

arises out of attempts to disguise lump sum amounts (particularly

lump sum distributions of property) as periodic allowances and

therefore deductible. The wording of the separation agreement or

court order will be crucial here. If the order is for the

payment of a specified sum of money, to be satisfied by periodic

installment payments, the installment payments are probably not

deductible, as it is the lump sum payment which is the amount

payable. (An example would be the sum of $12,000.00, payable by

monthly installments of $1,000.00.) On the other hand, regular

monthly payments which add up to a specified sum payable may well

be deductible. (For example, $1,000.00 per month for 12 months,

for a total of $12,000.00.) Further, if the payment is in

consideration of a release of claims by the recipient, or in lieu

9

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of alimony or maintenance, the installments would probably not be

deductible on the ground that they are not alimony or other

allowance but are payments in return for a release - a property

exchange.

Those wishing to have large annual payments be deductible as

qualifying alimony payments can take heart from the decision of

William K. Hanlin v. The Queen 85 OTC 5052 (F.C.T.O.) where

annual payments of $18,000,00, $19,000.00 and $17,000.00,

respectively, were held to be deductible. The court looked to

the agreement, which contained an acknowledgment by the parties

that the payments were for the periodic maintenance of the wife.

At the hearing of the tax appeal, the payor husband stated that

the reason for making the large annual payments was that, around

that time of year, his law partnership made large distributions

of cash to the partners, and accordingly, he would have the funds

available to make the payments. He denied that the payments were

made for any purposes other than periodic maintenance. The

careful drafting of the agreement, and this testimony, greatly

assisted in the argument for the deductibility of the payments.

The Hanlin case may also be of assistance if you have a poorly

worded agreement to contend with. In the recent Tax Court

decision Henson v. M.N.R. 85 OTC 506, the court, in a judgment

which does not contain any in-depth reasoning, uses the Hanlin

case to include in the recipient's income a payment "by way of

maintenance of $7,500.00 to be paid in four periodic instalments

of equal value ... ".

10

Page 13: I.redengine.lawsociety.sk.ca/inmagicgenie/documentfolder/AC0843.pdf · The Gagnon decision was applied by the Tax Court of Canada in Gavin Wood v. M.N.R. 86 D.T.C. 1389. In that case,

It should be noted that the periodicity requirement of the

section only specifies that amounts be "payable" on a periodic

basis, and not that they in fact be paid on a periodic basis.

The Department's practice, as set out in IT-118R2, paragraph 10,

is to allow the deduction of lump sum payments paid on account of

periodic payments which otherwise meet the criteria in section

60(b) as long as the payments are in arrears. Thus the payor

would get a deduction for late payments. This position was

recently confirmed by the Federal Court of Appeal in the case of

The Queen v. Sills, 85 DTC 5096. The agreement in that case

provided for monthly payments, but the payor spouse paid lump sum

amounts occasionally throughout the year, and indeed was in

arrears at year-end. The recipient argued that the payments

should not be included in her income because they did not meet

the periodicity requirement. This argument was accepted in the

Trial Division, but rejected by the Federal Court of Appeal. The

Court said at page 5098:

"On these facts, the $3,000 received by the Respondentfrom LaBrash was clearly paid by him and received by herto carry out the terms of the separation agreement.Some of the money was payable to the Respondent asalimony, the remainder was payable to her as maintenancefor the dependant children. All of it was payable on amonthly basis as stipulated in the separation agreement.Where the Trial Judge erred, in my view, was in nothaving due regard to the use of the word "payable" inthe subsection. So long as the agreement provides thatthe monies are payable on a periodic basis, therequirement of the subsection is met. The payments donot change in character merely because they are not madeon time. The learned Tax Review Board member made thesame error, in my view, when he said that the amounts tobe included in income "must be received exactlyaccording to the terms of the agreement". Thesubsection does not say that. If the learned Tax Review

11

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Board member and the learned Trial Judge are right, thenany monthly payment made to the Respondent on the secondday of the month for which it is due, for example, wouldnot be taxable in the hands of the Respondent. This issurely not a reasonable or a proper interpretation ofthe subsection."

The respondent also argued that the payments were not in fact

alimentary payments, as they were not paid in advance to allow

the recipient to maintain herself until the date of the next

payment. The court also rejected this submission, stating that:

"One of the problems with this submission is that thereis no evidence on this record of any re-imbursement foractual expenses. Furthermore, it seems clear that thekind of allowance contemplated by subsection 56(1)(b)would include any and all amounts paid under theagreement whenever they are paid and received since theamount is determined in advance and, once paid, it is atthe complete disposition of the recipient who is notrequired to account for it."

5. For the Maintenance of the Recipient and/orThe Children of the Marriage

There are a number of court cases dealing with the question of

whether or not payments of certain expenses are payments made for

the maintenance of the recipient and/or the children of the

marriage. Some examples of disputed amounts (where the Tax

Review Board or Tax Court of Canada decisions have not been

necessarily consistent) have been medical expenses, medical

insurance premiums, and house payments. Many of these payments

would of course be open to attack on the basis that they were not

paid as an "allowance", or not paid on a periodic basis. The

amendments to section 60.1, discussed at I.C., infra, clarify

this area a great deal.

12

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6. separated pursuant to a Divorce, Judicial Separationwritten Separation Agreement

In the case of Smith v. M.N.R., 79 DTC 827 (TRB), the husband and

wife (who were living separate and apart) entered into an

agreement which essentially provided as follows:

"I [the husband] agree to pay to you [the wife] $475.00on the first day of every month beginning April 1,1974."

The Court held that the husband could not deduct the payments

made to the wife pursuant to this agreement, even though it had

been signed by both parties, on the ground that it was not a

separation agreement. The Court concluded that to qualify as a

separation agreement the document had to contain an agreement to

live separate and apart, which in this case was completely

absent.

7. Actually Living Apart when the Payment was Made andThroughout the Rest of the Year

If, part way through a year in which otherwise qualifying alimony

payments are made, the spouses reconcile and once again cohabit,

none of the payments made in that year will be deductible to the

payor. However, it should be noted that, depending on the

recipient's income, (which would not include any of the alimony

payments) the payor may then be able to claim the married

exemption and may be able to claim a deduction for dependent

children. It is probable that the divorce cases dealing with the

issue of whether spouses are living separate and apart even

13

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though living in the same house would apply here as well to

determine whether the parties are in fact cohabiting.

B. MAINTENANCE PAYMENTS

Section 60(c) and (c.1) are somewhat different in their

requirements than section 60(b). For payments to be deductible

under either of these sections, it is not sufficient that they be

made under a written agreement; rather they must be paid pursuant

to a court order. Section 60(c) covers payments made to spouses

(not former spouses) for the maintenance of the spouse and/or the

children. This would cover, for example, payments made pursuant

to an order under The Deserted Spouse's and Children's

Maintenance Act.

Section 60(c.1) on the other hand does not require the payor and

the recipient to be married. It is intended to cover payments

made to common law spouses (which would not apply in Saskatchewan

as there is no legislation in Saskatchewan requiring maintenance

payments to be made to common-law spouses) and presumably to

maintenance payments made under an order pursuant to The

Children of Unmarried Parents Act. However, at this time there

are no regulations "prescribing" a class of persons under section

60(c.1), and accordingly the section does not appear to be of

much use.

14

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C. SECTION 60.1 RE: EXPENSES

Sections 56.1(2) and 60.1(2) greatly expand the circumstances in

which a person can obtain a deduction for tax purposes for

payments made for the benefit of a spouse or former spouse, where

the payments are not made directly to that spouse. As is the

case for alimony and maintenance payments under sections 56 and

60, supra, the amounts must be:

Paid in the taxation year;

Pursuant to a decree, order of judgment of a

competent tribunal or pursuant to a written separation

agreement;

For the maintenance of a spouse or former spouse or a

prescribed person (who will be called the "beneficiary")

or children of the beneficiary;

Where at the time the expense was incurred and

throughout the remainder of the year, the taxpayer was

living apart from the beneficiary.

The payments must be:

1. In respect of qualifying expenses

a. The expense must be for the maintenance of the beneficiary or

the children of the beneficiary.

b. It cannot be an expenditure for the acquisition of tangible

15

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property, unless it is an expenditure on account of a medical or

educational expense or in respect of an owner-occupied home.

The intent of this provision appears to be to allow a deduction

for all types of medical and educational expenditures, including

those which result in the acquisition of tangible property. An

exa~ple of this would be a medical expenditure for a wheelchair

or an educational expenditure for text books.

c. Qualifying payments of principal and interest on a mortgage

on a owner-occupied home (see the definition of "owner-occupied

home" in section 56.1(4)) and payments for improvements to the

house, cannot exceed 1/5 of the original principal amount of the

mortgage on the house or of the original principal amount of the

indebtedness which financed the improvements to the house in any

year.

This subsection is a fine example of obfuscation in the drafting

of the Income Tax Act. Translated, section 60.1(2) requires you

to:

i. s. 60.1(b)(ii) Take 20% of the original principal

amount on the house mortgage and 20% of the original

principal amount on any loan for improvements to the

house.

ii. S. 60.1(2)(b)(i) -- Add up all of the payments in

relation to the house which you want to deduct using

16

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section 60.1, which would include monthly mortgage

payments, payments on a loan for improvements, and

actual cash expenditures for improvements. It is

unclear whether maintenance expenditures are to be

included in this calculation, given that section

60.1(2) (a) refers to both "improvement" and

"maintenance" and section 60.1(2)(b)(i) does not.

iii. Section 60.1(2)(a) .- Add up all of the amounts which

you need the assistance of section 60.1 to be able to

deduct. This will include all of the amounts in (ii),

plus, probably, dental costs, camp fees, etc.

iv. Subtrac·t (i) from (ii) If you get a positive number,

which will only occur if the house related payments

which you want to deduct using section 60.1 exceed 20%

of the original principal amount owing on the house, you

must subtract that amount from the total amount in

(iii), and the result is the amount deductible to the

payor using section 60.1. In essence, the deduction

under this provision is reduced by the amount by which

payments made in relation to the house exceed 20% of the

original

house.

principal indebtedness outstanding on the

2. Incurred in the Year or the Immediatelypreceding Year

payments are deductible to the extent they are actually paid in

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the taxation year of the payor. However, if expenses are

incurred in the preceeding year but are not paid until the

taxation year in question, they are nonetheless deductible under

this provision. Thus, if the payor did not pay the December 1st

mortgage payment until the following January, that mortgage

payment would be deductible for the payor in the year it was

actually paid, due to the fact that the expense was incurred in

the preceeding year.

3. Specific Reference to the New Sections

The court order, or the written separation agreement, must

actually make reference to sections 60.1(2) and 56.1(2) of the

Income Tax Act. For this reason, payments made under old

orders or agreements will probably not be worded to give the

payor a deduction for otherwise qualifying expenses. It will be

necessary, if those expenses are to be made deductible, to have

the separation agreement amended, or to obtain a new court order.

This is a reasonable restriction, as separation agreements and

court orders before the amendments to section 60.1 would have

been made on the basis of a different set of rules on the

deductibility of payments, and presumably would not have been

based on these payments being able to be deducted by the payor.

4. Ownership of the House re: Mortgage Payments

Section 56.1(4)(a) defines "owner-occupied home" as a housing

unit owned by the taxpayer, whether jointly with another person

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or otherwise. (The definition also extends to shares in

cooperative housing corporations, however, we will ignore that

provision for the purpose of this discussion.) In section 56.1,

"taxpayer" means the recipient of the payment. As a result, in

order for mortgage payments to be deductible to the payor under

the deeming provisions in section 60.1, the spouse or former

spouse who receives the payments must at least be a joint owner

of the property. It appears that it would not be sufficient

for the payor spouse to be the sole registered owner of the home,

even if the recipient spouse had an order for exclusive

possession under The Matrimonial Property Act.

5. Other Criteria

If all of the above criteria are met, the amount of the

qualifying expenditures will be deemed by section 60.1(2) to have

been paid by the taxpayer and received by the beneficiary as an

allowance payable on a periodic basis. If all of the other

requirements in section 60(b}, (c), or (c.1), as the case may be,

are met, the payor will obtain a deduction for tax purposes under

section 60 and the beneficiary will be taxed on the amount under

section 56. It should be kept in mind, however, that section

60.1 does not itself give a deduction for these qualifying

payments. It merely deems certain payments, even though not in

fact an allowance payable on a periodic basis, to be an allowance

payable on a periodic basis, in order to make amounts which would

otherwise not be deductible under section 60 into deductible

sums.

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D. ALIMONY & MAINTENANCE DEDUCTION v.DEPENDENT SPOUSE & CHILD DEDUCTION

Section 109(4) of the Income Tax Act prohibits a taxpayer from

claiming a a deduction for a dependent spouse or child where that

taxpayer is entitled to a deduction for alimony or maintenance

payments pursuant to section 60(b) or (c).

Section 109(1)(d) allows a taxpayer a deduction for each child

who, during the year, was wholly dependent upon the taxpayer for

support. Section 109(1)(a) permits a married person deduction to

an individual who, during the year, supported his or her spouse.

The wording of section 109(4) would lead one to believe that

whenever a taxpayer was entitled to a deduction under section

60{b) or (c), whether or not the taxpayer chose to claim that

deduction, there would be no ability to claim a deduction under

section 109(1) for a spouse and dependent children. However, it

appears that the Department's assessing practice is to allow the

taxpayer, in the year of separation, to choose to claim either

the alimony or maintenance deduction, or the dependent spouse and

child deduction.

E. LEGAL FEES

The principles for the deductibility of legal fees paid to obtain

alimony or maintenance payments are discussed in the case of The

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Queen v. Burgess, [1981] CTC 258, 81 DTC 5192 (FCTD). In the

Burgess case, the recipient of the alimony payments, which were

ordered pursuant to a decree nisi of divorce, alleged that by

virtue of her marriage, she had a right to maintenance, which

fell within the definition of "property" under the Income Tax

Act. On that basis, then, legal fees paid to assert, declare or

enforce that right would be deductible. The Court found,

however, that the right to maintenance which exists during

marriage is a right which terminates upon the dissolution of the

marriage. As the payments in the Burgess case were made

pursuant to a decree nisi of divorce, it was held that the legal

fees incurred were incurred to establish the right to the

payment, which arose not by virtue of the marriage (which was

terminated by the divorce) but rather by the court order. The

legal fees were therefore not deductible as they were paid to

establish or ~reate a right, not to enforce an existing right.

On the basis of the reasoning in this case, while legal fees paid

to secure a maintenance order in a divorce decree would not be

deductible, legal fees incurred in negotiating maintenance

payable pursuant to a separation agreement, or pursuant to an

interim maintenance order, would be deductible as it would merely

be enforcement of the recipient's right to maintenance which

arose as a result of the marriage. Further, any legal fees paid

to enforce maintenance payments, whether those payments were

payable under an order in a divorce decree or pursuant to a

separation agreement or interim maintenance order, would also be

deductible, as they would not be paid to create the right to

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income, but rather to enforce that right.

The recent Tax court of Canada decision in John McCombe v. M.N.R.

85 DTC 268 confirms, on the basis of the reasoning in Burgess,

that legal fees paid by the payor of alimony, in the course of an

attempt to reduce or eliminate the obligation to pay are:

"incurred in order to bring into being a future orpotential right of exemption to which he had, at thetime, no legal entitlement whatever. The expensescannot be said to have been incurred for the purpose ofga1nlng or producing income from a property and they donot come within the meaning and intent of paragraphl8(1)(a) and subsection 248(1) and are therefore notdeductible".

It may be argued, however, on the reasoning in Burgess, that a

deduction would be available if the reason for the legal expense

was merely to have alimony payments reduced as opposed to

eliminated. Only the latter would extinguish the right.

II. DISTRIBUTION OF PROPERTY

A. ROLLOVER TO SPOUSE

Section 73(1) of the Income Tax Act allows property to be

transferred from one spouse to another, or to a former spouse in

settlement of rights arising out of their marriage, on a rollover

basis. This means that no capital gain would be recognized by

the transferor spouse on the transfer of the property, and the

transferee spouse would take the property at the transferor's

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cost base for tax purposes.

The word "transfer" has been interpreted in several tax cases as

requiring some action on the part of the "transferor".[l] As a

result, but for section 73(1.1) of the Income Tax Act, court

orders awarding an interest in property, or vesting title to

property in a spouse, where no action on the part of the other

spouse is required, may not have come within the scope of section

73(1), as they did not involve an active transfer. However,

section 73(1.1) essentially extends the meaning of "transfer" for

the purposes of section 73(1) to include the provisions of the

prescribed laws of a province, or court orders made pursuant to

those provisions, where a person acquires, is awarded or has

vested in him or her property formerly owned by that person's

spouse. Sections 5, 8, 21, 22, 23(4), 26 and 42 of The

Matrimonial Property Act, 5.5. c. M-6.1 are prescribed in

Regulation 6500(2) for the purposes of section 73(1.1).

The transferor spouse can elect to have the rollover available by

section 73(1) not apply to any particular transfer of property.

