Principal Issues: Will the attribution rules apply when money which was given to a spouse to contribute to TSFA is subsequently withdrawn from TFSA.
Position: Yes.
Reasons: A TFSA is an arrangement described in the definition qualified arrangement under subsection 146.2(1). Such an arrangement is a property under subsection 248(1) and property substituted for the money given to the spouse to contribute to the TFSA. Therefore, amount withdrawn from a TFSA will be property substituted and subject to the attribution rules.
XXXXXXXXXX 2010-035449 Andrea Boyle, CGA
June 3, 2010
Dear XXXXXXXXXX :
Re: Attribution Rules - Tax-free Savings Account
This in reply to your email dated January 18, 2010, in which you asked for clarification on the application of the attribution rules.
You have requested confirmation of your understanding of the general application of the attribution rules and have asked for clarification of how the attribution rules apply with respect to a Tax-free Savings Account (TFSA). You asked for confirmation that if you give money to your wife and she buys dividend-paying shares, you will have to include in your income the dividend received and the taxable capital gain on disposition of the shares but you will not have to include in your income the income on the reinvestment of the dividend. As well, you have asked whether or not the income and taxable capital gains on dividend-paying shares would be attributed to you in the situation where you give money to your wife to contribute to a TFSA and she immediately withdraws the same amount of money from the TFSA to buy the dividend-paying shares.
The particular situation outlined in your facsimile appears to relate to a factual one, involving specific taxpayers. Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant tax services office. We are, however, prepared to offer the following general comments, which may be of assistance.
All statutory references in this letter are references to the provisions of the Income Tax Act, R.S.C. 1985 (5th supp.) c. 1, as amended.
Subsection 74.1(1) applies where an individual transfers or loans property to or for the benefit of another person who is, or has become, the individual's spouse or common-law partner. In that case, any income or loss derived from property, or from property substituted therefore, that relates to a period throughout which the taxpayer is resident in Canada, is deemed to be the individual's income or loss. Subsection 74.2(1) contains similar rules with respect to any taxable capital gains or allowable capital losses arising from the disposition of such property or property substituted for it.
Consequently, where an individual gives money to his/her spouse to acquire dividend-paying shares, any dividends received and taxable capital gains on the disposition of the property or property substituted will be income and taxable capital gains of the individual. However, any income derived from the reinvestment of the dividends by the spouse will not be income of the individual.
Paragraph 74.5(12)(c) provides an exception for a transfer of property by an individual to the individual's spouse or common-law partner where the transferred property is contributed to a TFSA of which the spouse or common-law partner is the holder.
More specifically, this paragraph provides that sections 74.1, 74.2 and 74.3 do not apply while the transferred property (or any substituted property) remains in a TFSA and only to the extent that the contribution is made using the individual's spouse or common-law partner's available TFSA contribution room. The exception no longer applies when the transferred property (or any substituted property) is withdrawn from the TFSA.
When the individual's spouse immediately withdraws the transferred property from the TFSA, it is our view that the withdrawn amount is a "substituted property". Consequently, any subsequent income and taxable capital gain earned on this substituted property would be income and taxable capital gain of the individual.
We trust that these comments will be of assistance.
Yours truly,
Louise J. Roy, CGA
Manager
for Director
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch