3520-6: last updated on October 16, 2019
1
Lecture 6: Non-Arm’s Length Transactions, Departure from Canada and Death of a
Taxpayer
1.1
Recommended Exercises and Self-study Problems
▪
▪
2
Exercises 9-8, 9-9, 9-10, 9-11, 9-12, 8-15, 8-16, 9-14, 9-15, 9-16, 9-17, 11-10
Self-study problems 9-7, 9-8, 9-9, 9-10, 9-11 (ignore the part about farm land)
Non-Arm's Length Transfers [CTP 9-142 to 9-172]
▪
The non-arm’s length transaction rules determine the deemed proceeds of disposition and
adjusted cost base (ACB) for gifts and transfers to non-arm's length persons. This is relevant
for determining: (a) the capital gain at the time of the transfer and (b) the future capital gain to
the new owner of the property (when he/she sells the property)
▪
Rules apply to transfers (gifts or sales) when the transfer is between persons (individuals,
corporations, etc.) who are not at “arm’s length”
▪
▪
ITA 251(1): Related persons are deemed to not deal with each other at arm's length
▪
▪
see example at 9-168 for a theoretical tax avoidance opportunity in non-arm’s length
transfers
It is a question of fact whether others deal at arm's length
Related = connected by blood, marriage, common-law partnership or adoption
▪
Connected by blood
▪ = child, parent, grandparent (and great-grandparent, great-great grandparent, etc.)
▪ = brother, sister
▪ = horizontal or vertical relationship on family tree
▪
▪
Related by marriage
▪
2.1
2.2
But not aunts, uncles, nieces, nephews, cousins
= spouse and in-laws
• e.g. mother-in-law, daughter-in-law, sister (or brother)-in-law
Inadequate Consideration [ITA 69]
▪
All gifts are deemed dispositions at FMV (even gifts to arm’s length persons) except for gifts
to spouses [ITA 69 and 73(1)]
▪
See Figure 9-2
Sales to non-arm's length persons
▪
Sales to non-arm’s length persons should take place at FMV except for transfers to spouses
because the one-sided adjustment in ITA 69 is intentionally harsh
▪ If the sales price is > FMV, the purchaser's ACB is deemed to be FMV
▪
If the sales price is < FMV, the seller's proceeds of disposition is deemed to be FMV
▪ Sales price too low (< FMV) is the more common situation
This edition of the notes was updated by Priya Shah [p_shah@yorku.ca].
3520-6: last updated on October 16, 2019
▪
2.3
2.4
Read 9-154 carefully
▪
A gift or sale to a spouse automatically occurs at tax cost (ACB for capital property, UCC for
depreciable property) [ITA 73(1)]
▪
However, if the transferor makes an election not to have ITA 73 apply, ITA 69 and the above
rules apply (i.e., the disposition will occur at FMV). These rules for spouses apply to spousal
trusts and common-law partners
Attribution Rules [9-187 to 9-201]
▪
The income attribution rules can determine the tax on the future income and capital gains
earned by the new owner of the property. Special rules apply when (a) a property is loaned or
transferred to a spouse or minor child (child under 18) or minor niece or nephew [ITA 74.1
(income) and 74.2 (capital gains)]; (b) a property is loaned to another non-arm’s length person
(e.g., a 30 year old child, an 84 year old parent) and one of the main purposes of the loan was
to reduce the income of the lender [ITA 56(4.1)]
▪
The attribution rules move the income (and capital gains in the case of a spouse) from the
family member’s tax return to the lender/transferor’s tax return
▪
If a loan or transfer is to a spouse, any income or capital gains earned by the spouse is
taxed in the lender/transferor's hands [ITA 74.1 (1) and 74.2(1)]
▪
If a loan or transfer is to a minor child (or minor niece or nephew), only the income earned
by the minor (not capital gains) is taxed in the lender/transferor's hands [ITA 74.1(2)]
Tax on Split Income (“TOSI”) [11-110 to 11-147]
▪
The 1999 Federal Budget introduced “tax on split income” (TOSI) measures (which were
commonly referred to as the “kiddie tax”), the purpose of which was to prevent the shifting of
certain types of income to minors for tax advantage.
▪
In 2017, new TOSI legislation was introduced aimed at preventing a shift of income that would
otherwise be realized by a high-tax rate individual to lower-tax rate family members:
▪
▪
Changes are intended to extend the “kiddie tax” rules to adult children, spouses and other family
members where certain types of income are allocated to family members not ‘involved’ in
earning the income
The new TOSI rules became effective January 1, 2018
▪
Split Income is taxed at the top rate. The only credits available against the resulting tax payable is
the dividend tax credit, foreign tax credits that relate to the amount included in split income, and
the disability tax credit
▪
Most common encountered types of split income
▪
▪
▪
▪
Dividends from private companies
Shareholder benefits on loans received from a private company
Interest received on debt issues by a private corporation
Capital gains on the disposition of private company shares
This edition of the notes was updated by Priya Shah [p_shah@yorku.ca].