If the transferor spouse so elects in his or her tax return for

the year in which the property was transferred, the rollover will

not apply and the transfer of property will be subject to the

1. Hansen, Bryan J. "The Definition of 'Transfer' in Sections74 and 75 - Judicial Nonsense", The Canadian Tax JournalVolume 24, No.6, Page 612.The court in the Boardman case, infra, casts some doubt on themeaning of 'transfer' as discussed above. However, thedefinition of "transfer" was not part of the ratio of theBoardman case.

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usual rules in the Income Tax Act relating to dispositions of

capital properties. If the transferor and transferee are still

married at the time of the transfer, then they are deemed for the

purposes of the Income Tax Act not to deal with each other at

arm's length (section 251 of the Income Tax Act) and accordingly

section 69 would apply to deem the transferor to have received

proceeds of disposition equal to the fair market value of the

property at the time of the transfer. The transferor would then

be taxed on any capital gains inherent in the property.

As a result, the combined effect of section 73(1) and (1.1) is to

make it very easy to transfer property from one spouse to

another, whether during marriage or on the breakup of a marriage,

on a tax deferred basis. Further, through an election in the

transferor's tax return, capital gains can be recognized

immediately. This may be useful where the transferee intends to

dispose of the property very soon, but the agreement is that the

transferor is to pay the capital gains tax on the disposition.

B. ATTRIBUTION OF INCOME

1. The Basic Rules

The Department of Finance does not like the idea of a high

income-earning person transferring income producing property, or

property on which capital gains could be recognized, to a lower

income spouse, if the result is to have the income or capital

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gain taxed in the hands of the lower income spouse at a lower tax

rate. This would result in a net loss of revenue to the Treasury,

as less tax would be paid overall. Accordingly, sections 74.1 to

74.5 inclusive of the Income Tax Act (most of which are new

provisions) contain extensive rules to ensure that the income or

loss, or the capital gain or capital loss, respectively, on

property transferred or loaned between spouses is included in the

income of the transferor (lender) spouse. As a result:

(a) If an income generating property (such as a rental house)

were transferred from husband to wife, the net rental income from

that house would be included in the taxable income of the

transferor husband, rather than in the income of the transferee

wife; and

(b) If the house was subsequently sold, yielding a capital gain,

that capital gain would be taxed in the hands of the transferor

husband rather than the transferee wife.

Transfers for fair

transferor elects not

under II A above.

market value are an exception, if the

to have the rollover apply, as discussed

2. Exceptions: separation & Divorce

The Department of Finance is making a concerted effort, with the

new amendments, to ensure that income cannot be passed on to the

lower income spouse in the course of an ongoing marriage.

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However, this same theory does not apply in the case of separated

or divorced spouses, and accordingly, the attribution rules can

be avoided in those circumstances:

(a) Naturally, the attribution rules cease to apply upon

divorce. In the above example, rental income earned after the

divorce is taxed in the hands of the transferee rather than the

transferor. Also, if the house is sold after the divorce, the

gain is taxed in the hands of the transferee.

(b) Section 74.5(3)(a) provides that income or loss (but not

capital gains or losses) is not attributed to the transferor

spouse where it is earned while the parties are living apart and

separated pursuant to a court order or written separation

agreement. It should be noted, however, that section 74.5(5)

removes the exception, and would retroactively provide for the

attribution of income or loss back to the transferor, where the

parties were separated pursuant to a written separation agreement

and commenced living together again within 12 months of the date

of the agreement.

(c) The attribution of capital gains and capital losses can be

avoided, for dispositions of property occuring prior to divorce,

where the parties are separated pursuant to a court order or

written separation agreement, if the parties sign a joint

election pursuant to section 74.5(3)(b) that the attribution

rules not apply, and that election is filed with the tax return

for the year in which the parties commenced to so live apart. It

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appears on the wording of this section that the relevant year is

the year in which the court order or written separation agreement

is obtained. Again, if the parties are separated pursuant to a

written separation agreement and reconcile within 12 months of

the date of the agreement, section 74.5(5) removes the saving

provision and would apply to tax the capital gains or capital

losses arising from any disposition of transferred property in

the hands of the transferor spouse.

(d) The attribution rules in general apply only to "transfers or

loans" of property. As mentioned above, the word "transfer" has

been interpreted to require some action on the part of the

transferor. The extended meaning of "transfer" as set out in

section 73(1.1). does not apply to the attribution rule sections.

Accordingly, the attribution rules as a whole may be able to be

avoided by having the property pass from one spouse to the other

pursuant to a court order in which the property is vested in the

transferee spouse. The vesting order, if properly drawn, (being

an order directed to the Registrar of the appropriate Land Titles

Office to change the registered owner of the property, rather

than merely an in personam order directed to the "transferor"

requiring that person to execute a transfer of land in favour of

the "transferee"), will doubtless mean that there is no action on

the part of the former owner of the property and accordingly

there would be no "transfer". It would also be prudent for the

"transferor" to object to the granting of the order. The result

would be a complete avoidance of the attribution rules,

regardless of whether the parties were living together or apart

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at the time of the order, at the time the income was earned, or

at the time the property was disposed of.

A vesting order will not always be a complete answer, though. In

the recent Federal Court Trial Division decision in Boardman and

Sask-Can Investments Ltd. v. M.N.R. 85 DTC 5628, a vesting order

failed (at least at this level - the case is under appeal) to

prevent adverse tax consequences. In that case, the husband was

the main shareholder of a corporation, though the wife owned one

share in the company. The husband and wife divorced in 1977, and

in the course of that proceeding, the court ordered the Registrar

of Land Titles to register title to two houses owned by the

corporation to the wife as a division of property. The Federal

Court Trial Division held that the court order constituted a

"transfer of property made pursuant to the direction of,or with the concurrence of, [the husband to the wife]for the benefit of the [husband] within the meaning ofsection 56(2) of the Income Tax Act, and in addition,was a benefit conferred on the taxpayer within themeaning of section 245(2) of the Act."

As a result, the company recognized a capital gain on the

properties, and the value of the properties was included in the

husband's income.

There are a number of sections under the Income Tax Act that can

be applied by Revenue Canada to produce tax consequences where

property is removed from the ownership of a corporation and

placed in the hands of another person. These include section

15(1), section 56(2) and section 245(2). Caution should be

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exercised if part of a matrimonial property settlement involves

property owned by a corporation. However, in many situations, it

is possible that the assets of a corporation may be able to be

divided between separate corporations owned by each spouse, all

on a tax deferred basis, using a "butterfly" reorganization. The

details of such a reorganization are beyond the scope of this

paper, however, a good discussion can be found in Kellough,

Howard H., "Splitting up the Business of a Private Corporation",

which article is published in the papers from the 1984 Corporate

Management Tax Conference, sponsored by the Canadian Tax

Foundation.

If there will be a significant delay between the date of the

transfer of the property and the ultimate divorce, the following

suggestions should be considered to avoid the potential

application of the attribution rules:

(e) A court order, as opposed to a separation agreement, will

avoid potential tax problems resulting from a reconciliation. If

there is a subsequent reconciliation, there will be no

retroactive change in the tax treatment of income or capital gain

during the period of separation. Naturally, upon the

reconciliation, the usual tax treatment would once again apply,

and income and capital gain would be attributed to the

transferor, however, during the period of separation the income

would be taxed in the hands of the transferee.

(f) Ensure that the parties complete a joint election pursuant

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to section 74.5(3)(b), in order to protect the transferor spouse

from the attribution of capital gains on dispositions of property

occuring during the period of separation. Alternatively, the

transferee spouse could be prohibited from selling the property

until the divorce, however, that may not be appropriate if the

transferee spouse needs the proceeds of the disposition of the

property to meet expenses.

(g) If possible, have the "transfers" of property, including

land, be accomplished by opposed vesting order rather than by way

of a document signed by the "transferor".

3. Details of the New Attribution Rules

The Old Rules

The attribution rules that were in effect before May 23rd, 1985

applied to certain transfers (whether direct or indirect) of

property to a spouse. The rules applied to include in the

income of the transferor only income or loss from property and

capital gains or capital losses, but not income earned from the

re-investment of attributed income, nor business income or

losses. These old rules continue to apply to transfers which

occurred before May 23rd, 1985. However, for transfers after

that date, and for loans and other types of transactions not

formerly covered, a new, broader and infinitely more complex set

of rules applies.

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Income from Property

The new section 74.1 extends the attribution rules to cover loans

[1] as well as transfers. Not only are loans and transfers to a

spouse or minor covered; the section also extends to loans or

transfers for the benefit of a spouse or minor.[2] The rules only

add amounts to the income of an individual who is resident in

Canada throughout the year. Also, if a minor who is a recipient

turns eighteen in the year, there is no attribution in respect of

income earned by the minor for that year.

Capital Gains and Losses

In addition to income from property, capital gains and capital

losses, and gains and losses from listed personal property, are

by section 74.2(1), attributed. The capital gains exemption is,

however, available to the person who is taxed on the capital

gain. (See section 74.2(2)).

Section 75.1 also attributes to the transferor the capital gain

or capital loss on property transferred to a child, grandchild or

great grandchild if the property is disposed of before the year

1. There is an exemption (see the note under "History" undersection 74.1 in Appendix III) for loans outstanding on May22nd, 1985 and repaid by the end of 1988. There is noattribution on such loans, or on income earned, during thatperiod even if the loan is not repaid by the end of 1988.

2. This provision extends to any minor, not just a minor whois a child or other descendent of the transferor/lender.

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in which the minor turns eighteen.

Section 74.1(3) ensures that the attribution rules cannot be

circumvented by the lower income spouse borrowing money from the

bank, and the higher income spouse giving or lending property to

payout or reduce the debt. This section attributes all or a pro

rata amount of the income from the property acquired with the

loan (depending on the value of the gift compared to the cost of

the property acquired with the bank loan) to the person who made

the gift. Of course, loans and gifts, direct or indirect, to or

for the benefit of the spouse or minor are covered by this

subsection.

Trusts

Section 74.3 sets out rules for the attribution of income where

property is loaned or transferred to a trust in which a spouse of

the transferor/lender or minors (whether or not they have any

connection to the transferor/lender) are beneficially interested.

corporations

Section 74.4

property is

corporation.

provides for the attribution of income where

transferred or loaned by an individual to a

This section does not apply where the transfer/loan

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is to a small business ,corporation,[1] but would apply where the

orporation is, for example, an investment corporation. In order

for attribution to apply, there must be a "designated

shareholder" of the corporation, being a spouse, a minor, or a

partnership, trust or non-small business corporation in which

such a person is a partner, beneficiary or shareholder, as the

case may be. As usual, direct or indirect transfers or loans are

covered.

The calculation under section 74.4 is quite complex, but it

basically includes in the income of the transferor/lender:

a. Whenever dividends are paid to a designated shareholder,

an amount which can be equated to interest on the value

of the property transferred or loaned to the

corporation.

is complex.

The calculation of the attributed amount

However, if the income earned by the

corporation exceeds the prescribed interest rate under

the Income Tax Act, the amount in excess can be earned

by the designated shareholder without attribution to the

transferor/lender.

b. Whenever capital gain is realized by the individual's

1. "Small business corporation" is defined in section 248(1)to include a holding company if all or substantially allof its assets were shares or debt of a connected activebusiness corporation.

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spouse, an amount equal to the share of the capital gain

reasonably attributed to an increase in the value of the

transferred property.

Exceptions to the Rules

Section

and some

74.5 sets out some exceptions to the attribution rules,

provisions which extend their application. The

exceptions are:

a. Section 74.5(1) which contains an

attribution rules in sections

transfers at fair market value.

only if:

exemption from the

74.1 and 74.2 for

The exception applies

i. The fair market value of the consideration was

greater than or equal to the fair market value of

the property transferred;

ii. If debt was part of the consideration received by

the transferor,

A. Interest must be charged on the debt at the

least of the interest rate prescribed under

the Income Tax Act at the time the debt was

incurred, or a commercial interest rate

between arm's length parties at the time the

debt was incurred;

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B. In each year that the loan was outstanding

up to and including the year in question,

interest must have been paid no later than

30 days after the end of the taxation year;

iii. If the transfer was to a spouse, the rollover

provisions under section 73 must not have been

applied.

Note that this exception does not apply to transfers to

a corporation.

74.5(2) also

74.1 and 74.2

b. Section

section

above.

exempts from attribution under

loans which comply with (ii)

c. Section 74.5(3)(a) exempts from the attribution rules

income or loss from property earned by a spouse during a

period of separation pursuant to a court order or

written separation agreement.

d. Section 74.5(3)(b) exempts capital gains during a period

of separation if the transferor spouse files an election

with his return in the year in which the spouses

commenced to live apart.

e. Section 74.5(4) also terminates attribution under

section 74.4(3) (being in relation to dividends paid by

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a corporation or capital gains realized) while the

spouses are living separate and apart pursuant to a

court order or written separation agreement.

In c, d, and e above, if the parties are separated pursuant

to a written separation agreement and reconcile within twelve

months of the date the agreement was entered into, by section

74.5(5) the exemption from attribution does not exist and

amounts will be attributed back to the transferor/lender even

during the period of separation.

f. While this does not appear directly in the section, no

amounts are attributed on business income or loss, or on

income earned from the re-investment of attributed

income.

Extensions and Inclusions

As mentioned above, section 74.5 also contains some

provisions which extend the attribution rules to cover

situations which would not normally be included in the

terminology of "loan or transfer". These are:

a. Back to back loans and transfers, as contemplated by

section 74.5(6). This would include where the

individual loans or transfers property to a third party,

and that property or other property is then loaned or

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/transferred to a "specified person", being the original

transferor/lender's spouse, a minor, or a corporation,

trust or partnership in which such a person is

interested.

b. Section 74.5(7) extends the attribution rules to

situations where an individual guarantees repayment of a

loan made to a "specified person".

c. Section 74.5(9) clarifies that a loan or transfer of

property to a trust is deemed to be a loan or transfer

for the benefit of a person beneficially interested in

the trust. Section 74.5(10) defines a "beneficial

interest" in a trust to include any contingent right to

receive any income or capital of the trust.

d. Section 74.5(11) is an interesting section which says

that the attribution rules will not apply if someone is

trying to use them to reduce tax.

Saving Provision

The new attribution rules are not straight forward. There are

some technical problems with them, and areas in which double

taxation can occur. The above is a general description of some

very complex legislation. It is not a complete analysis. If

questions arise on the application of the rules to any particular

fact situation, you should refer to the legislation itself.

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C. MATRIMONIAL PROPERTY AWARDS AFTER DEATH

The Matrimonial property Act of Saskatchewan allows a person to

apply for a division of matrimonial property after the death that

person's spouse. The tax implications of such an order should be

considered.

Generally speaking, section 70(6) of the Income Tax Act allows a

rollover of property from a deceased person to a spouse if both

were resident in Canada immediately before the death and the

property is transferred or distributed to the spouse on or after

the death and as a consequence thereof. Section 70(6.1) expands

the interpretation of "trust" for the purpose of section 70(6) to

include a trust created:

"(a) Under the terms of the taxpayer's will; or

(b) By an order of a court in relation to the taxpayer'sestate made pursuant to any law of the provinceproviding for the relief or support of dependents."

The Dependents' Relief Act of the Province of Saskatchewan is

such a law, and orders for the distribution of property made

pursuant to that Act would qualify for the rollover. Also,

Interpretation Bulletin IT-305R2 states that Revenue Canada will

allow property transferred or distributed to a spouse as a result

of a disclaimer or renunciation by another beneficiary to qualify

for the rollover, on the terms set out in the Interpretation

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Bulletin.

The Matrimonial property Act, however, probably could not be

construed as a law providing for the relief or support of

dependents. As a result, then, the question is whether one can

say that a transfer of property from the estate of a deceased

spouse to the survivor by reason of an order made under The

Matrimonial Property Act of the Province of Saskatchewan is a

transfer or distribution as a consequence of the death of the

property owner. Revenue Canada's position, as set out in the

letter from Revenue Canada attached as Appendix III D, is that

the rollover would be available.

D. SPOUSAL JOINT AND SEVERAL LIABILITY FOR TAX

1. On amounts attributed under sections 74 to 75.1

Section 160(1) of the Income Tax Act makes a transferor and

transferee spouse jointly and severally liable for the tax on

income attributed to the transferor spouse under sections 74 to

75.1 of the Income Tax Act. This section is designed to

ensure that a person does not transfer all of his or her property

to the spouse and thus avoid liability to Revenue Canada for tax

which would otherwise be payable by reason of the fact that the

transferor no longer has any property from which payment of tax

can be enforced. The principal liability for tax on these

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attributed amounts remains with the transferor, however, the

Minister has the right under 160(2) to at any time assess the

transferee for this tax.

2. Transfers when the transferor was under a tax liability.

If a person transfers property to a spouse, section 160(1) also

makes the transferee spouse jointly and severally liable with the

transferor for the tax payable by the transferor in the year of

the transfer or in any preceeding year. This liability is

limited to the difference between the fair market value of the

property transferred and the fair market value of the

consideration given to the transferor spouse by the transferee

for that property.

