Principal Issues: [TaxInterpretations translation]
1. Can the taxable capital gain resulting from the disposition of an immovable by Madame be taxed equally between the spouses who are living separate and apart because of marriage breakdown at the time of the disposition?
2. Does the net rental income form part of her taxable income?
Position:
1. In the situation presented, one half of the property had been transferred to Madame by Monsieur. Half of the taxable capital gain would be attributed to Monsieur unless a joint election was signed by Monsieur and Madame so that section 74.2 would not apply.
2. Madame receives the rental income as the owner of the building and the net rental income must form part of Madame's taxable income.
Reasons:
1. Where an individual has transferred property to the individual's spouse, all taxable capital gains or allowable capital losses arising from the disposition of the property or property substituted therefor, other than from listed personal property, are deemed to be taxable capital gains or allowable capital losses of that individual. Pursuant to paragraph 74.5(3)(b) of the Act, the attribution rules in subsection 74.2(1) do not apply to any disposition of property that occurs while the spouses are living separate and apart by reason of marriage breakdown, provided they jointly elect that section 74.2 does not apply.
2. The husband does not make periodic support payments. To compensate for the support, the husband has transferred his undivided share of an immovable. The wife receives the rent as the owner of the building.
January 27, 2003
Shawinigan-Sud Tax Centre Headquarters
T1 Client Services Sylvie Labarre, CA
(613) 957-8953Attention: Ms. Danielle Gélinas
2002-017719Disposition of immovables
This is further to your letter of December 2, 2002, in which you asked for our opinion on the questions raised by XXXXXXXXXX following the disposition of immovables and the receipt of rental income from another immovable.
Ms. XXXXXXXXXX ("Madame") and Mr. XXXXXXXXXX ("Monsieur") were married on XXXXXXXXXX and ceased living together on XXXXXXXXXX. The divorce decree was pronounced on XXXXXXXXXX.
Madame has written to you to clarify two aspects of their separation and divorce. The first concerns the disposition of the immovable wholly owned by Madame since the separation of property. The second concerns support measures.
Immovables
From XXXXXXXXXX until XXXXXXXXXX, Madame and Monsieur owned XXXXXXXXXX immovables in equal undivided ownership. In XXXXXXXXXX, there was a separation of the undivided property due to the breakdown of their marriage. As a result, Monsieur transferred his 50% share of XXXXXXXXXX immovables to Madame, and Madame thus became the full owner of those XXXXXXXXXX immovables. Furthermore, Madame transferred to Monsieur her 50% share of the other XXXXXXXXXX immovables, with Monsieur becoming the full owner of those XXXXXXXXXX immovables.
In XXXXXXXXXX, Madame sold XXXXXXXXXX of the XXXXXXXXXX immovables she owned. Monsieur also sold one.
Madame wishes to know whether she should be taxed on the entire capital gain from the disposition of the XXXXXXXXXX immovables she owned or whether she should be taxed on 50% of the gain and Monsieur on the other 50%. She also wishes to know what the consequences would be of signing an election so that section 74.2 of the Income Tax Act (the "Act") does not apply to those XXXXXXXXXX properties.
Support
The divorce judgment of XXXXXXXXXX ratified and declared enforceable the consent to provisional and ancillary measures signed by the parties on XXXXXXXXXX and XXXXXXXXXX respectively.
In this consent, the parties agreed to child support of $XXXXXXXXXX per month. The parties agreed that the sum of $XXXXXXXXXX per month was derived from the net rental income from an immovable transferred entirely to Madame in consideration of the dissolution of the marriage. In this regard, on the division of the XXXXXXXXXX properties held in co-ownership, Madame was allocated one more property than Monsieur, thereby benefiting from an excess of net rental income of approximately $XXXXXXXXXX over Monsieur's net rental income. Clause XXXXXXXXXX of the consent stipulated that Madame would withdraw an annual amount of $XXXXXXXXXX, indexable, tax-free, as child support, from her rental income.