3520-6: last updated on October 16, 2019
▪
▪
Note: There could be other instances of split income involving private corporations, trusts, or
partnerships, so a tax expert should be consulted
Note that there are various exceptions to the general TOSI rules, which may exempt/exclude certain
payments from TOSI (depending on the age of the individual):
▪
Individuals under 25:
▪ Income or taxable capital gains from a property that is acquired as a result of:
▪ The death of a parent; or
▪ The death of any person  as long as the individual is either a full-time student at
a post-secondary institution or eligible for the disability tax credit
▪
Individuals 18 and older:
▪ Amounts received from an excluded business (a business there the individual is
actively engaged regularly, continuously, and substantially)  See CTP 11-135 for
more details
▪
Individuals 25 and older:
▪ Amounts received from excluded shares
▪ Excluded shares: taxpayer must own at least 10% of the outstanding shares of the
corporation and:
• The corporation must not be a professional corporation;
• Less than 90% of the corporation’s income from the previous year is from the
provision of services; and
• Less than 10% of the corporation’s income from the previous year is from a
related business
▪ If the amount received represents reasonable return, it is not split income
▪ Must factor in labour contributions, the assumption of business risk, and capital
contributions
▪
Individuals aged 18 to 24:
▪ Amount received represents Safe Harbour Capital Return  return on property
contributed by the individual, provided that the return does not exceed a prescribed
capital return
▪ If the amount received represents reasonable return, it is not split income
▪ Only factor in capital contributions (more restricted than reasonableness test for
those over the age of 25)
▪
▪
▪
Individuals of any age:
▪ Capital gains on qualified property (eligible for the lifetime capital gains deduction)
▪ Property acquired through marriage breakdown
▪ See CTP 11-140
Salary payments are not caught by TOSI but continue to be subject to the existing “reasonableness”
test
The new TOSI rules are highly complex. A detailed review of these rules is beyond the scope of
this course
This edition of the notes was updated by Priya Shah [p_shah@yorku.ca].
3520-6: last updated on October 16, 2019
2.5
Avoiding Income Attribution [9-202 to 9-205]
▪
▪
▪
▪
▪
2.6
There is no attribution when:
▪
ITA 74.5(1)(a): the spouse, child, or minor niece or nephew pays, from his/her own
resources, consideration equal to the fair market value of the asset transferred
▪
ITA 74.5(1)(b): money is borrowed and interest is charged equal to (or more than) the
prescribed interest rate. The interest must be paid in the year (or within 30 days after yearend)
▪
ITA 74.5(1)(c): in spousal transfers income attribution rules apply without regard to
consideration provided by the transferee unless the spouse elects out of ITA 73(1)
Read 9-202 and 9-203 carefully
Read example about Mrs. Blaine in 9-204
Read 9-205 for reinvestment of proceeds
Remember that when TOSI applies, the attribution rules will not apply. TOSI taxes the income
at the top personal tax rates, so if TOSI applies there is no need for the attribution rules to
apply
Attribution Anti-Avoidance Provisions and Tax Planning [9-206 to 9-212]
▪
▪
▪
Read 9-211, especially on ITA 74.1(3), ITA 74.5(6), ITA 74.5(7)
Read 9-212
Read 9-206 to 9-209 on giving adult children cash gifts and making interest-free loans to adult
children
▪
If a loan or transfer is to a non-arm's length major (a “major” is someone who is not a
minor) who is not a spouse, the attribution rules apply only to loans if one of the main
purposes of the loan is: (a) to reduce tax; and (b) to income split [ITA 56(4.1)]
▪
ITA 56(4.2) exempts a loan to a “major” from ITA 56(4.1) if the interest rate charged
is the prescribed rate
▪
3
This interest must be paid in the year or within 30 days after the end of the year
Departure from Canada (Departure Tax) [8-132 to 8-133]
▪
▪
▪
If you have ceased to be a resident of Canada, you have a deemed disposition at FMV of all
your property except for Canadian real estate and RRSPs and pensions (and a few other less
common exceptions) [ITA 128.1]
For most Canadian residents, this means that they will have to report deemed dispositions (and
hence capital gains or capital losses) on their shares and other investments (e.g., mutual funds,
rental properties)
The good news, however, is that the tax on these deemed capital gains is not due until property
is actually sold as long as acceptable security is provided to the government (and no interest is
charged on the (postponed) unpaid tax)
This edition of the notes was updated by Priya Shah [p_shah@yorku.ca].