This section of the act prevents a person who is or will be under

a tax liability from disposing of all of their property by

transfer to a spouse and then being unable to pay their taxes by

reason of the fact that they have no property.

This joint and several liability

property was transferred as a result of

particular:

does not apply where

marri~ge breakup. In

(a) Where property is transferred to a spouse after February

16, 1984;

(b) The transfer is pursuant to a court order or written

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separation agreement; and

(c) At the time, the taxpayer and the spouse were separated·

and living apart as a result of the breakdown of their

marriage;

the transferee spouse is not liable for tax on income attributed

to the transferor spouse under section 74 (as explained above,

there are only limited circumstances in which income would be

attributed to the transferor where property was transferred in

these circumstances in any event), and the transferee does not

pick up any liability for the transferor's taxes at that time.

Further, for transfers of property occurring before the date of

the budget in which the amendment was announced (being February

15, 1984) where the transferee spouse under the old version of

section 160 would have been liable for the transferor's taxes,

the transferee spouse's liability for those taxes is deemed to

have been discharged on February 16, 1984. As a result,

liability for the tax of a former spouse on marriage breakup is

not an issue.

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III. ADDENDA

A. The following sections of The Income Tax Act (Canada):

1. Sections 60(b), (c), & (c.1)

60. Other Deductions

There may be deducted in computing a taxpayer's income for ataxation year such of the following amounts as are applicable:

(b) Alimony Payments· an amount paid by the taxpayer in theyear, pursuant to a decree, order or judgment of a competenttribunal or pursuant to a written agreement, as alimony or otherallowance payable on a periodic basis for the maintenance of thereceipient thereof, children of the marriage, or both thereceipient and children of the marriage, if he was living apartfrom, and was separated pursuant to a divorce, judicialseparation or written separation agreement from, his spouse orformer spouse to whom he was required to make the payment at thetime the payment was made and throughout the remainder of theyear;

(c) Maintenance Payments· an amount paid by the taxpayer in theyear, pursuant to an order of a competent tribunal, as anallowance payable on a periodic basis for the maintenance of thereceipient thereof, children of the recipient, or both therecipient and children of the recipient if, at the time thepayment was made and throughout the remainder of the year, he wasliving apart from his spouse to whom he was required to make thepayment;

(c.1) Idem an amount paid by the taxpayer in the year,pursuant to an order made in accordance with the laws of theprovince by a competent tribunal, as an allowance payable on aperiodic basis for the maintenance of the recipient thereof,children of the recipient, or both the recipient and children ofthe recipient if, at the time the payment was made and throughoutthe remainder of the year, he was living apart from the recipientwho was an individual within a prescribed class of personsdescribed in the laws of the province;

2. Sections 56.1(4) and 60.1

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56.1(4) Definitions For the purposes of this subsection andsubsections (2) and 60.1(2),

(a) "owner-occupied horne" of a taxpayer means a housing unit or ashare of the capital stock of a cooperative housing corporationowned, whether jointly with another person or otherwise, in ataxation year by the taxpayer, if the housing unit was, or if theshare was acquired for the sole purpose of acquiring the right toinhabit a housing unit owned by the corporation that was,inhabited by the taxpayer at any time in the year and;

(b) "housing unit" includes the land subjacent to the housingunit and such portion of any immediately contiguous land as mayreasonably be regarded as contributing to the taxpayer's use andenjoyment of the housing unit as a residence.

60.1

(1) Maintenance Payments - Where, after May 6, 1974, a decree,order, judgment or written agreement described in paragraph60(b), (c) or (c.l), or any variation thereof, has been madeproviding for the periodic payment of an amount by the taxpayerto or for the benefit of a person who is his spouse, formerspouse, or where the amount was paid pursuant to an order made inaccordance with the laws of a province, an individual within aprescribed class of persons described in the laws of a province,or for the benefit of children in the custody of such a person,the amount or any part thereof, when paid, shall be deemed, forthe purposes of paragraphs 60(b), (c) and (c.l), to have beenpaid to and received by that person if, at the time the paymentwas received and throughout the remainder of the year in whichthe payment was received, the taxpayer was living apart from thatperson.

(2) Agreement - For the purposes of paragraphs 60(b), (c), and(c.l), the amount, if any, by which

(a) the aggregate of all amounts each of which is an amount(other than an amount to which paragraph 60(b), (c), or (c.l)otherwise applies) paid by a taxpayer in a taxation year,pursuant to a decree, order, or judgment of a competent tribunalor pursuant to a written agreement, in respect of an expense(other than an expenditure in respect of a self-containeddomestic establishment of the taxpayer or an expenditure for theacquisition of tangible property that is not an expenditure onaccount of a medical or educational expense or in respect of theacquisition, improvement or maintenance of an owner-occupied horneof a person described in subparagraph (i) or (ii) incurred in theyear or the immediately preceding taxation year for maintenanceof a person who is

(i) the taxpayer's spouse or former spouse, or

(ii) where the amount was paid pursuant to an order made in

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accordance with the laws of a province, an individualwithin a prescribed class of persons described in thelaws of the province,

or for the maintenance of children of that person in the person'scustody, or both that person and such children if, at the timethe expense was incurred and throughout the remainder of theyear, the taxpayer was living apart for that person,

exceeds

(b) the amount if any, by which

(i) the aggregate of all amounts each of which is anamount included in the aggregate determined underparagraph (a) in respect of the acquisition orimprovement of an owner-occupied home of thatperson, including any payment of principal orinterest in r~spect of a loan made or indebtednessincurred to finance, in any manner whatever, suchacquisition or improvement

exceeds

( i i ) the aggregate of allamount equal to 1/5amount of a loan orsubparagraph (i)

amounts each of which is anof the original principal

indebtedness described in

shall, where the decree, order, judgment or written agreement, asthe case may be, provides that this subsection and subsection56.1(2) shall apply to any payment made pursuant thereto, bedeemed to be an amount paid by the taxpayer and received by thatperson as an allowance payable on a periodic basis.

(3) Prior payments - For the purposes of this section andsection 60, where a decree, order or judgment of a competenttribunal or a written agreement made at any time in a taxationyear provides that an amount paid before that time and in theyear or the immediately preceding taxation year is to beconsidered as having been paid and received pursuant thereto, thefollowing rules apply:

(a) the amount shall be deemed to have been paid pursuantthereto; and

(b) the person who made the payments shall be deemed to havebeen separated pursuant to a divorce, judicialseparation or written separation agreement from hisspouse or former spouse at the time payment was made andthroughout the remainder of the year.

3. Sections 70(6) and (6.1)

70(6) Where transfer or distrib~tion to spouse or trust. Where

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any property of a taxpayer who was resident in Canada immediatelybefore his death that is a property to which paragraphs Sea) and(c), or paragraphs S(b) and (d), as the case may be, wouldotherwise apply has, on or after his death and as a consequencethereof been transferred or distributed to

(a) his spouse who was resident in Canada immediately beforethe taxpayer's death, or

(b) a trust,residentpropertywhich

created by the taxpayer's will,in Canada immediately after thevested indefeasibly in the trust

that wastime the

and under

(i) his spouse is entitled to receive all of the incomeof the trust that arises before the spouse's death,and

(ii) no person except the spouse may, before thespouse's death, receive or otherwise obtain the useof any of the income or capital of the trust,

if it can be shown, within the period ending 36 months after thedeath of the taxpayer or, where written application therefor hasbeen made to the Minister by the taxpayer's legal representativewithin that period, within such longer period as the Ministerconsiders reasonable in the circumstances, that the property hasbecome vested indefeasibly 'in the spouse or trust, as the casemay be, the following rules apply:

(6.1) How trust created.

For the purposes of subsection (6) and paragraph 104(4)(a), atrust shall be considered to be created by a taxpayer's will ifthe trust is created

(a) under the terms of the taxpayer's will; or

(b) by an order of a court in relation to the taxpayer'sestate made pursuant to any law of a province providingfor the relief or support of dependants.

4. Sections 73(1) and (1.1)

73. Inter vivos transfer of property of spouse, etc., or trust

(1) For the purposes of this part,any particular capital propertytransferred to

(a) his spouse;

where at any time after 1977of a· taxpayer has been

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(b) a former spouse of the taxpayer in settlement of rightsarising out of their marriage;

(c) a trust created by the taxpayer under which

(i) his spouse is entitled to receive all of the incomeof the trust that arises before the spouse's death,and

(ii) no person except the spouse may, before thespouse's death, receive or otherwise obtain thatuse of any of the income or capital of the trust,or

(d) an individual pursuant to a decree, order or judgment ofa competent tribunal made in accordance with prescribedprovisions of the law of a province if that individualeither entered into a written agreement with thetaxpayer in accordance with such provisions or is aperson within a prescribed class of persons referred toin such provisions,

and both the taxpayer and the transferee were resident in Canadaat that time, unless the taxpayer elects in his return of incomeunder this Part for the taxation year in which the property wastransferred not to have the provisions of this subsection apply,the particular property shall be deemed to have been disposed ofat that time by the taxpayer for proceeds equal to,

(e) where the particular property is depreciable property of aprescribed class, that proportion of the undepreciated capitalcost to the taxpayer immediately before that time of all propertyof that class that the fair market value immediately before thattime of the particular property is of the fair market valueimmediately before that time of all of that property of thatclass, and

(f) in any other case, the adjusted cost base to the taxpayer ofthe particular property immediately before that time,

and to have been acquired at that time by the transferee for anamount equal to those proceeds.

(l.l) Interpretation

For greater certainty, where, by the operation of prescribedprovisions of the law of a province or by virtue of a decree,order, or judgment of a competent tribunal made in accordancewith such provisions, a person referred to in subsection (l)

(a) acquires or is deemed to have acquired,

(b) is deemed or declared to have or is awarded, or

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(c) has vested in him,

property that was or would, but for such prov1s1ons, have been acapital property of the taxpayer referred to in subsection (1),that property shall, for the purposes of subsection (1), bedeemed to be capital property of the taxpayer that has beentransferred to that person.

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74.1(1) Income Tax Act-Part I

74.1 (l) Transfers and loans to spouse.-Where an individual has transferred or loaned pro~

erty, either directly or indirectly, by means of a trust or by any other means whatever, to or forthe benefit of a person who is his spouse or who has since become his spouse, any income orloss, as the case may be, of that person for a taxation year from the property or from propertysubstituted therefor, that relates to the period in the year throughout which the individual isresident in Canada and that person is his spouse, shall be deemed to be income or a loss, as thecase may be, of the individual for the year and not of that person.

(2) Transfers and loans to minors.-Where an individual has transferred or loaned property,either directly or indirectly, by means of a trust or by any other means whatever, to or for thebenefit of a person who was under 18 years of age, any income or loss, as the case may be, of thatperson for a taxation year from the property or from property substituted therefor, that relates tothe period in the year throughout which the individual is resident in Canada, shall be deemed tobe income or a loss, as the case may be, of the individual and not of that person unless thatperson has, before the end of the year, attained the age of 18 years.

(3) Repayment of existing indebtedness.-For the purposes of subsections (1) and (2), where,at any time, an individual has loaned or transferred property (in this subsection referred to as the

."loaned or transferred property") either directly or indirectly, by means of a trust or by any othermeans whatever, to or for the benefit of a person, and the loaned or transferred property orproperty substituted therefor is used

(a) to repay, in whole or in part, borrowed money with which otherproperty was acquired, or(b) to reduce an amount payable for other property,

there shall be included in computing the income from the loaned or transferred property, or fromproperty substituted therefor, that is so used, that proportion of the income or loss, as the casemay be, derived after that time from the other property or from property substituted therefor thatthe fair market value at that time of the loaned or transferred property, or property substitutedtherefor, that is so used is of the cost to that person of the other property at the time of itsacquisition, but for greater certainty nothing in this subsection shall affect the application ofsubsections (1) and (2) to any income or loss derived from the other property or from propertysubstituted therefor.Related provlsions-i4.3-Transfers or loans to a trust:74.5(1)-Transfers for fair market value consideration:74.5(2)-Loans for value; 74.5(31-Spouses living apart:74.5(61-Back-to·back loans and transfers: 74.5(7)­Guarantees; 74.5(9)-Transfersor loans to a trust: 74.5(10)­Beneficially interested: 74.5(111-Artificial transactions:82(21-Dividends deemed received: 1IO.l(4)-lnterest anddividend income deduction; 212( 12)-Deemed payments tospouse etc.

History-S. 74.1 added by 1986. c. 6. s. 38. applicable withrespect to transfers of property made after May 22. 1985 andwith respect to loans that arc outstandinll on or after May

22. 1985. except that in the case of a loan outstanding onMay 22. 1985.

(al s. 74.1 is not applicable with respect to loans that arerepaid before 1988; and(b) in the case of a loan that is not repaid before 1988. s.74.1 does not apply to any income or loss. as the case maybe. relating to any period ending before 1988.

Definltlons-s. 74.1-"amount" see subsec. 248(1); "bene·ficially interested" see subsec. 74.5(101: "borrowed money"see subsec. 248(1); "Canada" see s. 255: "individual", "per·son". "property" see subsec. 248(11: "resident" see s. 250;"spouse" see subsec. 252(3): "substituted property" see sub­sec. 248(5); "taxation year" see subsec. 249(1).

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Div. B-Subdiv. (-Rules 74.2(2)

74.2 (l) Gain or loss deemed that of lender or transferor.-Where an individual has loaned ortransferred property (in this section referred to as "loaned or transferred property"), either directlyor indirectly, by means of a trust or by any other means whatever, to or for the benefit of a person(in this subsection referred to as the "recipient") who is his spouse or who has since become hisspouse, the following rules apply for the purposes of computing the income of the individual andthe recipient for a taxation year:

(a) the amount, if any. by which(i) the aggregate of the recipient's taxable capital gains for the year from dispositions ofproperty (other than listed personal property) that is loaned or transferred property orproperty substituted therefor occurring in the period (in this subsection referred to as the"attribution period") throughout which the individual is resident in Canada and the recip­ient is his spouse

exceeds(ij) the aggregate of the recipient's allowable capital losses for the year from dispositionsoccurring in the attribution period of property (other than listed personal property) that isloaned or transferred property or property substituted therefor

shall be deemed to be a taxable capital gain of the individual for the year from the dispositionof property other than listed personal property;(b) the amount, if any, by which the aggregate determined under subparagraph (a)(ii) exceedsthe aggregate determined under subparagraph (a)(i) shall be deemed to be an allowable capitalloss of the individual for the year from the disposition of property other than listed personalproperty;(c) the amount. if any, by which

(i) the amount that the aggregate of the recipient's gains for the year from dispositionsoccurring in the attribution period of listed personal property that is loaned or transferredproperty or property substituted therefor would be if the recipient had at no time ownedlisted personal property other than listed personal property that was loaned or transferredproperty or property substituted therefor

exceeds(ij) the amount that the aggregate of the recipient's losses'for the year from dispositions oflisted personal property that is loaned or transferred property or property substituted there­for would be if the recipient had at no time owned listed personal property other thanlisted personal property that was loaned or transferred property or property substitutedtherefor,

shall be deemed to be a gain of the individual for the year from the disposition of listedpersonal property;(d) the amount, if any, by which the aggregate determined under subparagraph (c)(ii) exceedsthe aggregate determined under subparagraph (c)(i) shall be deemed to be a loss of the indi­vidual for the year from the disposition of listed personal property; and(e) any taxable capital gain or allowable capital loss or any gain or loss taken into account incomputing an amount described in paragraph (a), (b), (c) or (d) shall, except for the purposesof those paragraphs and to the extent that the amount so described is deemed by virtue of thissubsection to be a taxable capital gain or an allowable capital loss or a gain or loss of theindividual, be deemed not to be a taxable capital gain or an allowable capital loss or a gain orloss. as the case may be, of the recipient.(2) Deemed gain or 10Sl.-For the purposes of sections 3 and 111 as they apply for the

purposes of section 110.6, where an individual is deemed under subsection (l), subsection 74(2)or section 75.1 to have a taxable capital gain or allowable capital loss for a taxation year, suchportion of the gain or loss as may reasonably be considered to relate to the disposition of aproperty by another person in the year shall be deemed to arise from the disposition of thatproperty by the individual in the year.Related provislons-74.3-Transfers or loans to a trust:74.5(1)-Transfer for fair market value consideration:74.5(2)-Loans for value: 74.5(3)-Spouses living apart:74.5(61-Back·to·back loans and transfers; 74.5(7)­Guarantees: 82121-Di\'idends deemed received by taxpayer;J10.)(4 l-Inlert'st and di\'idend income deduction: 212( ]2)­D('emcd payments to spouse ('lc.

History-S. 74.2 added by J986, c. 6, s. 38. Subsec. 74.2(l)is applicable with respect to transfers of property made afterMay 22. 1985 and with respect to loans that are outstandingon or after May 22, 1985, except that in the case of a loanoutstanding on May 22,1985,

la) subsec. 74.2(1) is not applicahle with respect to loans 49that are repaid before 191\11: and

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74.3(1) Income Tax Act-Part I

(h) in the ca~e of a loan that i~ not repaid before 1988.section 74.2 doe~ not apply to any di~posilion of propertyocculTinlt before 1988.

