24 What are the attribution rules and why do they exist?
Dilpreet Grewal
Due to the progressive nature of the Canadian income tax system, there is a built-in tax incentive to spread income around the family unit. For example, let’s say Charles has $100,000 of interest income on some of his investments and is taxed at a very high marginal rate. If he can somehow transfer a portion of these investments to his young unemployed children, Harry and William, then the tax on the entire family unit will be lower (as they are, presumably, taxed at much lower marginal rates). The attribution rules are intended to address income splitting schemes like this.
The attribution rules are a complex set of laws which are used to handle various income-splitting scenarios. Attribution rules ensure that any income earned, or (in the case of transfer to a spouse) capital gains or losses realized are taxed to the transferor and not the transferee.
Let’s get back to the example above. Suppose Charles transferred all of his investments to Harry and William at an amount other than FMV. In this scenario, even though the children own the assets, the $100,000 of income would still be attributed back to Charles and included on his tax return.
Note that the attribution rules apply to transfers to children under the age of 18 and to spouses. For transfers to children only the income earned after the initial transfer is attributed back to the transferor. For transfers to spouses the income AND capital gains/losses (after the initial transfer)are transferred back.
The attribution rules don’t apply if:
- income earned or lost is realized in a period following death of either the transferor or transferee
- the transferor is not a Canadian resident
- the transferee ceases to be a spouse of the transferor within a time period
- spouses are separated at the time of transfer
- where the transferor receives fair market value on the property which is transferred or through interest-bearing loans
Note, that if the transferor receives fair market value on the property, the payment (or loan) must be from the transferee’s own funds.
Attribution Rules Summary Table
|
Transferee |
Property gifted or sold for an amount other than FMV |
|
Minor child or non-arm’s length child: individual under the age of 18 at time of transfer; child, niece, nephew ITA 74.1 (2), 75.1 (2) |
Income or losses* are attributable. Capital gains or losses are not attributable. *Exclude business income |
|
Trust ITA 74.3 (1) |
Capital gains or losses are attributable.
|
|
Spouse or common-law partner ITA 74.1 (1) |
Both income or losses* and capital gains or losses are attributable. *Exclude business income |
Referenced from: RBC Wealth Management article “Income splitting and the attribution rules” (author Karim F. Visram, CFA, CGA, CFP, FMA)
Interactive content (Author: Jessica Thao, January 2020)
Interactive content (Author: Diane Macutay, January 2020)
References and Resources:
- ITA – 74.1 (1), 74.1 (2), 74.3 (1), 74.2, 75.1 (2), 74.5 (12)
- Video – “What are the attribution rules? – Tax Tip Weekly” (author: Allan Madan)
- Article – “Income splitting and the attribution rules” (author: Karim F. Visram, CFA; CGA, CFP; FMA)
January 2020