Madame wishes to know whether the $XXXXXXXXXX from her rental income withdrawn as child support is rental income or a non-taxable child support amount.
Our Comments
Immovables
The amount of the capital gain on which Madame must be taxed in 2001 as a result of the disposition of the XXXXXXXXXX immovables she owned depends, among other things, on the application of the attribution rule provided for in section 74.2.
For present purposes, we have assumed that subsection 73(1) applied at the time of the transfer of the undivided shares between the spouses on XXXXXXXXXX. The provisions of subsection 73(1) allow the deferral of accrued gains and losses, including any terminal loss or recapture of capital cost allowance, until such time as the transferee disposes of or is deemed to have disposed of the property.
We have also assumed that the undivided share held by Madame in each of the immovables since XXXXXXXXXX was acquired by her without any transfer of property from Monsieur and that the undivided share held by Monsieur in each of the immovables since XXXXXXXXXX was acquired by him without any transfer of property from Madame. There is therefore only the undivided share acquired in XXXXXXXXXX by each of the spouses that was transferred from the other spouse.
Pursuant to paragraphs 74.2(1)(a) and (b), where an individual has transferred property to the individual’s spouse, all taxable capital gains or allowable capital losses arising from the disposition of the property or property substituted therefor, other than listed personal property, are deemed to be taxable capital gains or allowable capital losses of that individual. Thus, in the current situation, the application of section 74.2 would result in one-half of the taxable capital gain realized on the XXXXXXXXXX immovables disposed of by Madame being attributed to Monsieur and deemed to be his taxable capital gain and not Madame's.
The same rules would apply regarding the immovable disposed of by Monsieur by virtue of Madame having transferred half of that immovable to him. Thus, Madame would be taxed on half of the capital gain realized on the immovable disposed of by Monsieur in XXXXXXXXXX.
There are some exceptions to this general rule. Under paragraph 74.5(3)(b), the attribution rules set out in subsection 74.2(1) do not apply to the disposition of a property that occurs while the spouses are living separate and apart due to marriage breakdown, provided that they jointly elect that section 74.2 not apply in respect of that property. The election must be filed with the transferor's income tax return. Consequently, if Madame and Monsieur sign an election in respect of each of the properties disposed of by Madame in XXXXXXXXXX so that section 74.2 does not apply in respect of those properties (with the election being filed with Monsieur's tax return), Madame will be taxed on the entire taxable capital gain resulting from the disposition of those immovables and Monsieur will not be taxed on any portion. Similarly, if Madame and Monsieur sign an election in respect of the immovable disposed of by Monsieur in XXXXXXXXXX so that section 74.2 does not apply in respect of that immovable (with the election being filed with Madame's income tax return), Monsieur will be taxed on the entire taxable capital gain resulting from the disposition of that immovable.
Subsection 74.2 does not apply to re-attribute taxable capital gains realized or allowable capital losses incurred in a period after the divorce becomes final. Consequently, Madame and Monsieur will take into account the entire taxable capital gain or allowable capital loss they realize on the disposition of the immovables they still owned at the time of the divorce, i.e., on XXXXXXXXXX.
Support Payments
According to our understanding of the terms of the consent agreement on provisional and ancillary measures, Monsieur did not make periodic payments for support established under those measures. To compensate her regarding such support, he transferred his undivided share in an immovable, which provided her with rental income. She is now the full owner of the immovable. We are of the opinion that it is as owner of the immovable that Madame receives the rental income. Consequently, this net rental income must be included in her taxable income.
For your information, unless exempted, a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Customs and Revenue Agency's library. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, the CRA library version can be provided. Alternatively, the client may request a severed copy using the Privacy Act criteria, which does not remove client identity. Requests for this latter version should be made by you to Madame Jackie Page at (819) 994-2898. A copy that has been severed in accordance with the Privacy Act will be sent to you for delivery to the client.
We hope you find these comments of assistance. Should you require additional information regarding the content of this document, please do not hesitate to contact us.
Ghislaine Landry, CGA
for the Director
Business and
Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch
- 4 -