Subsec. 74.2(2) i~ applicable to 1985 e/ SCQ.

Definitlons-s. 74.2-"allowahle capital loss" see ss. 38.248(1): "amount" see suh~ec: 248(1); "Canada" see s. 255;

"individual" foCe suhsec. 248(1); "listed personal propcrt)'"foCe 5S. 54. 248()); "person". "propert)," sec subsec. 248()):"rc~ident" see s. 250; "spouse" see subsec. 252(3); "substi­tuled property" see suh~ec. 248(5); "taxable capital gain"see ss. 38. 248()); "taxation year" see subsec. 249()):"trust" see 5~. 104(1). 248())'

Definltions-s. 74.3-"allowable capital loss" see ss. 38.248()): "amount". "individual" see ~ubsec. 248(1); "listedpersonal property" see ss. 54. 248() I: "person". "property"see subsec. 248(1); "substituted property" see subsec.248(5/: "taxable capital gain" see s~. 38. 248(1l; "taxationyear" see subsec. 249()): "tru~t" see s~. 104(1). 248(1l.

74.~(1) Transfers or loans to a trust.-Where an individual has loaned or transferred prop­erty (in this section referred to as "loaned or transferred property"), either directly or indirectly,by means of a trust or by any other means whatever, to a trust in which another individual who isat any time a designated person in respect of the individual is beneficially interested at any time,the following rules apply:

(a) for the purposes of section 74.1. the income of the designated person for a taxation yearfrom the property shall be deemed to be an amount equal to the lesser of

(i) the amount in respect of the trust that was included by virtue of paragraph 12(1 )(m) incomputing the income for the year of the designated person, and(ii) that proportion of the amount that would be the income of the trust for the year fromthe property or from property substituted therefor if no deduction were made under subsec­tions 104(6) or (12) that

(A) the amount determined under subparagraph (i) in respect of the designated personfor the year

is of(8) the aggregate of all amounts each of which is an amount determined under subpar­agraph (i) for the year in respect of the designated person or any other person who isthroughout the year a designated person in respect of the individual; and ..

(b) for the purposes of section 74.2, an amount equal to the lesser of(i) the amount that was designated under subsection 104(21) in respect of the designatedperson in the trust's return of income for the year, and(ii) the amount, if any, by which

(A) the aggregate of all amounts each of which is a taxable capital gain for the yearfrom the disposition by the trust of the property or property substituted therefor

exceeds(B) the aggregate of all amounts each of which is an allowable capital loss for the yearfrom the disposition by the trust of the property or property substituted therefor,

shall be deemed to be a taxable capital gain of the designated person for the year from thedisposition of property (other than listed personal property) that is loaned or transferred prop­erty.

(2) Definition of "designated person".-For the purposes of subsection (1), "designated per­son", in respect of an individual, means a person

(a) who is the individual's spouse; or(b) who is under 18 years of age.

Related provlslons-82(21-Dividends deemed received;11O.1(41-lnterest and dividend income deduction; 212() 2)­Deemed payments to spouse. etc.

Hiltory-S. 74.3 added by 1986. c. 6. s. 38. applicable withrespect to transfers of property made after May 22. 1985 andwith respect to loans that are outstanding on or after May22, 1985.

74.4 (1) Definitions.-In this section,"designated benefit".-"designated benefit", at any particular time, in respect of propertyloaned or transferred either directly or indirectly by means of a trust or by any other meanswhatever by an individual (in this definition referred to as the "transferor") to a corporation,means

(a) in the case of a loan of property that is money. the principal amount of the loanoutstandin~ at the particular time,(b) in the case of a loan of property other than money, the fair market value of theproperty at the time the loan was made. and(c) in the case of a transfer of property. the amount. if any. hy which

50

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Div. B-Subdiv. (-Rules 74.4(3)(a)(ii)

(i) the fair market value of the property at the time the transfer was made to thecorporation

exceeds(ii) the aggregate of

(A) the fair market value, at the time the transfer was made. of the consideration.other than consideration that is excluded consideration at the partiCular time. reoceived by the transferor for the property, and(8) the fair market value, at the time of receipt. of any consideration, other thanconsideration that is excluded consideration at the particular time. received by thetransferor at or before the particular time from the corporation or from a person withwhom the transferor deals at ann's length. in exchange for excluded considerationpreviously received by the transferor as consideration for the property;

"designated shareholder".-"designated shareholder" of a subject corporation in respect of anindividual means a shareholder of the subject corporation that is

(a) a person who is the individual's spouse,(b) a person who is under 18 years of age,(c) a partnership of which a person described in paragraph (a) or (b) is a member,(dl a trust in which a person described in paragraph (a) or(b) is beneficially interested, or(e) a corporation (other than a small business corporation) of which a person described inparagraph (a) or (b) is a specified shareholder;

"excluded consideration".-"excluded consideration", at any time, means consideration re­ceived by an individual that is

(a) indebtedness.(b) a share of the capital stock of a corporation. where the articles of the corporationprovide for more than one class of shares at that time, or(e) a right to receive a share described in paragraph (b);

"monthly designated benefit".-"monthly designated benefit" in respect of a property, for amonth or a portion thereof. means the greatest amount that the designated benefit in respectof the property is at any time in the month or the portion, as the case may be.

(2) Transfers and loans to corporation for benefit of spouse or minor.-Where an individualhas loaned or transferred property, either directly or indirectly, by means of a trust or by any othermeans whatever, to a corporation (in this section referred to as the "subject corporation") otherthan a small business corporation. in computing the income of the individual for a taxation year,with respect to the period (in this section referred to as the "relevant period") in the year andafter the time of the loan or transfer and throughout which the individual is resident in Canadaand any shareholder of the subject corporation is a designated shareholder in respect of theindividual, an amount equal to the amount calculated under subsection (3) in respect of theproperty shall be deemed to be a taxable dividend received by the individual in the year from thesubject corporation.

(3) Calculationol amount.-For the purpose of subsection (2), the amount calculated underthis subsection in respect of the property with respect to the relevant period in the year is theamount, if any, by which the lesser of

(a) the amount, if any, by which(i) the aggregate of

(A) the aggregate of all amounts each of which is the product obtained when(I) the monthly designated benefit in respect of the property for a month, or aportion thereof, in the relevant period

is multiplied by(II) %of the Quotient obtained when the rate of interest prescribed for the purposeof subsection 161(1) that is in effect during that month is divided by 12, and

(8) the aggregate of all amounts each of which is an amount calculated under clause(A) in respect of the property with respect to a relevant period in a preceding taxationyear

exceeds 51(ii) the aAAre~ate of

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74.4(3)(a)(ii)(A) Income Tax Act-Part I

(A) the aggregate of all amounts each of which is a taxable dividend paid in the year ora preceding taxation year to the individual or to a taxable Canadian corporation that iswholly-owned by him, on a share that is excluded consideration received by him asconsideration for the loan or transfer of the property or excluded consideration substi­tuted therefor, and(8) o/:! of the aggregate of all amounts each of which is an amount included in comput­ing the income for the year or a preceding taxation year of the individual or a taxableCanadian corporation that is wholly-owned by him as interest on excluded considera­tion, received by him as consideration for the loan or transfer of the property or onexcluded consideration substituted therefor, and

(b) the aggregate of all amounts each of which is(i) a taxable dividend paid by the subject corporation in the relevant period or a relevantperiod in a preceding taxation year to a designated shareholder of the subject corporationin respect of the individual, or(ij) a capital gain of the individual's spouse from a disposition of property occurring in therelevant period or in a relevant period in a preceding taxation year, to the extent that thegain may reasonably be attributed to an increase in the value of the property loaned ortransferred or of property substituted therefor

exceeds(c) the aggregate of all amounts each of which is an amount calculated under this subsectionfor the purpose of subsection (2) in respect of the property for a preceding taxation year.

(4) Deduction permitted.-\Vhere an individual has loaned or transferred property, either di­rectly or indirectly, by means of a trust or by any other means whatever, to a corporation and as aconsequence thereof an amount (in this subsection referred to as the "attributed amount") has,by virtue of subsection (2), been deemed to be a taxable dividend received from a subject corpora­tion by an individual in a taxation year, the following rules apply:

(a) an amount equal to the lesser of(i) the aggregate of all taxable dividends paid by the subject corporation in the year to adesignated shareholder of the subject corporation in respect of the individual, and(ij) that portion of the attributed amount that

(A) the amount detennined under subparagraph (i) in respect of the designated share­holder for the year

is of(8) the aggregate of all amounts each of which is an amount detennined under subpar­agraph (i) for the year in respect of a designated shareholder of the subject corporationin respect of the individual

shall be deemed not to be a taxable dividend received from the subject corporation in the yearby the designated shareholder; and(b) an amount equal to the lesser of

(i) the amount that would have been the amount detennined under subparagraph (3)(b)(ii)for the year in respect of the designated shareholder if that subparagraph were read withoutreference to the words "or in a relevant period in a preceding taxation year", and(ii) the amount, if any, by which

(A) the attributed amountexceeds

(8) the aggregate of all amounts each of which is an amount detennined under para­graph (a) for the year in respect of a designated shareholder of the subject corporationin respect of the individual,

shall be deemed not to be a capital gain of the designated shareholder from the disposition ofa property by him in the year.

(5) Time of dividend.-For the purposes of this section, where one or more loans or transfersof property have been made as part of a series of transactions or events which includes thepayment of a dividend, and it may reasonably be considered that the payment of the dividend wasmade in contemplation of such loans or transfers, the dividend shall be deemed to have been paid 52immediately after the first such loan or transfer, as the case may be.

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Di\'. B-Subdiv. f-Rules 74.5(3)(a)

Related pro\islons-5)(lllc)-Exchanl!c dc('m('l! tran~fcr ofconvertible proJX'rt)· by taxpaycr to cO!T'oration: 74.5(61­Back·to·back loan~ and tranMer~: 74.!i17 I-Guarantees;74.!i(8)-"~pecified per~on" definfd; 74.5(91-Tran~fers orloan~ to a tru~t; 74.!i( IO)-Bcneficiall)' interested: 74.5(11)­Artificial transactions; 82(2)-Dividends deemed received;87( 2)(j. 7)-Amal!!amations-continuinll corporat ion;110.)(4)-Dividend and intere~t income dfduction;2i 2(12)-[)eemed parments to spouse. etc.

History-S. 74.4 added by 1986, c. 6, s. 38, applicable withrespect to loans and transfers of property made after No­vember 21, 1985.

Definitions-I. 74.4-"amount" see sub~ec. 248(1); "arm'sIfnl!lh" see ~ub~ec. 25)(1}; "beneficiall\' interested" see suo.sec. 74.5( 101; "Canada" ~ee s. 255: "caritaI gain" see ss. 39,248()}; "co!T'oration" ~ee sub~ec. 248()t; "class of shares"see subsec. 248(6); "dividend", "individual". "person","principal amount". "propcrt),,, see subsec. 2480); "resi·dent" see s. 250; "series of tran~aclions or events" see sub­sec. 248(101; "~hare". "~hareholder", "small business co!T'o­ration", "specified shareholder" see subsec. 248(1); "spouse"see subsec. 252(3); "sub~tituted property" see subsec.248(5); "taxable Canadian cO!T'oration", "taxable dividend"see 55. 89(1), 248(11: "taxation year" see subsec. 249(11;"trust" see ss. 104(11.248(1).

74.5 (1) Transfers for fair market conslderation.-Notwithstanding any other provision ofthis Act. subsections 74.1(1) and (2) and section 74.2 do not apply to any income. gain or lossderived in a particular taxation year from transferred property or from property substituted there­for if

(a) at the time of the transfer the fair market value of the transferred property did not exceedthe fair market value of the property received by the transferor as consideration for the trans­ferred property;(b) where the consideration received by the transferor included indebtedness,

(i) interest was charged on the indebtedness at a rate equal to or greater than the lesser of(A) the rate prescribed for the purpose of subsection 161(1) that was in effect at thetime the indebtedness was incurred, and(B) the rate that would, having regard to all the circumstances, have been agreed upon,at the time the indebtedness was incurred, between parties dealing with each other atarm's length,

(ij) the amount of interest that was payable in respect of the particular year in respect ofthe indebtedness was paid not later than 30 days after the end of the particular year, and(iii) the amount of interest that was payable in respect of each taxation year preceding theparticular year in respect of the indebtedness was paid not later than 30 days after the endof each such taxation year; and

(c) where the property was transferred to or for the benefit of the transferor's spouse, thetransferor elected in his return of income under this Part for the taxation year in which theproperty was transferred not to have the provisions of subsection 73(1) apply.

Related provlsions- 74.5(6)-Back-to-back loans andtransfers.

(2) Loans for vaJue.-Notwithstanding any other provision of this Act. subsections 74.1(1)and (2) and section 74.2 do not apply to any income, gain or loss derived in a particular taxationyear from loaned property or from property substituted therefor if

(a) interest was charged on the loan at a rate equal to or greater than the lesser of(i) the rate prescribed for the purpose of subsection 161(1) that was in effect at the timethe loan was made, and(ij) the rate that would, having regard to all the circumstances, have been agreed upon, atthe time the loan was made, between parties dealing with each other at arm's length;

(b) the amount of interest that was payable in respect of the particular year in respect of theloan was paid not later than 30 days after the end of the particular year; and(c) the amount of interest that was payable in respect of each taxation year preceding theparticular year in respect of the loan was paid not later than 30 days after the end of each suchtaxation year.

Related provlsions-74.5l7l-Cuarantees.

(3) Spouses living apart.-Notwithstanding subsection 74.1(1) and section 74.2, where anindividual has loaned or transferred property, either directly or indirectly. by means of a trust orby any other means whatever, to or for the benefit of a person who is his spouse or who has sincebecome his spouse,

(a) subsection 74.1(1) does not apply with respect to any income or loss from the property, orproperty substituted therefor, that relates to the period throughout which the individual isliving apart and is separated from that person pursuant to a decree, order or judgment of acompetent tribunal or a written separation agreement; and 53

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74.5(3)(b) Income Tax Act-Part I

(b) section 74.2 does not apply with respect to a disposition of the property. or propertysubstituted therefor. during the period throughout which the individual is living apart and isseparated from that person pursuant to a decree, order or judgment of a competent tribunal ora written separation agreement. if the individual tiles with his return of income under thisPart for the taxation year during which he commenced to so live apart and be so separatedfrom that person an eJection completed jointly with that person not to have that sectionapply.

Related pro\·isions-74.SfSI-Exceplion.

(4) Idem.-Notwithstanding any other provision of this Act and except as provided in subsec­tion (5), where an individual has loaned or transferred property. either directly or indirectly, bymeans of a trust or by any other means whatever, to a corporation the shareholders of whichinclude

(a) a person who is or who has since become the individual's spouse.(b) a partnership of which such a person is a member,(c) a trust in which such a person is beneficially interested, or(d) another corporation of which such a person is the sole shareholder.

no amount shall be determined under subparagraph 74.4(3)(b)(i) or (ii) in respect of a taxabledividend paid by the corporation to that person or that other corporation or in respect of a capitalgain realized by that person with respect to the period throughout which the individual is livingapart and is separated from that person pursuant to a decree. order or judgment of a competenttribunal or a written separation agreement.Related pro\lisions-74.S(S)-Exceplion.

(5) Exception.-Subsections (3) and (4) do not apply where an individual who is separatedfrom his spouse pursuant to a written separation agreement ceases to live apart from that spousewithin 12 months after the date on which the agreement was entered into.

(6) Back·ta-back loans and transfers.-\Vhere an individual has loaned or transferred property(a) to another person and that property, or property substituted therefor. is loaned or trans­ferred by any person (in this subsection referred to as a "third party") to or for the benefit of aspecified person with respect to the individual, or(b) to another person on condition that property be loaned or transferred by any person (inthis subsection referred to as a "third party") to or for the benefit of a specified person withrespect to the indi\'idual,

the following rules apply:(c) for the purposes of sections 74.1, 74.2 and 74.4, the property loaned or transferred by thethird party shall be deemed to have been loaned or transferred, as the case may be, by theindividual to or for the benefit of the specified person; and .(d) for the purposes of subsection (1). the consideration received by the third party for thetransfer of the property shall be deemed to have been received by the individual.

Related provisions-74.S(S)-"Specified person" defined.

(7) Guarantees.-\Vhere an individual is obligated, either absolutely or contingently, to.effectany undertaking including any guarantee, covenant or agreement given to ensure the repayment,in whole or in part, of a loan made by any person (in this subsection referred to as the "thirdparty") to or for the benefit of a specified person with respect to the individual or the payment, inwhole or in part, of any interest payable in respect of the loan, the following rules apply:

(a) for the purposes of sections 74.1, 74.2 and 74.4, the property loaned by the third partyshall be deemed to have been loaned by the individual to or for the benefit of the specifiedperson; and(b) for the purposes of paragraphs (2)(b) and (c), the amount of interest that is paid in respectof the loan shall be deemed not to include any amount paid by the individual to the thirdparty as interest on the loan.