3520-6: last updated on October 16, 2019
▪
▪
Taxpayers leaving the country and ceasing to be a resident of Canada must also file a list of
properties owned at the time of departure with their tax return so that the CRA can verify that
all deemed capital gains have been reported
Five-year rule [ITA 128.1(4)(b)(iv)]
▪ If you have been resident in Canada less than 60 months in the last 10 years, then the
deemed disposition rules will not apply to any property brought to Canada
▪
▪
4
This rule was designed to facilitate short-term executive transfers to Canada
When you become a resident of Canada, the cost of each of your capital properties (other than
taxable Canadian property) for Canadian tax purposes is deemed to = FMV at the immigration
date (the purpose of this rule to ensure that only capital gains accrued while being a resident of
Canada are subject to Canadian tax)
Death of a Taxpayer [9-177 to 9-185 and 11-50 to 11-54]
▪
▪
▪
▪
▪
The Deemed Disposition rules on Emigration and Death determine the capital gains on
emigration [ITA 128.1] and death [ITA 70]. The rules for gifts or bequests on death [ITA 70)
are virtually identical to the rules for gifts during lifetime [ITA 69]
There is a deemed disposition of all capital property for proceeds equal to FMV immediately
before death and the recipient gets the property with a cost equal to FMV [ITA 70(5)]
ITA 70(6) provides for an automatic exemption to these rules for property transferred to a
spouse (or spousal trust or a common-law partner)
▪ There is a tax-free rollover for these spousal transfers
▪ The deemed disposition takes place at ACB or UCC
ITA 70(6.2) allows the executor (i.e., the person who handles the financial and other matters
of the deceased person) to elect out of a spousal rollover on an asset by asset basis, if they want
to trigger a capital gain
▪ The deemed disposition at FMV rules would then apply
▪ Why elect out of the spousal rollover?
▪ To utilize a taxpayer's unused $866,912 lifetime capital gains deduction on death
Allowable Capital Losses and Net Capital losses
▪ ITA 111(2) allows these losses to be applied against any type of income in the year of
death or the immediately preceding year. Recall: capital losses can typically only be used
to offset capital gains.
▪ ITA 164(6) allows capital losses realized in the first year of the estate to be carried back
to the year of death (but not the immediately preceding year)
This edition of the notes was updated by Priya Shah [p_shah@yorku.ca].
3520-6: last updated on October 16, 2019
Review Problem:
1. Income Attribution
Sandra Bolt is 49 years of age and is married to Tod Bolt. They have two children. On December 31,
2019, her son, Dirk, is 20 years old and her daughter, Dolly, is 15 years old. Each of the children earns
about $10,000 per year in income from part time jobs. While her husband Tod qualified as a
professional accountant, he did not enjoy the work and, for the last ten years, he has assumed
the role of house parent. As a consequence, his only current source of income is the interest
on $335,000 that he has in his personal savings account. This interest amounts to about
$20,000 per year and all of the savings were accumulated from amounts that he earned while
working as a professional accountant.
On December 28, 2019, Sandra is holding shares in a Canadian public company that
have an adjusted cost base of $185,000 and a fair market value of $225,000. She is considering
transferring these shares to either her husband or to one of her two children. She seeks
your advice as to the tax consequences, both to herself and to the transferee, which would result
from such a transfer.
During your discussions, Sandra has indicated the following:
 The transfer will take place on December 31, 2019.
 Any proceeds she receives from her family on the share transfer will not be invested in
income producing assets.
 She wishes you to assume that the securities would pay eligible dividends during 2020 of
$18,500 and that the transferee would sell the securities on January 1, 2021 for
$260,000. The gross up on the eligible dividends would be $7,030 [(38%)($18,500)],
resulting in a taxable amount of $25,530 ($18,500 + $7,030). The federal dividend tax
credit would be $3,835 [(6/11)($7,030)]
Required:
Each of the following independent Cases involves a transfer by Sandra to a
member of her family. Indicate, for both Sandra and the transferee, the 2019, 2020, and
2021 tax effects of:
 the transfer on December 31, 2019,
 the assumed 2020 receipt of the dividends, and
 the assumed 2021 disposition by the transferee.
*Note that some of the Cases have been included to illustrate specific provisions of the relevant
legislation and do not necessarily represent a reasonable course of action on the part of
Sandra.
Case A
Sandra gives the securities to her husband and does not elect out of the
provisions of ITA 73(1).
Case B
Sandra’s husband uses money from his savings account to purchase the
securities for their fair market value of $225,000. Sandra does not elect out of the
provisions of ITA 73(1).
