Dear Sirs:
Re: Subsection 73(1) Income Tax Act
We are replying to your letter of November 9, 1990 wherein you requested our views regarding the application of the above subsection to the hypothetical situations described ln your letter. We refer also to our telephone conversation (Thornley 19(1) of January 16, 1991.
It would appear that you have a specific situation in mind relating to a proposed transaction. Confirmation of the tax consequences of specific proposed transactions will only be provided in response to a request for an advance income tax ruling. As you are aware the procedure for requesting an advance ruling are fully described in the recently revised Information Circular IC 70-6R2. We can, however offer the following general comments with respect to your enquiry.
Our Comments
The transfer of any property, including securities and real property which are not inventory, to a person with whom the transferor does not deal at arm's length is usually treated for income tax purposes as a disposition of property at fair market value. Subsection 73(l) of the Income Tax Act provides an exception to this rule for an inter vivos transfer of property to a spouse. The enclosed Interpretation Bulletin IT-209R discusses the income tax effects of this provision on the donor and donee. Provided subsection 73(1) is applicable and the taxpayer does not opt out of the provision this subsection allows a capital property to be transferred to a spouse at the transferor's adjusted cost base with the result that the transferor will not be required to include in income in the year any capital gain that would have ordinarily have accrued up to the time of the transfer.
As indicated during our telephone conversation, subsection 73(1) of the Act would not apply where a taxpayer disposes of property to himself. However, where property such as real estate that is wholly owned by an individual is transferred by that individual from himself, as sole owner, to himself and his spouse as joint tenants it is our view, for purposes of subsection 73(1) of the Act, that the sole owner has only disposed of one-half of the property in question. This is so irrespective of the forms or documents required by the land registry office for its own purposes.
Thus subsection 73(l) of the Act would likely be applicable on the transfer of the types of capital property referred to above (that are not inventory) from a husband, as sole owner, to himself and his spouse as joint tenants unless the taxpayer elects that the rollover not apply. But as indicated above, the transferor will be deemed to have disposed of only one-half of the capital property in question for proceeds equal to the adjusted cost base of that one-half. The transferee will be deemed to have acquired the one-half interest for an amount equal to the transferor's proceeds. In other words no capital gain will be realized by the transferor at this point of time and the realization of accrued gains or losses is postponed until the transferee disposes of his or her share of the property. However, because of the attribution rules in sections 74.1 to 74.5, any income or losses from the property and any capital gains or capital losses resulting from the subsequent sale of the property may be attributed to the transferor if the transferee is the transferor's spouse at the time the income is earned or the loss incurred or at the date of sale as the case may be. (See IT-511).
The forgoing represents our general views with respect to the subject matter of your letter, however, the facts of a particular situation may result in a different conclusion. As indicated, these opinions are not rulings and in accordance with the guidelines set forth in Information Circular 70-6R2 they are not binding on the Department.
We trust this information will be of assistance to you.
Yours truly,
for DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch