» Tax Consulting and Related Services »
June 13, 2024

Tax Tips

Attribution of Property on Marital Breakdown
Subject: Attribution - Separation & Divorce
Number: 07-09
Date: 6/15/2007
Filing the appropriate elections is necessary to ensure that an unexpected result does not occur

As discussed in previous Tax Tips, attribution occurs where there has been a transfer of property to a spouse at less than fair market value. Fair market value can be an actual cash payment or the payment of interest on a loan at the prescribed rate by the 30th day of each subsequent year.

When individuals are separated, there is no attribution on the income from the transferred property where the property has been transferred pursuant to written agreement or court order. This will apply as long as the parties remain separate and apart. There are, though, those situations where transfers occur and the individuals become “spouses” again by living together. In those situations, even though the initial transfers were done pursuant to a written agreement, there would be attribution once the individuals decide to live together again.

In order to ensure that capital gains are not attributed back to a transferor during a separation, the parties must be living separate and apart by reason of marital breakdown, and they must each sign a joint election where they agree not to have the capital gains attribution rules apply to any subsequent sale of the transfer of property. This is of concern where individuals are separated but not yet divorced. If the election is not made, then the capital gain arising from a subsequent sale of the transfer of property, while the individuals are separated and not yet divorced, will attribute back to the transferor. This election is not a prescribed form and must be prepared by the individuals involved.

Filing the appropriate elections is necessary to ensure that an unexpected result does not occur.

In those situations where there has been a transfer of property while the individuals were married and they are subsequently separated or divorced, any attribution that occurred because of the first transfer will cease from the date of separation onwards.

TAX TIP OF THE WEEK is provided as a free service to clients and friends of the Tax Specialist Group member firms. The Tax Specialist Group is a national affiliation of firms who specialize in providing tax consulting services to other professionals, businesses and high net worth individuals on Canadian and international tax matters and tax disputes.

The material provided in Tax Tip of the Week is believed to be accurate and reliable as of the date it is written. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Neither the Tax Specialist Group nor any member firm can accept any liability for the tax consequences that may result from acting based on the contents hereof.