Principal Issues: [TaxInterpretations translation] 1. Does the 90-day threshold referred to in the definition of "common-law partner" in subsection 248(1) apply to subsection 74.5(3)?
2. If it is established that the taxpayers were living apart from each other because of a breakdown of their common-law relationship, which, of the transferor or transferee, will be taxed on: (a) rental income earned from the time of separation until the death of the transferee? (b) the capital gain from the deemed disposition on death? and (c) the recapture of depreciation from the deemed disposition on death?
Position: 1. The 90-day threshold does not apply for the purposes of subsection 74.5(3). Thus, the question of whether two individuals live "separate and apart because of the breakdown of marriage or common-law partnership" is a question of fact.
2. (a) The transferee; (b) The transferor, unless the transferor makes jointly with the transferee's legal representative, the election under paragraph 74.5(3)(b) for the taxation year in which the disposition of the rental property is deemed to have occurred; c) The transferee.
Reasons: 1. Previous CRA position in document 2012-043802; 2. (a) Paragraph 74.5(3)(a); (b) Paragraph 74.5(3)(b). The transferor and the transferee must jointly elect to rely on this paragraph to prevent the application of the attribution rules in section 74.2; (c) Paragraph 74.5(3)(a), since the nature of recapture of depreciation is analogous to the nature of the depreciation expense that was claimed in the past. That expense was for a rental property, so the recapture will be income from the property.
FINANCIAL STRATEGIES AND INSTRUMENTS ROUNDTABLE 5 OCTOBER 2012
2012 APFF CONFERENCE
Question 22 -- Application of the attribution rules when the death of a common-law partner is within 90 days of a separation
Consider the following situation:
1. Two common-law partners - within the meaning of subsection 248(1) - separated on June 1, 2012 and lived separate and apart, because of a breakdown of their common-law relationship, until the death of one of them on August 14, 2012.
2. At the time of separation, a rental property was transferred between the common-law spouses, and the automatic rollover rules in subsection 73(1) applied.
3. No consideration was paid in respect of the transfer by the transferee to the transferor.
4. The transferee died on August 14, 2012.
Questions to the CRA
1. Is the 90-day limit stated in the definition of "common-law partner" in subsection 248(1) applicable to subsection 74.5(3)?
2. If it is established in the particular situation that the taxpayers lived separate and apart because of a breakdown of their common-law relationship, which of the transferor ("Transferor") or recipient of the transfer ("Transferee"), must be taxed on:
- the rental income from June 1, 2012 to August 14, 2012?
- the taxable capital gain from the deemed disposition on death?
- the recapture of depreciation resulting from the deemed disposition on death?
CRA Response
1. Subsection 74.5(3) does not require a minimum time for individuals to be considered as living separate and apart from one another because of the breakdown of a common-law relationship. Thus, in the particular situation, the two taxpayers could, according to the facts, be considered as living separate and apart from each other for the purposes of subsection 74.5(3), notwithstanding the fact that they are deemed living together in a conjugal relationship for the purposes of the definition of "common-law partner" in subsection 248(1).
2. The following tax consequences relating to the rental property would apply to the particular situation if it is established on the facts that the two taxpayers were living separate and apart from June 1, 2012 to August 14, 2012 because of the breakdown of their common-law relationship.
a. The rental income from June 1, 2012 to August 14, 2012
Subsection 74.1(1) essentially provides that where an individual has transferred or lent property, directly or indirectly, to a person who is the individual’s spouse or common-law partner, the income or loss of that person for a taxation year from the property is deemed to be income or loss of the individual for the year and not of that person.
In addition, paragraph 74.5(3)(a) essentially states that subsection 74.1(1) does not apply to income from the property that relates to a period throughout which an individual is living separate and apart from his or her spouse by reason of a breakdown of their marriage or common-law partnership.
The CRA is of the view that the attribution rules in subsection 74.1(1) would not apply in respect of rental income from June 1, 2012 to August 14, 2012. Thus, this income should be added to the computation of the Transferee's income for the 2012 taxation year.
b. Capital gain from deemed disposition on death
Paragraph 70(5)(a) provides that where in a taxation year a taxpayer dies, the taxpayer shall be deemed to have, immediately before the taxpayer’s death, disposed of each capital property of the taxpayer and received proceeds of disposition therefor equal to the fair market value of the property immediately before the death.
Furthermore, subsection 74.2(1) provides inter alia that where an individual (the Transferor) has lent or transferred property, directly or indirectly, to a person who is the individual’s spouse or common-law partner (the Transferee), the taxable capital gain realized (or the allowable capital loss sustained) of the Transferee from the disposition of the lent or transferred property or a substituted property is deemed to be the taxable capital gain or allowable capital loss of the Transferor.
However, paragraph 74.5(3)(b) allows spouses living separate and apart from one another because of the breakdown of a common-law relationship to make an election in order to avoid the application of section 74.2.
The CRA is of the view that the attribution rules in subsection 74.2(1) would apply to attribute the amount of the taxable capital gain to the Transferor, unless the Transferor makes the election under paragraph 74.5(3)(b) together with the Transferee's legal representative for the taxation year in which the disposition of the rental property is deemed to have occurred (in this case, 2012).
c. The recapture of depreciation on the deemed disposition on death.
The attribution rules set out in subsection 74.1(1) would not apply in respect of the recapture of depreciation that in the particular situation is treated as income from the property pursuant to section 13. Thus, the amount of such a recapture should be added in computing the Transferee's income.
Randa El-Kadi
(613) 957-2082
October 5, 2012
2012-045320