(S) "Specified person" defined.-For the purposes of subsections (6) and (7). "specified per-son", with respect to an individual, means

(a) a person who is or who has become the spouse of the individual;(b) a person who is under 1S years of age: or(c) a corporat ion. other than a small business corporation. the shareholders of whichincludea person described in para~raph (a) or (h), a trust in which such a person is beneficially

54

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Div. B-Subdi\'. f-Rules 75(2)

interested, a partnership of which such a person is a member or another corporation, otherthan a small business corporation, of which such a person is a specified shareholder.

(9) Transfers or loans to a trust.-Where a taxpayer has loaned or transferred property, eitherdirectly or indirectly, by means of a trust or by any other means whatever, to a trust in whichanother taxpayer is beneficially interested, the taxpayer shall, for the purposes of this section andsections 74.1 to 74.4, be deeemed to have loaned or transferred the property, as the case may be,to or for the benefit of the other taxpayer.

(10) Beneficially fnterested.-For the purposes of this section and sections 74.1 to 74.4, ataxpayer is beneficially interested in a trust if the taxpayer has any right (whether immediate orfuture, whether absolute or contingent or whether conditional on or subject to the exercise of adiscretionary power by any person or persons) to receive any of the income or capital of the trusteither directly from the trust or indirectly through one or more other trusts.

(11) Artificial transactions.-Notwithstanding any other provision of this Act, sections 74.1to 74.4 do not apply to a transfer or loan of property where it may reasonably be concluded thatone of the main reasons for the transfer or loan, as the case may be, was to reduce the amount oftax that would, but for this provision, be payable under this Part on the il)come and gains derivedfrom the property or from property substituted therefor.Related provlsion_51(1)(cl-Exchange deemed transfer of DefinitionS-I. 74.5-"amount" seesubsec. 248(1); "ann'sconvertible propert)' b)' taxpayer to corporation: 82(2/- length" see subsec. 251(1 I: "beneficially interested" see sub-Dividends deemed received b)' taxpayer: 87(2)(j.71- sec. 74.5UOI: "capital gain" see 55. 39, 248(1); "corpora·Amalgamations-continuing corporation; llO.1(41-lnterest tion", "individual", "person". "prescribed", "property",and dividend income deduction; 212(l21-Deemed pa}'1Tlents "shareholder", "small business corporation", "specifiedto spouse etc. shareholder" see subsec. 248U I: "spouse" see subsec.Hilto1')'-S. 74.5 added by 1986, c. 6, s. 38, applicable with 2~~(31: ':~ubstituted property" ~e su~ec. 248151; "taxablerespect to transfers of propert)' made after Ma)' 22, 1985 and dlvlden~, see 55••~9(] I, 248U I: 'taxat,I,on y~r see subsec.",.ith respect to loans that are outstanding on or after May 249(1); taxpayer see subsec. 248(1); trust see 55. 104111,22, 1985. 248(1).

55

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75(3) Income Tax Act-Part I 298

75.1 (1) Gain or loss deemed that o( trans(eror.-Where(a) a taxpayer has, after 1971, transferred property (which property is referred to in this sub­section as "transferred property") to a child of his in circumstances such that subsection 73(3)applied in respect of the transfer.(b) the transfer was made at less than the fair market value of the transferred property imme­diately before the time of the transfer, and(c) in a taxation year, t~e transferee disposed of the transferred property and did not, beforethe end of that year, attam the age of 18 years,

the following rules apply:(d) the amount, if any, by which

(i) the aggregate of the transferee's taxable capital gains for the year from dispositions oftransferred property • •

exceeds(ii) the aggregate of the transferee's allowable capital losses for the year from dispositionsof transfe1Ted property,

shaJl, during the lifetime of the transferor while the transferor is resident in Canada. bedeemed to be a taxable capital gain of the transferor (or the year from the disposition ofproperty;

(e) the amount, if any, by which the aggregate determined under subparagraph (d)(jj) exceedsthe aggregate determined under subparagraph (d)(i) shall, during the lifetime of the transferorwhile the transferor is resident in Canada, be deemed to be an allowable capital loss of thetransferor for the year from the disposition of property; and<0 any taxable capital gain or allowable capital loss taken into account in computing anamount described in paragraph (d) or the amount described in paragraph (e) shall, except forthe purposes of those paragraphs, to the extent that the amount so described is deemed byvirtue of this subsection to be a taxable capital gain or an allowable capital loss of the trans­,feror, be deemed not to be a taxable capital gain or an allowable capital loss, as the case maybe. of the transferee.

Related pro\isions-38-Taxable capital gain and allowable Interpretation Bullelins-IT·26RR2: Intrr "il'OS transfer ofcarita) los.~: 39-Capital gain and capital loss: 74.2(21- farm property to child.Deemed gain or loss: 160-Tax Iiability-non·arm·s lengthproperty transfer.

(2) Extended meaning o( "child".-For the purposes of this section. "child" of a taxpayerincludes a child of his child and a child of his child's child..HiatOT)'-AlI that portion ofsubsec. 75.}(1 I following para.tc)substituted by 1974·75-76, c. 26, s. 41, applicable to 1975 II/seq. That portion formerl)' read:

in computing the transferor's income for any taxation yearthe amoun\, if an)', by which

(dl the aggregate of the transferee's taxable capital gainsfor the year from the disposition of the transferred prop­erty,

exceeds(e) the aggregate of the transferee's allowable capitallosses for the year from the disposition of the transferredpropert)',

shall, during the lifetime of the transferor while the trans­feror is resident in Canada. be deemed to be a taxable capitalgain of the transferor for the year from the disposition of

property, and any gain or Joss taken into account in comput·ing the aggregate described in paragraph (dl or the aggre­gate described in paragraph (e) shall, for the purposes ofcomputing the income of the transferee for a taxation year,be deemed not to have been a gain or loss of the transferee.S. 75.l added b)' 1973-74, c.14, s. 20.2, applicable to 1972et

seq.

DefinitiON-I. 75.1-"allowable capital loss" see s. 38. lub­sec. 248(1); "amount" see subsec. 248(1); "in Canada" see I.255: "property" !oCe subsec. 248( 1); "taxable capital gain" lefs. 38, subsec. 248( 1): "taxation year" see s. 249: "taxpayer" leesubsec. 248(1).

IntfY'll1'elation BuUetin -IT-268R2: In/llr ('ivos transfer offarm propert)' to child.

56

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[11 5~,123]

maintenance.[Interpretation Bulletin No. IT-118R2] Alimony and

Page 57

Reference: Paragraphs 60(b), (c) and (c.l) (also sections 56.1 and 60.1, subsection109(4), and p'3Jragraphs 56(1)(b)" 56(1)(c), 56(I)(c.l) and 212(1)(/).

1. An amount paid is deductible by thepayer in the year paid under paragraph6O(b) and is included in computing incomeof the payer's spouse or former spouse inthat year under paragraph 56(1) (b) if allthe following requirements are met:

(a) the amount is paid as alimony orother allowance for the maintenance ofthe spouse (or former spouse), childrenof the marriage, or both (see 6 and 7below) ;

(b) the spouses (or former spouses) areliving apart at the time the paymentis made and throughout the remainderof the year pursuant to a divorce, judi­cial separation, or written separationagreement;

(c) the amount is paid pursuant to adecree, order, or judgment of a com­petent tribunal or pursuant to a writtenagreement (see 8 below);

(d) the payment is one of a series pay­able on a periodtic. basis (see 9 to 12

.. below) ; and

(e) the amount is paid or deemed to bepaid to' the spouse or former spouse(see 16 to 19 below) ..

2. Where an amount paid does not meetall the requirements in 1 above, it may be'deductibl'e by the payer under paragraph6O(e) and included in computing income ·ofthe payer's spouse under paragraph56(1) (c). To qualify under paragr,aphs60 (c) and 56(1) (c), all the followingrequirements must be met:

(a) the amount is paid as an allowancefor the maintenance of the spouse, chil­dren of the spouse, or both (see 6 and7 bel'Ow);

(b) the spouses are living apart at thetime the payment is made and through­out the remainder of the year;

(c) the amount is paid pursuant to anorder of a competent tribunal (see8 below);

(d). the payment is one of a series pay­'able on a periodic basis (see 9 to 12below); and

(e) the amount is paid or deemed to bepaid to the spouse (see 16 to 19below) .

~ 52,123

3. For the purposes of the provisions ofthe Act discussed in this' bulletin, a partyto 'a common-law relationship does notqualify as a spouse or former spouse.Applicable to payments under an ordermade after December 11, 1979, an amountpaid by a party to a common-law relation­ship is deductible by the payer under para­graph 60(c.l) and is included in computingincome of the recipient uttder paragraph56 (1 ) (c.l). The same treatment will alsoapply with respect to orders made beforeDecember 12, 1979, provided the partieshave so agreed in writing, and will applyfor the taxation year 1n which the agree-

,ment is made and subsequent years. T'Oqualify under p'aragraphs· 6O(c.l) and56(1) (c.l), all the following -requirementsmust be met: .

(a) the amount is paid as an allowancefor. the maintenance of the recipient,children of the recipient, or both (see6 and 7 below);

(b) the 'recipient and the prayer areliving apart at the time the payment ismade and throughout the remaioriderof the year;

(c) .. the amount is pa1d pursuant to anorder made in acoordance with' thelaws of a province by a competenttribunal; .

(d) the" :p-ayment is one of a se-ries pay­able on a periodic basis (see 9' to 12below); and

(e) the 'amount is paid or deemed to bepaid to the recipient who is an indi­vidual within a prescribed class of per­sons under provincial laws whichrecognize a support obligation withrespect to the parties to a common­law relati'onship on a breakdown oftheir relationship (see also 16 to 19below).

A t the time of publication, the only pre­scribed class of persons consists -of persons·described in subclause 14(b)(i)of the FamilyLaw Reform Ad of Ontario who were par­ties to proceedings giving rise to an orderunder Ontario law.

4. Comments on personal exemptionsthat may be claimed under section 109 ina year in which a change in marital statusoccurs appear in IT-191 R, "Residents of

© 1985, CCH Canadian Limited

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4·85 Interpretation Bulletins

Page 58

IT-118R2 33,057-9

Canada: Personal Exemptions". In anyyear subsequent to a year in which thereis a divorce or separation, if a taxpayer isentitled to a deduction under paragraph6O(b) or (c) in a ta.'<:ation year for a pay­ment for alimony or maintenance of aspouse or child, the taxpayer cannot claima marital deduction for that spouse or adeduction for the child as a dependant inthat year. Similarly, effective for the 1984and subsequent ta.'<:ation years, a taxpayerentitled to a deduction under paragraph6O(e.l) for child support payments in ayear· will 'not be entitled to claim, as adependant in that year, any child supportedby such payments.

5. Where a taxpayer is required by -acourt order or an agreement to pay anallowance for aHmony 'Or maintenance, andalso to sell the ,family residence to thetaxpayer's spous'e(or former spouse orformer party to a common-law union). withpayment for the residence to be effectedby a reduction in the allowance 'Otherwisepayable, the amount to be included in.computing income· by ·,the recipient andd·educted by the payer is the net amount

'actually paid (~JloW'aJ1ce otherwise payableless amount withheld in respect of the salJeof the res~dence).

Allowance6. In order to meet the ·requirements in

l(a)~, 2(a) and 3(a) above, an am:ount mustbe paid as anaUowance. For purposes ofthe pmovislons 'of the Act discussed in thisbulletin, an allowance is a specified sumof money which has been established inadvance of payment by the court or theparties as being the required recurringpayment to be made by the payer inrespect of the maintenance of the pers'onsdescribed ;in 1(a), 2(a) or 3 (a) above.Once paid, it is at the complete dispositionof the recipient. A requirement ·for p:ay­ment 'Or reimbursement of an actual main­tenance expense (e.g., medical; educational,heating; hydro, mortgage payment, etc.),whether or not recurring,' does not qualifyas' a requirement to pay an allowance.However, refer to the discussion on thirdparty payments ;in 16(b) below for con­structive receipt, and in 20 below for pay­ments that 'are deemed to be allowances.

7. The Department considers that aspecifie,d sum of money that is subject toadjustment in accordance with changes In

the Consumer Price Index or 'some similarformula or index may qualify QS an allow­ance even though the exact future amountspayable are not specified in the' order oragreement. However, an amount that ispayable by reference to a proporti'on ofthe payer's income, variations in mortgagepayments or similar formula does not Qualifyas an allowance, since it is not a limitedpredetermined sum.

Payments Pursuant to an Order orAgreement

8. Although periQdic payments madepri'or, to the date of a decree, order, judg­ment 'Or .written separation. agreementcannot be considered to be paid "pursuantto" it, ,they may ,nevertheless qualify forpurposes of l(b) and (c) or 3(c) above ifmade after 1983. Subsections 60.1(3) and56.1(3) provide that ..such payments madein the year of the order or agreement orin' the immediately preceding year thatotherwise qualify are deemed to be paidand received pursu<l!nt to the order oragreement \'\There '1:he d'Ocument providesthat they are to be so considered. .

Pa}-ments on a 'Periodic Basis9:: The' phrase "payable' 'on aperiodic

basis" in 1(d)', 2 (d) and'3(d) above isinterpreted to mean "payments which areInJade periodically, recurring at fixed times,not at variable periods, not in the exerciseof the discretion of orie 'or more individuals,but £rom SIOme antecedent obligatio.n"·' (seealso 20 below).

10. Where a lump-sum payment is madein place of several periodic payments notyet due but imposed under a court orderor agreement, such a paymen t does notQualify as "periodic". Also, where anamount lin respect of a period prior tothe order or agreement requiring the pay­ment to be mQde is p'aid a.:fter ,the date ofsuch order or agreement, such an amountdoes not qualify because it was not pay­able on a periodic basis (see also 8 above).A lump-sum paid in a taxati'On year isregarded as qualifying as a periodic pay­ment only where it can be identified asbeing the payment of amounts payableperiodically that were due after the dateof the order and had fallen into arrears.For greater certainty, a commuted lwnp­sum payment to obtain a release from aliability imposed by an order or agreementwhether such liability be in reSpect of

1T 52,123

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33,057-10 1T-118R2 Interpretation BulletinsPage 59

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arrears of maintenance payments, futurepayments, or both, does not qualify becauseit was not made ilfl accordance with theagreement.

11. An annual payment required by acourt order or agreement is regarded aspayable on a periodic basis if a series ofsuch payments is to be made.

12. An amount paid pursuant to a courtorder or agreement which requires a tax­payer to pay a periodic allowance for onlypart of the year may still qualify as "peri­odic". For example, a monthly allowancefor the maintenance of a child of the mar­riage is not disqualified because it is. notrequired to be paid for two months of theyear when the child is residing with thepaying taxpayer.

Alimony Payable for a Limited Period.13. It is not necessary for periodic pay­

ments of alimony' or maintenance to con­tinue throughout the remainder orf the lifeof the recipient in order to be deductibleunder paragraph 6O(b), (i:) or (c.l). Pro­vided all the requirements in 1, 2 or 3above, as applicable, are met, periodic pay­ments for a limited period' (such as untilremarriage or until the recipient is qualifiedto enter the work-force), qualify for deduc­tion under these paragraphs.

Specified Sum Payable on a PeriodicBasis

14. Where, under a court order or anagreement, a specified sum of money is tobe paid and payment is required to bemade in whole or in part by regular instal­ments,such regular instalments '!lormallydo not qualify under paragraphs 6O(b), (c)or (c. 1) and are not income of the recipient.

Where Payments Excessive15. Alimony or maintenance is generally

a sum not in excess of an amount suffi­cient to maintain 'the recipient and lorchildren in the style to which they wereaccustomed prior to the breakdown of themarriage or common-law union. Wherethe periodic payments are considerably inexcess of maintenance requirements, thereis a presumption that the whole amountis a payment of capital, regardles's of thewording used in the agreement, if the pay­ments are to be made over a short periodonly.

n52,123

Payments to Third Parties16. For purposes of the requirement:;

set out in l(e), 2(e) and 3(e) above, theDepartment considers that an amount ispaid to the spouse, the former spouse orthe party to a common-law relationship,respectively, if

(a) the amount IS actually paoid to suchperson;

(b) the amount is paid to a third paTtyand deducted from the amount payableto such person with the express orimplied concurrence 'Of such person(in these circumstances the paymentto the third party is regarded as con­structively received by the spouse, theformer spouse or the party to acommon-law relationship, but see alISOthe comments in 18 below); or

(c) the amount is paid to the court 'Oran agency of the court for the benefitof such person pursuant to a courtorder.

17. Under subsections 60.1 (1) and 56J ( 1) ,a taxpayer is deemed to have paid, and thespouse or former spouse. of the taxpayeris deemed to have received, all or part ofa specific periodic maintenance allowanceeven though it is paid to a third party(including any child of the marriage) if

(a) the amount was paid after May 6.1974 and purSUlalIlt to a decree, orderOT judgment of a competent tribunalmade or varied after that date,

(b) the amount paid was :for the benefitof the spouse or former spouse orchildren in the custody of that indi­vidual, and

(c) the spouse or former spouse W13.S

living apart from the taxpayer at thetime that the payment was made andduring the remainder of the year.