Case C
Sandra’s husband uses money from his savings account to purchase the
securities for their fair market value of $225,000. Sandra elects out of the provisions
of ITA 73(1).
This edition of the notes was updated by Priya Shah [p_shah@yorku.ca].
3520-6: last updated on October 16, 2019
Case D
Sandra’s husband uses money from his savings account to purchase the
securities for $140,000. Sandra does not elect out of the provisions of ITA 73(1).
Case E
Sandra’s husband uses money from his savings account to purchase the
securities for $140,000. Sandra elects out of the provisions of ITA 73(1).
Case F
Sandra gives the securities to her daughter, Dolly.
Case G
Sandra gives her daughter, Dolly, a $225,000 loan. The loan requires
interest to be paid at commercial rates and Dolly uses the proceeds of the loan to
purchase her mother’s securities at fair market value. Sandra believes that the
combination of dividends on the securities and Dolly’s income from part time jobs
will be sufficient to pay the interest on the loan.
Case H
Sandra gives her son, Dirk, a $225,000 interest free loan. Dirk uses the
proceeds to purchase his mother’s securities at their fair market value of $225,000.
Solution
Case A
 2019
o
o


2020
o
o
2021
o
deemed disposition at adjusted cost base of $185,000
Therefore no capital gain for Sandra and ACB of the securities to Tod would be
$185,000.
$25,530 taxable dividend attributed back to Sandra
She would also claim the related dividend tax credit
Capital gain of $37,500 [(1/2)($260,000-$185,000)] is attributed back to Sandra
Case B
 Without electing out of ITA 73(1), the transfer still takes place at ACB and the results are the
same as in Case A.
Case C
 2019
o Transfer recorded as a disposition at FMV
o Capital gain for Sandra of $20,000 [(1/2)($225,000-$185,000)]
o ACB to Tod is $225,000
 There would be no attribution for the dividends in 2020 or taxable capital gain in 2021. Tod
would report the income
Case D
 Without electing out of ITA 73(1), the transfer still takes place at ACB and the results are the
same as in Case A.
This edition of the notes was updated by Priya Shah [p_shah@yorku.ca].
3520-6: last updated on October 20, 2018
Case E
 2019
o
o
o
 2020
o
o

2021
o
Case F
 2019
o
o
 2020
o
o

2021
o
o
Case G
 2019
o
 2020
o
o

2021
o
Sandra elected out of 73(1) and paid consideration that is less than FMV
ITA 69(1) is applicable  proceeds are deemed to be the FMV amount
Sandra would record a taxable capital gain of $20,000 [(1/2)($225,000-$185,000)]
Since the transfer was at less than FMV, the attribution rules apply
Taxable dividends of $25,530 included in Sandra’s net income for tax purposes and she
would claim the related dividend tax credit
Tod’s ACB is $140,000, so the taxable capital gain is $60,000 [(1/2)($260,000$140,000)] and it would be attributed back to Sandra
69(1)  non-arm’s length gift is deemed to be at disposition and acquisition at FMV
Therefore Sandra has a taxable gain of $20,000 [(1/2)($225,000-$185,000)]
Gift was to a minor, therefore attribution rules apply
Divided of $25,530 is attributed back to Sandra. Sandra would also claim the related
dividend tax credit
In the case of a transfer to a minor, attribution rules do not apply to capital gains
Therefore Dolly would include the taxable capital gain of $17,500 [(1/2)($260,000$225,000)] in her net income for tax purposes
Transfer at FMV; Sandra has a taxable gain of $20,000 [(1/2)($225,000-$185,000)]
Since transfer was at FMV and the related loan requires interest at commercial rates,
attribution does not apply
Dolly will include taxable dividends of $25,530 in her net income for tax purposes and
she will claim the related dividend tax credit
Dolly will include the taxable capital gain of $17,500 [(1/2)($260,000-$225,000)] in her
net income for tax purposes
This edition of the notes was updated by Priya Shah [p_shah@yorku.ca].
3520-6: last updated on October 20, 2018
Case H
 2019
o
 2020
o
o

2021
o
Transfer at FMV  Sandra has taxable capital gain of $20,000
Although Dirk is not a minor, ITA 54(4.1) says attribution applies where an interest free
or low interest loan has been given to a non-arm’s length individual, and one of the main
purposes of the loan is to avoid overall taxes
Therefore the dividend of $25,530 is attributed back to Sandra and she would claim the
related dividend tax credit
Taxable capital gain of $17,500 [(1/2)($260,000-$225,000)] is not attributed back to
Sandra and is included in Dirk’s net income for tax purposes.
This edition of the notes was updated by Priya Shah [p_shah@yorku.ca].