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24.5.2 Transferring Income

Learn about the intricacies of transferring income within family members and the tax implications it can entail under Canadian tax laws, including exceptions and attribution rules.


TRANSFERRING INCOME

Transferring income to family members can trigger what are called attribution rules. These rules are designed to prevent taxpayers from lowering their tax burden by shifting income-generating assets to other family members. If property or income-producing assets are transferred from the taxpayer to other family members, the tax consequences may be passed back to the taxpayer. One exception to these rules occurs in the event of a marriage breakdown. If the married couple is living apart, the attribution rules relating to income and capital gains do not apply.

Both income and capital gains from property transferred from one spouse to another are attributed to the transferor unless the transfer is made for fair market value (FMV). If the transfer is made by way of a loan, the loan must bear interest. The rate of interest cannot be less than the prescribed rates published by the CRA (Canada Revenue Agency). Additionally, the interest must actually be paid within 30 days after the particular year to which it relates.

Key Terms and Definitions

  • Attribution Rules: Regulations that attribute the income or capital gains of transferred property back to the original owner for tax purposes, to prevent tax evasion through income splitting.
  • Fair Market Value (FMV): The price that property would sell for on the open market between a willing buyer and seller, each having reasonable knowledge of the relevant facts.
  • Prescribed Rates: Interest rates set by the CRA that must be applied to inter-family loans to avoid tax advantages.
  • Canada Revenue Agency (CRA): The federal agency responsible for administering tax laws for the Government of Canada.

Frequently Asked Questions (FAQs)

Q: What are attribution rules in Canada?

A: Attribution rules are regulations that ensure any income or capital gains from transferred property are taxed back to the original owner, aimed at preventing tax avoidance strategies like income splitting within families.

Q: Are there exceptions to the attribution rules?

A: Yes, one notable exception is a marriage breakdown. If the couple is living apart, attribution rules for income and capital gains do not apply.

Q: What is the importance of fair market value (FMV) in property transfer?

A: If property is transferred at its fair market value, the transferor may avoid having that income or capital gain attributed back to them. Transfers at FMV are considered arm’s length transactions, which are generally outside the scope of attribution rules.

Q: What are prescribed rates?

A: Prescribed rates are interest rates set quarterly by the CRA. They aim to ensure that intra-family loans carry a reasonable interest rate to prevent tax advantages.

Key Takeaways

  1. Attribution Rules: When transferring income or property within family members, the tax obligations typically revert to the original owner unless structured correctly.
  2. Fair Market Value: Transferring property at FMV can help avoid income or capital gains being attributed back to the transferor.
  3. Prescribed Rates and Loans: Loans between family members must bear an interest rate no lower than those prescribed by the CRA and must be paid within 30 days of the year’s end to avoid tax issues.
  4. Marriage Breakdown Exception: Attribution rules do not apply if a married couple is living apart due to a marital breakdown.

Diagrams

Attribution Rules Flowchart

    graph LR
	A[Income-Producing Assets] --> B{Transfer to Family Member}
	B -->|Yes| C(Apply Attribution Rules)
	B -->|No| D[No Attribution]
	C --> E[Transfer back to Original Owner's Tax]
	D --> F[Tax to Transferee]

Figure 1: Attribution Rules Decision Flowchart.

Conclusion


CSC® Exams Practice Questions

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Welcome to the Knowledge Checkpoint! You'll find 10 carefully curated CSC exam practice questions designed to reinforce the key concepts covered. These questions will help you gauge your grasp of the material, identify areas that need further review, and ensure you're on the right track towards mastering the content for the Canadian Securities certification exams. Take your time, think critically, and use these quizzes as a tool to enhance your learning journey. 📘✨

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## What triggers attribution rules in the context of transferring income? - [ ] Transferring income to friends - [ ] Transferring income to a business partner - [x] Transferring income to family members - [ ] Transferring income to a charity > **Explanation:** Attribution rules are triggered when income-producing assets are transferred from the taxpayer to family members, potentially passing the tax consequences back to the taxpayer. ## When do the attribution rules not apply in transferring income to family members? - [ ] During tax season - [x] In the event of a marriage breakdown where the couple is living apart - [ ] When the transfer is made during the holidays - [ ] When the transfer involves only small amounts of income > **Explanation:** The attribution rules do not apply when a married couple is living apart due to a marriage breakdown. ## What needs to occur for income and capital gains from property transferred between spouses to not be attributed back to the transferor? - [ ] The transfer must be made with no documentation - [x] The transfer must be made for fair market value - [ ] The transferor must notify the CRA - [ ] The transferee must sign a waiver > **Explanation:** Income and capital gains from property transferred between spouses are attributed to the transferor unless the transfer is made for fair market value. ## If a property transfer between spouses is made by way of a loan, what requirement must be fulfilled to prevent attribution? - [ ] The loan must be documented with a lawyer - [x] The loan must bear interest at least equal to the prescribed rates published by CRA - [ ] The loan must be paid back within 6 months - [ ] The loan must be co-signed by a third party > **Explanation:** When a property transfer between spouses is made by way of a loan, the loan must bear interest at a rate at least equal to the prescribed rates published by the CRA, and the interest must actually be paid to prevent attribution. ## By what time frame must interest on a loan-based property transfer between spouses be paid to avoid attribution? - [ ] Within 60 days after the tax year - [x] Within 30 days after the particular year to which it relates - [ ] By the end of the fiscal year - [ ] By the end of the following calendar year > **Explanation:** The interest on a loan-based property transfer must be paid within 30 days after the particular year to which it relates to prevent attribution. ## Why is it important for interest on loans for transferred property to be paid? - [ ] To build credit score - [ ] To document the transfer - [x] To prevent the attribution of income or capital gains - [ ] To avoid a penalty from the CRA > **Explanation:** Paying the interest on loans for transferred property is crucial to prevent the attribution of income or capital gains to the transferor. ## Under what condition can income and capital gains be attributed back to the transferor when property is transferred between family members? - [x] When the transfer is not made for fair market value - [ ] When the property is held in a joint account - [ ] When the transferor is over 60 years old - [ ] When the transferor has not filed taxes for that year > **Explanation:** Income and capital gains from property transferred between family members can be attributed back to the transferor unless the transfer is made for fair market value. ## What does the term 'fair market value' mean in the context of transferring property? - [ ] The lowest price the property can be sold for - [ ] The value determined by the transferor's family members - [x] The price that property would sell for on the open market - [ ] The initial purchase price minus depreciation > **Explanation:** Fair market value refers to the price that the property would sell for on the open market, ensuring that transfers are made at arm's length and preventing attribution. ## What is one exception to the attribution rules for income transfers among family members? - [ ] Transfers made before 2000 - [ ] Transfers involving a primary residence - [x] Transfers occurring due to a marriage breakdown where the couple is living apart - [ ] Transfers to siblings below 18 years of age > **Explanation:** An exception to the attribution rules is when property transfers occur due to a marriage breakdown and the couple is living apart. ## What is the consequence if the prescribed interest on a loan-based property transfer between spouses is not paid within the required timeframe? - [x] The income or capital gains may be attributed back to the transferor - [ ] The transfer is considered void - [ ] The transferor must pay a fine - [ ] The transferor loses the right to make future transfers > **Explanation:** If the prescribed interest on a loan-based property transfer is not paid within 30 days after the year to which it relates, the income or capital gains may be attributed back to the transferor.

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