These provisiohS also apply after December11, 1979 in respect of an order made afterthat <Late by a competent tribunal inaccordance with the laws of a provincethat recognize an obligation for mainte-'nance of an individual _described in _3(e)above and the children in the custody ofsuch person. By written agreement theparties may cause the same provisions toapply to such order made after May 6,1974 and before December 12, 1979 butonly in respect of payments made in theyear in which the agreement is made andin subsequent years.

© 1985, CCH Canadian Limited

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4-85 Interpretation Bulletins

Page 6 aIT·118R2 33,057-11

18. I t should be noted that subsections60.1(1) and 56.1(1) affect only the require­ments set out in 1(e), 2(e) and 3(e) above.For amounts to qualify under paragraph6Q(b), 6O(c), 6O(c.l), 56(1)(b), 56(1)(c) or56(1)(c.1), the other requirements in 1 to3 above, as applicable, must also be met.For example, in order to qualify underthese provisions of the Act, an amountmust be paid as an allowance (see 6 ahove).This means that, subject to the deemingprovisions discussed in ZO below, paymentsmade to creditors of the person referredto in 17 abov.e in respect of specific livingexpenses (e.g., medical, rent, or mortgage)in compliance with the court order orseparation agreement and in addition toany maintenance allo\\<-ance payments there­under do not qualify. The difference betweenthis type of payment and the type of pay­ment described in 16(b) above is illustratedby the following example: .

-Agreement A requires a husband topay $300 a month to his separated wifeas an allowance for the maintenance ofthe wife and children and also to pay$200 a month directly to a privateschool attended by the childre:t inresp'ect of their fees.

-Agreement B requires a husband topay $500 a month to his separated wifeas a maintenance allowance. nus agree­ment provides that, initially, paymentof this amount will consist of $300 paiddirectly to the wife and $200 paiddirectly to a private school attended bythe children in respect of their fees,but that the wife may, at any time,change this arrangement and requirethat the $500 be paid directly to herto do with as she wishes.

Under Agreement A, the monthly amountof $200 paid directly to the school doesnot qualify as an allowance (see 6 above).This is a payment of specific expens·es.Under Agreement B, however, the $200paid directly to the school is consideredto be constructively received by .the wife(see 16(b) above) and the entire $500 isconsider'ed to be an allowance since it isat the complete disposition of the wife(see 6 above).

19. Where payments continue to be madea.fter the death of the payee or deemedpayee (i.e.. the spouse, former spouse orcommon-law pamner), they a.re not deduct-

ible by the payer whether they are madeto the estate, the children, or anyone else.However, if not entitled to a deductionunder paragraph 60(b), (c) or (c.l) in theyear, the payer may be entitled to a deduc­tion for a child as a depend:ant in thatyear pursuant to the provisions of section109. Also, if custody of the child revertsto the payer on the death of the spouse,former spouse or common-law partner,there may be entitlement to a deductionfor child care expenses in accordance withthe provisions of section 63.

20. Pursuant to subsections 60.1 (2) and56.1 (2), certain payments made after 1983wilt be deemed to have been paid andreceived as an allowance payable on aperiodic basi'S for purplOses of 6, 9 and 18above. Such payments must be made pur­suant to a stipulation contained in a courtorder, decree or judgment or a writtenagreement that subsections 60.1 (2) and56.1 (2) are to apply in respect of expendi­tures such as medical bilts, mortgage pay­ments or tuition ,fees (but 'see exclusionsbelow), incurred in the year or the pre­ceding year for ,the maintenance of thepayer's spouse, former spouse or childrenin the custody of such p·ersons. At thetime that the expenditure was incurredand throughout the remainder of the year,the spouses or former spouses must havebeen living apart. These provisions wiltalso apply to payments made after 1983on behalf 'of an individual described in 3(e)above, if made pursuant ,to a court ordermade under the laws of a province thatrecogniizes a 'support obligation for themaintenance of such a person and childrenin the custody of such a person. However.the following payments are specificallyexcluded .from qualifying for deduction:

(a) amounts paid on account of an ex­penditure in respect of a residence ofthe payer, and

(b) amounts paid on account of an ex­penditure for the purchase of tangibleproperty except an expenditure onaccount of:(i) a medical or educati'onal expense

or an expense for the mai'ntenanceof the owner-occupied horne of thespouse, ·former spouse or common­law partner, or

(ii) expenditures in respect of thepurchase or improvement of theowner-'Occupied home of the spouse.

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33,058 IT-118R2 Interpretation Bulletins

Pa ge 61

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former spouse or common-law partner,including any payment of principalor interes.t on any debt incurred tofinance the purchas'e or improve­ment, but not to exceed 20% of theorigin'al principal amount of anydebt incurred to finance the pur­chase or improvement.

Non-Resident Recipients21. Alimony or maintenance allowance

payments to a non-resident spouse, formerspouse or party to a C'ommon-Iaw relation­ship, a're subject to non-resident tax inaccordance with paragraph 212(1) (f) ofthe Act. That paragraph is considered toapply only to those payments which, ifthe recipient were a resident, would berequired to be ·included in income underparagraph 56(1),(b), 56(1) (c) or 56(1) (c.1)

of the Act, subject to any overriding effectof a tax agreement 'Or convention withthe country of residence of the recipient.

22. vVhere a resident taxpayer is required,by a decree, order, judgment, or agree­ment, to remit the full amount of thealimony or maintenance allowance to anon-resident payee and to be responsiblefor payment of the non-resident tax, it willbe necessary to C'ompute the gross amounton which tax is to be levied and the taxpayable by applying the following formulain which the tax rate percentage is ex­pressed as ''1 whole number.

Tax tax rate Pay-payable = 100 minus tax rate X ment

For example, if the rate is 15'% and thepayment is $850', the computation IS

1585 X $850 = $150,

and the gross amount, which is deductiblefrom income proV'ided the payment other­wise qualifies under 6O(b), 60(,,) or 6O(c.l),is $850 plus $150, or $1,000.

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RfVfNUI CA"'A[lJ. lAlAllON

INTERPRETATION BULLETINPage 62

,

D'INTERPRETATION: /t

SUBJECT INCOME TAX ACTTransfer of Pwpcrty to a Spouse

NO: IT-25RR2REFERENCE: Sect inn 74

and (2).

D~TE: M~y II. 19R2

(also subsections 73( I). (1.1)

same amount. By ,irtue of suhsection 73(2), the capili.llcost of depreciable property is deemed to be the capili.llcost to the transferor and the capital cost allowancealready claimed by the transferor is deemed to have heenallowed to the transferee. Other capital property isdeemed to have been disposed of for proceeds equal 10 itsadjusted cost base to the transferor and acquired by thetransferee for the same amount. Accordingly, any recap­ture of capital cost allowance on depreciable property andany capital gains or losses on the disposition of the capitalproperty are deferred until the property is actually dis­posed of, or deemed to he disposed of, by the spouse ortrust.

This Bid/crill Tip/aces alld cunce/s /l11crprClalioll Blll/crinIT-258R dO/cd Seprcmher J7. lc)80. C/lrrcllT rC\'isiolls arcdesignaTcd by '·crrica/linN.

I. Subsection 74( I) pro"ides that any income or loss"rising after 1974 from property (or property substitutedtherefor) transferred to the transferor's spouse or a personwho has since become his spouse (whether transferreddirectly or indirectly by any means whatever includingtrusts and provisions in marriage contracts) is deemed tobe income or a loss of the transferor and not the transfereewhile the former is a resident of Canada. Prior to 1975 theforegoing also applied except that it was the Department'sview that the transferee could claim all or part of a loss.and any part of the loss not so claimed was deductible bythe transferor provided that the loss was not a businessloss. Sales at fair market value made prior to 1972 asdescribed in 6 below are excepted. Also excepted aretransfers to a sp(1use' s registered retirement savings planpursuant to subsection 146(5.1).

2. By virtue of paragraph 74(7)(a), the attribution ofincome rules explained above will cease to apply afterDecember I I, 1979 where spouses are Iiving apart and areseparated pursuant to a decree, order or judgement of acompetent tribunal or a written separation agreement.\\'here the separation was pursuant only to a writtenseparation agreement. subsection 74(8) restricts the ter­mination of the attribution rules to separations of at leasttwelve months duration from the date of entry into theseparation agreement.

3. Fortransfers of capital property after I Y7 I and before1980 to a spouse or to an exclusive lifetime trust for aspouse. when the spouse or trust and the transferor wereboth resident in Canada. suhsection 73( I) provides for amandatory rollover (1f the property at its undepreciatedcapital cost in the case of depreciable prnperty and at itsadjusted cost base in the case of other capital property.Depreciable property is deemed to be disposed of hy thetransferor for proceeds equal to its undepreciated capitalcost and to hav'e been acquired by the transferee for the

PUBLISHED UNDER THE AUTHORITY OF" THE OE:PUTYMINISTER OF NATION .... L REVENUE F"OR TAXATION

4. For transfers of capital property (including depreci­able property) between spouses after 1979, the provisionsof subsections 73(1) and (2) will continue toapply as in 3above unless the transferor elects in his income tax returnnot to have those provisions apply. A transferor may electfor 1980 and subsequent taxation years to transfer hiscapital property to his spouse at its fair market value ratherthan to have it deemed to be transferred for proceeds equalto its undepreciated capital cost or its adjusted cost hase.A transfer at fair market value may, in certain cir­cumstances. be advantageous to a taxpayer, for exampleif he has capital losses against which to apply a capitalgain resulting from the transfer at fair market value to hisspouse.

5. Certain nther transfers occurring after 1977 are sub­ject to the rollover provisions in subsections 73( 11 and (2)unless, in the case of such transfers after ]979, an elec­tion. as described in paragraph 4 above. has been made bythe transferor not to have those provisions apply. Theseother transfers include a transfer made to a former spousein settlement of rights arising out of their marriage, and atransfer to a former common law spouse made pursuant toa provincial law designated in the Income Tax Regula­tions. In addition, as some provinces have enacted legis­lation declaring that a spouse has a specified interest incertain assets (lwned by the other spouse or providing forsuch a determination by a court, and as such a declarationor order ma:- not be a "transfer" in common law, subsec­tion 73( 1.11 was enacted for greater certainty to deemsuch a dt'..:Ia~:Jtit)n or order to he a tramfer subject to therollover pre)\' is ions . Only those declarat ions and orderswhich are pursuant to pmvincial laws designated in theIncnme Tax Rq;ulations are subject to this deeming pro­vision. Although these transfers and deemed transfers aresubject t(1 the wllO'er provisions. they are not subject tothe attributi(1n rules in suhsection 74(1) and (2).

6. For purposes of secliom 73 and 74 a transfer iscon .. idered to include a sale to a spouse whether or not atfair market value. However, where a sale was made priorto 1972 to a spouse at fair market value and the sale price

PUBLIE AVEC L'AUTORISATION DU SOUS-MINISTREDU REVENU NATIONAL POUR L'IMP6T

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Page 63

was fully paid by the transferee in l:ash or kind and nolfrom funds furnished hy the tramferor, it is the Depart­ment's practice not to attrihute the income or loss from thetransferred property or property substituted therefor to thetransferor. So-called "payment" in services or by meansof a note or other promise to pay is not regarded aspayment.

7. By virtue of paragraph 74(7)(b), the attribution rulesof subsection 74(2) will not apply to transfers of propertybetween spouses under certain circumstances. Where thespouses are living apart and are separated pursuant to adecree, order or judgement of a competent tribunal or awritten separation agreement and the transferor files, withhis return of income for the taxation year during which hecommenced to so live apart, a joint election with hisspouse not to have subsection 74(2) apply, it will cease toapply. Paragraph 74(7)(b) is applicable for the 1980 andsubsequent taxation years. However, where the separa­tion takes place before 1981 the election can be filed witheither the transferor's 1980 or 1981 return.

8. A transfer does not include a genuine loan made by aperson to his spouse. No all-inclusive statement can bemade as to when a loan can be considered to be..genuine" , but a written and signed acknowledgement ofthe loan by the borrower and an agreement to repay itwithin a reasonable time ordinarily is acceptable evidencethat it was so. If, in addition, there is evidence that theborrower has given security for the loan, that interest onthe loan has been paid, or that actual repayments havebeen made, it is accepted that the loan was genuine. Thefact that no interest is required to be paid does not mean, initself, that a genuine loan has not been made.

9, Where there is a genuine loan and there is no evi­dence that the terms of that loan are not being honoured,the Department considers that such a loan made directly toa spouse is not a transfer of property for the purpose ofsubsection 74(1).

IO. It is necessary to distinguish between income or a lossfrom property and income or a loss from a business.Subsection 74(1) does not apply to attribute businessincome or losses even if the business operates with someor all of the property obtained originally from the trans­feror.

I I. Income or a loss derived from the investment or otheruse of the earnings from the transferred property is notattributed to the transferor and thus for income tax pur­poses is income or a loss of the transferee. Interest on anyinterest allowed to accumulate is also considered to beincome of the transferee, but the interest being allowed toaccumulate is income of the transferor.

12. Pursuant to paragraphs 74(2)(a) and (b), where prop­erty is transfem:d by a taxpayer after 1971 by any means

til hi~ spouse or a person who has since become hisspouse. any t<ixahJc capilal gains or allowablt- capitallosses arlsm~ after 1974 from the dispositions of thepruperty or property suhstiwted therefor (other than listedpl'Tsonal property) are deemed to be those of the tram­ferar. Also, pursuant 10 paragraphs 74(2)(c) and (d), anygallls or losses arising after 1974 from the dispositions of"transferred" listed personal property are deemed to begams or losses of the transferor from the disposition oflisted personal property. Prior to 1975, only taxable capi­tal gains in a year plus taxable net gains on dispositions oflisted personal property in the year minus allowable capi­tal losses in the year were deemed to be those of thetransferor. Subsection 74(2) is not applicable to transfersmade pursuant to subsection 146(5.1) to a registeredrellrement savings plan under which the taxpayer'sspouse is the annuitant.

13. Subsections 74(l) and (2) do not apply to attributeany income or loss or any taxable capital gains or allow­able capital losses to a spouse (the transferor):

(a) from the date of death of the transferor or trans­feree;(b) from the date the transferor ceases to be residentin Canada until the date, if any, when he again takesup residence in Canada:(c) from the date the transferee ceases to be hisspouse: that is the date a divorce becomes final:(d) in the case of subsection 74(1), during theperiod that the transferor or his spouse are legallysepar<lted as explained in paragraph 2 above: or(e) in the case of subsection 74(2), during the periodthat the transferor and his spouse are legally separatedif an election has been made as explained in para­graph 7 above.

(d) above is applicable after December 11, 1979 while (e)above is appl icable for the 1980 and subsequent taxationyears.

Remuneration Paid to Employee b)' Spouse

14. Remuneration paid to an employee by his spouseprior to I9RO is not deductible in computing the spouse'sincome and cannot be included in computing theemployee's income by virtue of subsection 74(3). Simi­larly, where remuneration is paid prior to J980 to anemployee of a partnership in which his spouse was apartner, the spouse is deemed, by subsection 74(4), \0

have received as part of the im'ome from the business forthe year, that portion of the employee's remuneration thathis partnership interest is of all partnership interests.

I). Sut-sections 74(3) and (4) are not applicable withrespect to remuneration paid after J979 for servicesTendered a~ an employee after 1979. Therefore, prO\idedthat the re muneration paid to the employee by his spouseor spouse's partnership is reasonable in the cir­cumSlan<:es, it '" ill be deductible by the sp0use or partner­ship and illcJuded in the income of the employee.

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Propert} Transferred to a Trust

16. Suhject to the comments in 13 above and 17 below,subsection 74( I) will apply to attribute income or loss to atransferor where property is transferred to a trust underwhich a heneficiary who is the transferor's spouse has aright. whether vested or contingent, to capital of the trustresulting from the transfer or to any income derivedtherefrom.

17. Subsection 74( I) will only attribute to a transferoramounts of income which would otherwise be taxable inthe hands of a beneficiary who b the transferor's spouse.It does not apply to attribute income that is otherwisetaxable in the hands of the trust only or anotherbeneficiary .

18. Subsection 74(1) applies to the following amountsthat would otherwise be included in the income of thetransferor's spouse as beneficiary of the trust, subject tothe comments in I, 13 and 16:

(a) income which is "payable" to the beneficiaryin the year (subsections 104(13) and (24»;(b) the value of benefits to the beneficiary out of thetrust and amounts paid by the trust, out of its income,for the maintenance of property for the beneficiary'suse (sedion lOS).

19. Where a part of the accumulated income of the trustwould otherwise be included in the income of a spousepursuant to a preferred beneficiary election. as providedin subsection 104( 14), subsection 74(1) \vill apply whenthe spouse has;) right, whether vested orcontingenl. to thecapital or inC0llle of the trust.

