R. B. Day 957-2136
APR 13 1988
Dear XXXX
We are writing in reply to your letter of March 14, 1988 (and further to our letter of February 25, 1988) wherein you requested our views regarding the income tax consequences of Mr. A electing not to use subsection 73(1) of the Income Tax Act (the "Act") in the situation described in item 3 on page 2 of our previous letter. For ease of reference, we will restate the situation described in previous correspondence.
XXXX
Pursuant to subsection 74.5(1) of the Act, Mr. A may elect not to have subsection 73(1) of the Act apply by reporting the capital gain realized on the transfer to Mrs. A. Both Mr. A's proceeds of disposition and Mrs. A's adjusted cost base or cost amount, for tax purposes, would be equal to the fair market value at the time of the transfer, in this case XXXX. On the assumption that Mr. A has not utilized any portion of his $100,000 lifetime capital gains deduction, the $90,000 capital gain realized by Mr. A upon the disposition of this property to Mrs. A can be offset by this deduction.
Since the fair market value of the cottage at the time of the transfer to Mrs. A would exceed the fair market value of the property received by Mr. A as consideration therefor (in this case $1) and it appears that interest at the rate prescribed by regulation will not be charged to Mrs. A, the exception to the attribution rules found in section 74.5 of the Act would not apply. As a consequence, should Mrs. A subsequently dispose of the cottage to a third party any capital gain realized by Mrs. A would be attributed to Mr. A.
However, subsection 74.2(2) of the Act provides that in circumstances in which an individual under subsection 74.2(1) of the Act has a taxable capital gain for a taxation year, such capital gain attributed to the individual will retain its character and that individual will be able to offset the capital gain to the extent permitted by the rules respecting the capital gains deduction. Accordingly, while any future capital gain arising upon the subsequent disposition by Mrs. A would be attributed to Mr. A, it is possible that Mr. A may offset the inclusion in income of part or all of such amount by claiming the capital gains deduction to the extent that Mr. A's particular circumstances at the relevant time will permit.
Yours truly,
for Director Small Business and General Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch