Principal Issues: Do sections 73 and 74.2 apply in a particular situation?
Position: General comments.
Reasons: Actual situation on which we can only give general comments on the application of the Act.
XXXXXXXXXX 2011-041829 I. Landry, M. Fisc.
January 4, 2012
Dear Ms. XXXXXXXXXX ,
Subject: Transfer of property between spouses
This is in response to your letter of May 29, 2011 in which you asked us for our comments regarding the application of sections 73 and 74.2 of the Income Tax Act (the "Act") to your situation, as described below.
You indicated in your letter that you were, before your divorce, the co-owner with your ex-spouse of your principal residence and your second home. When dividing the property of you and your ex-spouse in the course of your divorce, the principal residence was included in your share of the family patrimony and the second home was included in the patrimony of your ex- spouse according to their fair market value at the time of the divorce agreement. The transfer of title to the properties took place in front of a notary while you were still married. In the notarized deed for the transfer of the second home, it was stated that you gave your undivided half of that residence to your spouse.
Unless otherwise indicated, all statutory references herein are to the provisions of the Act.
Our Comments
The situation you submitted to us is an actual situation for which we cannot give you a definitive opinion. However, we are able to offer the following general comments that may be helpful to you.
As stated in paragraph 1 of Interpretation Bulletin IT-325R2, Property Transfers after Divorce and Annulment, subsection 73(1) allows capital property to be transferred on a tax-deferred rollover basis under certain circumstances where that transfer is between spouses. Where all conditions are satisfied, subsection 73(1) applies automatically. To avoid this, the taxpayer who transfers the property must make an election in the taxpayer’s income tax return filed by virtue of Part I of the Act for the taxation year of the transfer. Consequently, a taxpayer does not have to make an election for subsection 73(1) to apply to a transfer of property. However, the taxpayer must make an election if the taxpayer wishes that subsection 73(1) not apply to the transfer.
With respect to the application of section 74.2, paragraph 16 of Interpretation Bulletin IT-325R2 states that even if a subsection 73(1) rollover applies to a transfer, capital property transferred between spouses may still be subject to the rules in sections 74.1 and 74.2 concerning the attribution of income and capital gains to the transferor.
However, paragraph 74.5(3)(b) allows spouses who are separated because of a breakdown of their marriage or common-law partnership to make an election in order to avoid the application of section 74.2.
It should be noted, however, that the attribution rules in section 74.2 cease to apply after the divorce. Consequently, if a taxpayer disposes of a residence to which subsection 73(1) applies after the taxpayer’s divorce, the taxpayer’s former spouse does not have to make an election in order to avoid the application of the attribution rules set out in section 74.2, since those attribution rules automatically cease to apply after the divorce.
You can consult Interpretation Bulletin IT-325R2 on our site at the following address: http://www.cra-arc.gc.ca/E/pub/tp/it325r2/it325r2-e.pdf.
Best regards.
Michel Lambert, CA, M. Fisc.
for the Director
Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy
and Regulatory Affairs Branch