Depreciable Propert~·

20. Where depreciable property is transferred to a spouseand the spouse has no other property of the same class asthe property transferred. the income or loss from theprnperty attrihuted to the transferor sh\)uld retlect anyamount of capital cost allow:mce. terminal Joss or recap­ture of capit;_tl cost allowance in respect of the class which\\ ould otherwise be taken into account in computing theincume of the spouse. Where. under similar cir­cumstances. income ffl)m depreciable propeI1y trans­ferred to a trlls!. f\ir the hencfit of the tr:msferor's spouse,is attr:~utcd t\l the t~.Hlsfer\lr (see 16 t() jq ab\l\el. suchillL'''IJll: shlluld rdled any ;UlhllJJ1t \If capital \..ust allow­ann~. terminal )nss nr rccartdre (If capital Cl.'st all\l\\<Incein re,!'cct (,fthl' l!;lSS \\ hich \\ ould 0thervv i~e be taken intoaCCollnt in CPl1ljiuting the inu'me \)f the s!'ouse.

21. \\'line ,kl'r\x!al'k lir"j"l'I1:- i~ tr;:n~fcrred to a spou~e

;lIlJ the ~1'\'lIse has \,ther l'['('pen\ "f the same l'la~s as thepn'pl'ny tLHl':-l'rrcd. in l'\'iIl['ul:ng the incl'l1le or I\)ssfr\\111 the l'rpl)l·rt:- .Iltrihull'd t\l the transferor.

Page 64I r-2SHK2

ance claimed by the spouse in respect of the class(which portion may not exceed the maximum capitalcost allowance that would be deductible in respect ofthe transferred property if the property were in aseparate c1a<;s) may be deducted, and(b) a terminal loss or recapture of capital costallowance which arises in the year of disposition ofthe transferred property and would otherwise beincluded in computing the income of the spouse inrespect of the class should be taken into account to theextent such amount can reasonably be considered torelate to the transferred property.

Under the same circumstances, a similar reasonable allo­cation of capital cost allowance, terminal loss or recaptureof capital cost allowance must be made where the depreci­able property is transferred to a trust for the benefit of aspouse and the income from the property is attributed tothe transferor. After the year of disposition of the trans­ferred property by the spouse or the trust, there is noattribution of capital cost allowance, terminal loss orrecapture of capital cost allowance that arises in respect ofthe class. However, if the spouse acquires a substitutedepreciable property, the provisions of this paragraph orparagraph 20 above, whichever is appropriate, will apply.

Substituted Propert)' Income

22. Where a capital gain realized on disposition of trans­ferredproperty by the transferee has been attributed to thetransferor and a substituted property has been acquired bythe transferee, the funds representing the portion of thecapital gain which accrut:d after the property was trans­ferred to the transferee are not considered as part of thesubstituted property. For example. assume that after 1971a husband transferred to his wife capital property having acost to him of $20,000 and a fair market value of SSO.OOO.His \vife later disposed of the property for $80.000 and thecapital gain of S60,000 was attributed to the husband. Ifthe wife then acquired a substituted property with the$80,000 realized by her on the disposition of the trans­ferred property, only 5/8 of any income or capital gainrealized from such property would be attrihuted to thehusband.

23. A cJrital gain or loss arising on dispositic.'n of prop­ertv tran ferreJ before 1972 to a Sf1c,use or a per~on \\hoha~ ~inc'c becpme his spouse (or of'prl1perty ,uhstituteJ forsuch pr,jpeI1yl Cannot be Jttrihut\'d tl' lh~ transferor under~lJhSlxt!()n 74(2). \".'hile such CJ~'it;l1 t~ains or !llsses arethose \If the trJnsferee. it should be noted that, subject t0the cornm-:n~ in I and 6 abll\'e. all the income from suchproperty or substitut~dproperty reiT1Jins the income of thetransferor. For th<: .. ~ purr()~es. the Derartrllent con .. iderssubSiiluted pwrCI1y to include r;('['eI1y acquired with&;lins rt'aii?l~d on di~p\'sitilln \If the \'ri~;n:.d tramferredrropeI1y or a !,fllpeny q;"qit\Jl~d therefor. Thus. if theexample in 22 Jbove in\(ihed a pre-lli72 lransfer ofpnli)cny. all of the incoll1e arisin~ fr\'!~1 ,\J'o,(ltlll"d rr"r­erty a:y'JirL'd \\ ith the S~().(lno. ~u! n\'ne \)f the l:lr: tal

Page 67: I.redengine.lawsociety.sk.ca/inmagicgenie/documentfolder/AC0843.pdf · The Gagnon decision was applied by the Tax Court of Canada in Gavin Wood v. M.N.R. 86 D.T.C. 1389. In that case,

rain~ or lo~~L'~. would he attributahle \(I the transferorHowever. a~ set out in 11 ahllve. incollle on IIIC(lrnl.' wouldnot be attributable.

)Dhidend Tax Cn'dit

24. Subsection 82\.2) provides. in effect. that where thetransferor of property includes in his income a dividendreceived or deemed to be received by the transferee from ataxable Canadian corporation, the transferor is required togross-up the dividend and is entitled to the dividend taxcredit.

]';on-Resident Transferee

25. Where an amount paid or credited to a non-resident ofCanada is included in another taxpayer's income by virtueof section 74 and is subject to tax under Part I of the Act,subsection 212(2) provides that non-resident withholdingtax is not exigible on such amount.

Liabilit)' for Pa)'ment of Tax

26. Section 160 provides that the transferee and thetransferor are jointly and severally liable for any taxowing by the transferor on the day of transfer to the extentof the value of the property so transferred, and for the taxof the transferor that arises through the operation of sec­tions 74 and 75.

27. Example of the income tax effects of sections 73 and74.

)

Assume:

Year I

Year 2

Year 3

Page 65

Income Tax Com.equencc:

- Mr. A is deemed t(1 have received and Mr~

A is deemed to have paid $6000 for theasset (73(1) I.

- Mr. A realizes a capital gain of $500 on thesale of Mrs A's note. This gain will notattribute to Mrs A under subsection 74(2)since the note was not transferred to Mr. Abut was created on the original transfer.

- Net income of $900 ($1,900 revenue less$lOoo interest expense) is attributed toMr. A (74(1)).

- Mrs A's capital gain of $6000 (proceeds of$12.000 less deemed adjusted cost base of$6000) is attributed to Mr. A (74(2)).

7

Year 1

Year 2

- Mr. A has an income producing asset withan adjusted cost base of $6000 and a fairmarket value of $10,000.

- Mr. A sells this asset to Mrs A for$10,000. No election was made undersubsection 73(1).

- As consideration, Mr. A receives a prom­issory note from 1\1rs A of $10,000 hearinginterest at JOq per annum.

- Mr. A sells Mrs. A's note in an arms­length transaction for $10,500 cash.

- The property transferred to Mrs A pro­duces income of $ J900 before payment ofthe interest.

- Mrs A sells the property for $12,000.

Page 68: I.redengine.lawsociety.sk.ca/inmagicgenie/documentfolder/AC0843.pdf · The Gagnon decision was applied by the Tax Court of Canada in Gavin Wood v. M.N.R. 86 D.T.C. 1389. In that case,

II. i.! ,~~;! (t,!~:.·." ~A""'f'l ".

INTERPRETATION BULLETINPage 66

,

D'INTERPRETATIONINCOME TAX ACTbtablishment of Testamentary Spouse Trusts

N,:1 IT-305R2 D41[ September 4. 1984R,FU.c',:E Subsection 70(0) (also subsections 70(6. I)

and (6.2) and IOS(,) and (4»

This bulletin cancels and replaces Interpretation BulletinIT-305R dated May 9. /977. Currell1 r£'I'isions are desig­nall'd by ~'ertical Jines.

I. Taxable capital gains. allowable capital losses,recapture of capital cost allowance and terminal losses,which would otherwise arise on the death of a taxpayer byvinue of the deemed disposition of capital propeny undersubsection 70(5), are deferred if, as a consequence ofeither the taxpayer's death or a disclaimer or renunciationby a beneficiary under the taxpayer's will or intestacy,such propeny devolves to the spouse or to a trust estab­lished in favour of the spouse and the requirements ofsubsection 70(6) are met. A transfer. often referred to as arollover, of the deceased's tax cost of the capital propenyto the spouse or spouse trust then occurs.

:2, The provisions of subsection 70(6.2) provide that thelegal representative of the taxpayer can elect to havesubsection 70(5) apply instead of subsection 70(6) to anypropeny of the deceased taxpayer. The election is made inthe final return of income filed for the deceased.

Residence

3. For a testamentary trust to qualify as a spouse trustthe testator must have been resident in Canadaimmediately before death and the trust created by willmust be resident in Canada immediately after the time thepropeny vested in the trust.

Trust Created by the Testator's Will

4. Pursuant to subsection 70(6.1). if a trust meets thequalifications of subsection 70(6) as a result of a counorder under an Act for relief of dependants or familymaintenance, it will qualify in the same way as if therevised terms had been in the deceased taxpayer's will.This does not apply to variations made by agreementamong the beneficiaries even under a Variation of TrustsAct.

Disdaiml'r and Rt'nunciation

5. A disclaimer involvcsan outright refusal to accept agift. share or interest under a will. with no stipulation as tohow the executors should then distribute the refused gift.shan.> or interest. A disclaimer of an interest in favour ofanother individual is not a true disclaimer but an assign­ment. However. where such a disclaimer or assignment\\ould achieve the same effect as <l simple disclaimerwithout any assignment. a disdaimer is considered tohl!vl' been made for the purposes of subsection 70(6). Forsubsection 70(0) 10 apply. the disclaimer must be madewithin the 15 month time period required under that sub­section.

6. A renunciation by a benefIciary under a will or on anintestacy makes possible the transfer of propeny to aspouse trust that otherwise meets the requirements ofsubsection 70(6). This treatment of propeny renouncedby a beneficiary has application to transfers of such prop­enyafter 1980, A renunciation is considered to have takenplace where. for no consideration and without transfer toanother person. a taxpayer has abandoned a previouslyacquired right. A renunciation after 1980. where thepropeny renounced is transferred or distributed to aspouse trust, does not result in any taxation of thebeneficiary renouncing the interest in the propeny inaccordance with paragraph 70(6)(0. A funher discussionof renunciations in other circumstances is provided inIT-385.

7. Once a trust qualifies as a spouse trust under the termsof subsection 70(6). it remains a spouse trust and issubject to the provisions affecting such trust~ (e.g .• para­graph 104(4)(a)) even if its terms are varied by agreement.legal action or breach of trust. These eventualities maybring into play other provisions of the Act. such as sub­sections 106(2) and 107(4).

8. The testator may leave to the executor the care ofselecting the assets to be transferred to the spouse trust andspecify only the total value of the assets to be so trans­ferred. In the absence of any express directions in the will.the executor is governed by the law of the relevant juris­diction in allocating the assets of the estate to the variousbeneficiaries and trusts, In the Depanment's view thesekind~ of arrangements do not disqualify a trust otherwisequalifying as a spouse trust. A testator may provide for theestablishment of more than one trust (i,e .. a spouse trustand a family trust) and specify the total value of assets tobe transferred to each trust while leaving to the executor'sdiscretion the selection of specific propenies to be trans­ferred to each trust.

Vesting of Property

9. The property for which a rollover is sought must vestindefeasibly in a spouse trust within fifteen months afterthe death of a tel'talor although a longer period may berequired 10 establish that such vesting o(.·(.'urred within the

"uhh·.tll ·t uncl,-, th, Ruth•.fllv

,.11111' DI'fIl"yMulI·.!l·,

{" ""',11""1,11 lit'If"Ill!>" ft" 1'1 ...111'"

Puhh( III/Pf IlilltOlI!ollh'Jll

chI ~flut. ""fll'.III-

etu R"Vf"l" Nilll,lfl,ll fHlI11 I hllP"·l( ' ,J'.',allCl{Ja

Page 69: I.redengine.lawsociety.sk.ca/inmagicgenie/documentfolder/AC0843.pdf · The Gagnon decision was applied by the Tax Court of Canada in Gavin Wood v. M.N.R. 86 D.T.C. 1389. In that case,

1T-305R:!

Page 67

3

fifll'l'n m(\nth~. Where the: will of a del'edent provides fore~ta~li~hment of a ~p0u~e tru~t from the re~iduaJ as~ets ofan e:-.tate:, the fact that, prior to transfer of the asset~ to thetrust. income derived from thnse assets is used by theestate to pay specific ~equests or other testamentary debtsdoes not preclude the tru~t from qualifying as a spousetrust. In such a situatinn. the asset~ involved do not haveto ~epT(lpert~ of the trust from the date of death but theymUst vest in the: Sp\1USe trust within thl' fifteen-monthperiod dc:~cribcd ah\l\ c.

10. To qualify a~ a ~pouse trust. the spouse must beentitled to receive all the income of the trust arising beforethe spouse's death and no one but the spouse may receiveor otherwise obtain the use of anything, capital or income,from the trust before the spouse's death. For this purposeincome does not include dividends which have been thesubject of an election under section 83 or subsection131( I). Neverthele~s,while the spouse mayor may not beentitled to such dividends under the trust arrangement,they may not be distributed to anyone but the spouse priorto the spouse's death.

II. By virtue of subsection 108(4), a trust is considered aspouse trust even though it is charged with payment of anyincome or profits tax in respect of any of it~ income for thepurpo~es of the Act. or any estate, legacy. succession orinheritance duty payahk in consequence of the testator'sdeath in respe..:t of any property of the trust or any incomeor capital interest in it.

12. In interpreting the requirement that the spouse mustbe entitled to receive all of the income of the trust thatarises before the spouse's death, the Department appliesthe doctrine of constructive receipt so that the payment of.or the provision in the will for the payment of. any incomeof the trust to a person other than the spouse, on thecondition that it be used solely for the benefit of thespouse, does not disqualify an otherwise qualifyingspouse trust.

S'l'st pn1duite dan~ Ie~ quinle moi~. Lnrsque Ie testament d'unepl'T~(lnne del'cdre prcvoit I' etablissement d 'une fiducie en fa­veur du conjoint it partir des biens rcsiduels d'une succe~sion, Iefait que, avant Ie transfert des biens ala fiducie, Ie revenu tire deces biens soit utilise par la succession pour payer des legsparticuliers ou d'autres dettes testamentaires n'empeche pas lafiducie d'etre admise comme fiducie Creel.' en faveur duconjoint. Dan~ une telle situation, le~ hiens en cause n'ont pas aetre la proprirtc de la fiducil' 11 comptcr d(' la date du ded:s maisil~ doivent etre devolu~ dans la fidu"ie crece en faveur duconjoint au cour~ de la periode de quinze moi~ decrite plus haut.

10. Pour qu 'une fiducie ait qual ite de fiducie creee en faveur duconjoint, Ie conjoint doit avoir Ie droit de recevoir tout Ie revenude la fiducie qui est realise avant son drces. et nul autre que Ieconjoint ne peut recevoir ou autrement obtenir la jouissance dequoi que ce soit, capital ou revenu. de la fiducie avant son deces.A celte fin, Ie revenu ne comprend pas les dividendes qui ont faitI'objet d'un choix en vertu de I'article 83 ou du paragraphe131(1). Neanmoins. bien que Ie conjoint puisse ou non avoirdroit aces dividendes en vertu de I'arrangement concernant lafiducie, ces derniers ne peuvent etre distribues a personne saufau conjoint avant que celui-ci ne decede.

II. Aux termes du paragraphe I08(4), une fiducie est conside­ree comme une fiducie creee en faveur du conjoint meme si elledoit payer I'impot sur Ie revenu ou sur les benefices a regardd'une fraction quelconque de son revenu aux fins de la Loi, oudes droits SUl'cessoraux payables par suite du deces du testateurit regard de tout bien de la fiducic ou de toute participation aurevenu ou au capital de la fiducie.

I:!. Lorsqu 'j) interprete I'exigence suivant laquelle Ie conjointdoit avoir droit a la IOtalitc du revenu de la fiducic realise jusqu' ason dech. Ie Ministere applique Ie principe de I'encaissementimplicite, de sorte que Ie versement (ou la disposition du testa­ment visant Ie versement) de tout revenu de la fiducie a uneper~onne autre que Ie conjoint, a la condition qu'il soit utiliseuniquement au profit du conjoint, ne rend pas inadmissible unefiducie qui est par ailleurs admissible au titre de fiducie creee enfaveur du conjoint.

Page 70: I.redengine.lawsociety.sk.ca/inmagicgenie/documentfolder/AC0843.pdf · The Gagnon decision was applied by the Tax Court of Canada in Gavin Wood v. M.N.R. 86 D.T.C. 1389. In that case,

INTERPRETATION BULLETINPage 68

,

D'INTERPRETATION

NO: IT-325R DATE: December 28, 1982REFERENCE: Paragraph 54(c) (also subsections 73( I),

(1.1), (1.2) and (2».

SUBJECT: INCOME TAX ACTPropeny Transfers After Divorce and Annul­ment

when the propcny is eventually disposed of or deemed tobe disposed of. The same result occurs when a formerspouse receives capital propeny. in settlement of right~

arising out of the marriage. in 1978, 1979, or after 1979when no election is made by the taxpayer not to have therollover provisions apply.

6. A spouse trust continues to be a spouse trust evenafter a divorce or annulment and subsection J04(4) willapply so that the spouse trust is deemed to dispose of itscapital propeny, other than depreciable propeny, on thedeath of the spouse at fair market value.

This bulletin replaces alld callcels IntcrprC{(ITioll Bulleti"IT-325 dated June 2/, /976. Current revisions are desig­nated by \·ert;callines.

I . Transfers of capital propeny after 1977 to a formerspouse in settlement of rights arising out of the maniageare subject to the rollover provisions of subsection 73( I).Paragraphs 3. 4 and 5 of IT-258R2 discuss the provisionsof subsections 73(1). (1.1) and (2) in some detail.

2. Prior to 1978. the rollover provisions did not apply totransfers of capital propel1y to a former spouse.\10reover, in re~pect of such transfers after 1979, thetransferorcanelect in his income tax return not to have therollover prc'l\'isions apply. The comments in paragraphs 3and 4 that fol1o\1 are applicable in respect of tramiers ofpropeny to a f0rmer 'pc'use

(a) prior tl' 1978. \1 hether or not in settlement ofrights arising out of the marriage, and(b) after 1977 in situations where the rollover pro­visions of subsection 73( I) do not apply. i.e. thepropeny is not capital prc'peny. the transfers are notin settlement of rights arising out of the mamage. or(if tramfer is after 1979) the transferor (taxpayer)elects not to have the rollover provisions apply.

3. When a taxpayer transfers pwpeny to a fl'rmerspouse. as in 2 ~lbl'\'C. he \1 ill he c('nsidc:red to havedi'pc".ed of :k pn'peny fl'r rrocCl'J~ equal !<' the fairm;Jfket \ alue pf the p"'p,'n;. at the time l,f transt'cr As aresult, the t~,\pa;.cr 1\ ill realize any recapture l,f c;ipitalc'os; .t110wallCl'. terrninall()~s. income or capital e:ain~, orcapiul lo,se< at the tillle L)f the transfer.

4. The f(\;'111<:r 'p\'u,c' II ho rCL'\:i\cs the propen;. will beconsiJl'red t-, h:I\L' :k,;uirL',J the pn'pen) for an alllPuntequal to the t:l\;'J:cr~ pr\'l'ceJs n1' di~r\'siti(\n.

:-. Where a f\'r!l'cT '1"'!hC rL'ceilL'd ,'.lpll:1I pr,'penyII hile still :ll"ITic'J tn the t:l'I';1\ L'r ;Ind thL tr.iJ1,fer \1 ~IS

suhjed tl' thc' nd],,\ ,'r 1"'\1\ !,i'\I~s \,1' 'lIh'I",ti,'n 73( 1I. thefnr;llcr 'I"'!!'I' 1\ ill I:.:;':i/'· th,' 1\', ,'["llr,' n1' ,;ll'ila: c,'st:dll'\lanCe, !L'11~'II!~t1 1"ss. c:,['it:1I ~;liI!S III 'dpital Il"SL'S

r;.·'1!_I~~:LD ll'~·~~. • HE ALi.H~)=~lr"'" uFO il-iE iEPUTY: .•••• I~TEH ·.....-:iF .,,",.,,,I;.4.L ~ ... ····.·F·.JUE rOR T"x,rlC:~

7, When a trust is e~tablished to make alimony ormaintenance payments to a spouse or former spouse andsubsection 75(2) applies to the trust, the Depanment co.n­siders the trustee to be acting as agent for the transferor.The income and taxable capital gains of the trust will bedeemed to be the income and taxable capital gains of thetransferor and will be taxable in his hands. However, thetransferor will be allowed a deduction under subsection60(b) or 60(c) if the payments otherwise qualify and theamount will be taxable to the spouse under paragraph56(1 )(b).

8, GencfJll\', in cases of the annulment of either void orvoidable ma;nages. provisions in the Income Tax Actrelating to spouses will apply to the panies of annulledmarriages between the time of the suppl'sed marriuge andthe declaration of annulment. In respect of transfers after1978, subsection 73(1.2) pro\ ides that. for purposes ofsubsection 73( I), "spouse" and " former spouse"includes a pany to a void or voidable marriage, as the casemay be. with the result that a "former ~pouse" includesboth a divorced person and a pairy to a marriage II hich hasbeen annulled. The proposal in the :\'otice of \\'ays andMeans Motion of June IQ82. to repeal suheetion 73( 1.2)and to replace it \\ith suhsection 2.:'2(:.') will not affect theresult described in the precl'ding scnknce.

9, :\ftl'r 1Y77, irdn,fers ,I f ~':lri:;J1 pn't'c'n;. , rlJ~Sll~l;ll t(,a dnTee. ,-,rJer or illd~crrc'n! l,f it ~c:nrl';cnl t,;i,undl in...~'ct1rC:Jnce \Iith p~('~,~riheJ pr"vi~ion' L,f l.he IJw l'f aprtl\'ince. made hy 2t:l\i'a\ert0 an inJi\iJual \1 h" wa' hi~rartllcr in a L'ornmUll-L,\1 rc latiL'n~ hip arc trcJ:eJ III thc~all1e IT'Jn!ler as tr~llSkrs tl' a f~'rll1er 'r\'L:~e II tlll' Inll!,viJu.d had

(a) l"'lCfI:J intl' ;1 1\ IItler: .:,:'f'·':il1c·nt "ith lhe lax­pa:,-'r :n ~h:C('rll~1nct' \\iih :-.u .... h r!"t-\\·i ... il)n~. ()r(h) hc','n it rannu II ith thc i.l\i'~I: cr In .J \ ,.·:I,I1H'n­b\1 rC"d;i,'n~hip lIr S,'ll1L pCi Ill.in"'kc' .1' ,I"" r!i,,',1 inrIL'"ri:>,',l rn,\i,i\ln~ of IIIL' I~I\I "t.1 !'f,'ll:I,L'

The IL·!cI'.lnl I'r\'li~J('l1s "f Ihl: 1.1\1 ~:rL' ('rc·" '!l,,',! hyRC'l:lIL,li"1\ I,~,i,)(l( I l. ,\t the- ti:'lt' \It II fitin~ ,:rI: ;::,1 1 ,.

Si,l~l\ 1,1 ['he: f;lll1il;. l.hl Rd,'11l1 \d. 1')-:-; "I ()"LIlJ('

ha\e hLcn ;'IL',,'rihed.

PU9LIE A ...·EC L'''UTORISArIO~DU S('U<;- ..... ·~IO:;TRE

D U f, E I' E N U .... 10. r I) N ALP C' L! ~ L' IMP L) r

Page 71: I.redengine.lawsociety.sk.ca/inmagicgenie/documentfolder/AC0843.pdf · The Gagnon decision was applied by the Tax Court of Canada in Gavin Wood v. M.N.R. 86 D.T.C. 1389. In that case,

~.07

INCOME TAX AND SUPPORT PAYMENTS

INCO~IE TAX AND FA.\lILY LAW·

I~CO\lE TAX AND SUPPORT PAY\1ENTS

Page 69

Sl:P - 13

In Ihl' nl'goliation of support r~) m~nts und~r a !-1.·pdrJti\'n Jgr~l:Jl)cnl or in obtaining a l'ourtord~r for sU'pport payments it is the after tax position of the parties that should be the relevant faclorin dC:'lc:rmining the amount of such payments. The Income Tax Act contains provisions designed to lax

·Ihc inl'ome of the spouse or former spouse responsible for making support p:lyments on a split incomerJsis. that is to say. the paying spouse or former spouse is allowed to pay "bore tax dollars" to therecipient spouse or former spouse.

This is accomplished by allowing the paying spouse or fonner spouse to deduct support paymentsin computing taxable income and to require the recipient spouse or divorcee to include such poymentsIn computing tox:Jble in<.:ome. However, in order for payments to qualify for this special tax IrC::Jtmcntl:"~:' must f::lll within the very strict requirements (If the Income fax Act

In Iht' nvuni11 sitll;Jtion ·... :,I:re <'upport payments arc made the: re~ipjcnt taxp;l)t:r IS In a Ill\kCr lax!:Ir;ld;e.. What happens in effect is that the total tax paid on the income by the two taxpayers is lessthan Ihe tax that is payable by the one taxpayer with the larger income.

To illustrate the kind of tax relief available under the Income Tax Act take the example of ahusband with a gross income of S:!O,OOO.OO a year. He is separated from his wife who has custody ofbs two (hildren ages 5 and 7. The wife earns no income. The wife requires a minimum of $7,000.00 inspendable after-tax dollars to maintain herself and the children.

A. Support Payments Not Deductible. .If the husband could not make deductions for support payments made to his wife in calculating

) . taxable income the following would be his tax position:

HUSBAND'S Gross Income

Personal DeductionSpouse DeductionDeduction for 2 children under age 16Employment ExpenseCharitable Donations

Total Deductions

TAXABLE INCOME

TAX

On first SI4.924On b:.lJance 5988143.9~?C x 5988.)

Total Income Tax Poyable

·Prepared by Barbara A. Suzuki. November. 1974

$1,706.001,492.00

640.00150.001.00.00

4,534.00

433.93

$20.000.00

4.088.00

S15.91 :!.00

4.967.93

Page 72: I.redengine.lawsociety.sk.ca/inmagicgenie/documentfolder/AC0843.pdf · The Gagnon decision was applied by the Tax Court of Canada in Gavin Wood v. M.N.R. 86 D.T.C. 1389. In that case,

• :\f1l:r t~, c..Iolbrs J\·~il:.tble I S~O.OOO - S~.907.93)Support paym~nts to wife (after tax dollars)

• HUSBAND'S net after tax dollars available

Page 70

SI ~ .11.- 2<)':'_.1;01)6.QU

S 8.03~.07

B. Support Payments Deductible

If the husband were able to deduct support payments in calculating taxable income. and the wifewere required to include these payments in'calculating her t:lxable income, support pa)'ml.'nts of58.000 would need to be paid to provide the wife with about $7.000.00 in spendable after tax c..Iollars.

WIFE'S Gross Income

Personal DeductionFirst childSecond childCharitable Donations

Total Deductions

TAXABLE INCOME

TAX

S1,706.001,492.00

320.00100.00

S 8,000.00

3,618.00

S 4.382.0,-

On first 53.198.00On balance 5 I ,184.00(51,184.00 x ~7.40%)

Total Income Tax Payable

*After tax dollars available to wife

HUSBAND'S Gross Income

Personal DeductionSupport pay mentsEmployment ExpenseCharitable Donations

Total Deductions

TAXABLE INCOME

TAXOn first 59,594.00On balance $450.00($450.00 x 33.88x)

$ 651.00

324.42

975.4~

$ 7,024.58

S20.000.UO

S1,706.008,000.00

150.00100.00

9.956.00

S10.044.00

)

S2,568.00

152.46

Page 73: I.redengine.lawsociety.sk.ca/inmagicgenie/documentfolder/AC0843.pdf · The Gagnon decision was applied by the Tax Court of Canada in Gavin Wood v. M.N.R. 86 D.T.C. 1389. In that case,

Page 71

SLP I ~

,. Afll:r In dollars available 10 husbandIS20.000 - (S8.000.00 + S2,720.46)·1

S ~.7~0.4o

9.279.54

)

By taxing part of his income at his wife's lower rates, the husband hilS S1.247.47 more spendable aftertax dollars than he would have had if all of the income were taxed first in his hunds. His wife would in

\

lhis exjmplc receive $1,000.00 more in support payments but the amount of sp~ndabl~ after taxdollars Jvailable to her would still be $7,000.00.

It should be noted from the above illustration that if the husband is ~ntitJed to d~duct supportpayments in calculating taxable income he will not be entitled to claim the ordinary spouse andchildren's d~ductions for those same individuals. However, the wife will be able to claim dedudionsfor herself and the children in calculating her taxable income.

THE FIRST YEAR OF SEPARATION

Where husband and wife are both substantial income earners and separation occurs part waythrough the calendar year, with the wife retaining custody of the children, if the husband makes nosupport payments to the wife for the year in q~estion, it is possible for a "married equivalent"deduction ($ 1,492.00 in 1974) to be claimed on account of one of the children, by either the husbandor the wife but not both. If husband' and wife cannot agree as to which taxpayer may make thededuction neither spouse will be entitled to the deduction. In negotiating separation agreements someagreement should be reached in the agreement or by letter as to which spouse, if any I will be claimingthe "married equivalent deduction", and for which of the children. .

In the situation described below both husband and wife could also claim dependent deductionsfor each of the other two children. If no "married equivalent deduction" is claimed by any spouse,dependent deductions may be claimed for all of the children by both husband and wife.

Let us assume that there are three children of the marriage two children over age 16 and oneunder age 16 with no income of their own.

A. Married Equivalent Deduction Oaimed

It is agreed between husband and wife that the wife may claim· the "married equivalentdeduction" for the first year of separation.

WIFE'S Deductions (1974)

PersonalFirst child (under age 16)("married equivalent deduction")Second childThird childCharitable DonationsEmployment Expense

TOTAL DEDUCTIONS

$1,706.00

1,492.00550.00550.00100.00150.00

$4.548.00

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Page 72

SLP, 1(,

HL'SBA~D'S Dedul.·tions (I <t74)

PasonalSecond <:hildThird childEmployment ExpenseCharitable Donations

TOTAL DEDUCTIONS

$1,706.00550.00550.00150.00100.00

$3.056.00

Total deductions of husband and wife combined $7,604.00

B. Married Equivalent IXduction Not Claimed

It is agreed between husband and wife that neither spouse will claim the "married equivalentexemption" for the first year of separation.

.WIFE'S Deductions (1974)

PersonalFirst child (under age 16)Second childThird childCharitable DonationsEmployment Expense

TOTAL DEDUCTIONS

HUSBAND'S Deductions (1974)

PersonalFirst childSecond childThird childCharitable DonationsEmployment Expense

TOTAL DEDUCTIONS

S1,706.00320.00550.00550.00100.00150.00

$3.376.00

$1,706.00320.00550.00550.00100.00150.00

$3,376.00

Total deductions of husband and wife combined S6,752.00

In this example, where the married equivalent deduction is claimed by the wife the combinedtotal deductions are greater and the wife's total deductions are also greater but the husband's totaldeductions are less than when no "married equivalent deduction is claimed."

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Page 73

Thorne Riddell, Chartered Accountants, Review of theFederal Budget, February 1984

The rules in the Income Tax Act relating to the deduction and taxation of alimonyand maintenance payments will be extended. Amounts paid after 1983 by a taxpayer inrespect of expenses for the maintenance of the recipient or the recipient's children willbe allo\ol.'ed as a deduction to the taxpayer and will be taxed as income to the recipientprovided the taxpayer and the recipient have agreed to such treatment before the endof the year in which the payment is made. Payment in a year of both expenses of thatyear and those incurred by the recipient in the immediately preceding year are toqualify. This change will not apply to a "house purchase expense".

A house purchase expense will mean any amount paid for the acquIsition orimprovement of a dwelling unit and any payments on account of principal and interestin respect of indebtedness for the acquisition or improvement of property to the extentthe principal and interest payments exceed 20 per cent of the original principal amount.

In addition, any alimony and maintenance payments made after 1983 and before thesi~ning of an order or a wri tten separation agreement will be allowed as a deduction tothe payer and will be taxed as income to the recipient if the order or agreement soprovides. This change is restricted to payments made in the year the order oragreement is signed or the immediately preceding year.

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1+ Revenue Canada Revenu CanadaTaxation Imp6t Page 74

Head Office Bureau principal

Gau ley Ix. Co.Barristers & Solicitors300,701 Broadway AvenueP.O. Box 638Saskatoon, SaskatchewanS7K 3L7

Attention: Ms. N.E. Hopkins

July 9, 1986

Dear Sirs:

Your file VOlfe reference

Our fife Notre reference

5-1500M. Siegel(613)995-2455

This is in reply to your letter of April 23, 1986 concerning the applicationof subsection 70(6) of the Income Tax Act (the "Act").

You have indicated that pursuant to the provisions of The MatrimonialProperty Act of the Province of Saskatchewan a surviving spouse may beawarded by a Court a portion of the matrimonial property after the deathof her spouse. This award is made independently of any entitlement undera Will or the Intestate Succession Act and of any claim under the Dependent'sRelief Act.

You are concerned as to whether subsection 70(6) of the Act would beapplicable where there is a transfer of property from the estate of thedeceased spouse to the surviving spouse as a consequence of an Order madepursuant to The Matrimonial Property Act.

It is the Department's position that property received as a result ofan action commenced by a surviving spouse under The Matrimonial PropertyAct on or after the death of her spouse, will be considered to havebeen transferred as a consequence of his death, for the purposes ofsubsection 70(6) of the Act, where the action was not a part of matrimoniallitigation (divorce, separation) between the parties.

We hope this information will be of assistance to you.

Yours truly,

fOr~Financial Industries DivisionRulings DirectorateLegislative and Intergovernmental

Affairs Branch

Ottawa, Ont.K1 A Ol8

Ottawa (Ont.)K1 A Ol8 Canada